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Answer: The confidence level is reset to become lower.
## Explanation Expected Shortfall (ES) is defined as the expected loss given that the loss exceeds the VaR level. The magnitude of ES is influenced by: - **Confidence level**: When the confidence level decreases, the VaR threshold becomes less extreme, meaning we're considering losses that are less severe. This results in a lower ES value. - **Time horizon**: A longer time horizon typically increases ES magnitude due to greater potential for extreme losses. - **Sample size**: Larger sample size provides more data but doesn't necessarily reduce ES magnitude systematically. - **ES is not constant**: ES varies with market conditions and portfolio composition. Therefore, **lowering the confidence level** is the condition that will cause ES to drop in magnitude.
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Expected shortfall (ES) is a risk measure that does take account of expected losses beyond the VaR level. It was first proposed by Artzner et al. (1999) as an example of the coherent risk measure. Formally, the ES is defined as the expected loss conditional on the fact that the loss is greater than the VaR level. Lauren Li, FRM, is currently examining the properties of the ES. Under which of the following conditions will the ES drop in magnitude?
A
The time horizon is reset to become longer.
B
The sample size is adjusted to become larger.
C
The confidence level is reset to become lower.
D
The ES is a constant measure of risk for a given portfolio.