Answer: Relative to VaR, ES leads to more required economic capital for the same confidence level.

## Explanation **Correct Answer: B** **Key Points:** - **Expected Shortfall (ES)** is a coherent risk measure that considers the tail risk beyond the VaR threshold - **Value at Risk (VaR)** only measures the minimum loss at a given confidence level, ignoring the severity of losses beyond that point - For the same confidence level, ES will always be greater than or equal to VaR because it captures the average of losses in the tail - This means ES requires more economic capital allocation compared to VaR for the same confidence level **Analysis of Other Options:** - **A**: Incorrect - ES is actually more difficult to backtest than VaR because it requires estimating the entire tail distribution - **C**: Incorrect - Both VaR and ES are subadditive risk measures, meaning the risk of a portfolio is less than or equal to the sum of individual risks - **D**: Incorrect - Only ES accounts for the severity of losses beyond the confidence threshold; VaR only considers the threshold itself **Practical Implication:** When switching from VaR to ES, banks should expect higher capital requirements due to ES's more conservative nature in capturing tail risk, which is particularly important during market turmoil periods.

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