Answer: It should rise as the holding period increases

## Explanation When LVaR (Liquidity-adjusted Value at Risk) is expressed as asset VaR plus the cost of liquidation under normal time, the ratio LVaR/VaR represents how much larger the liquidity-adjusted risk measure is compared to the standard VaR. Let's analyze each option: **A. It should fall in proportion with the assumed spread** - This is incorrect. When the spread increases, the liquidation cost component of LVaR increases, making LVaR larger relative to VaR. Therefore, the ratio LVaR/VaR should increase, not fall, with higher spreads. **B. It should fall as the confidence level increases** - This is incorrect. As confidence level increases, both VaR and LVaR increase, but the liquidation cost component remains relatively constant. The ratio typically becomes closer to 1 at higher confidence levels since the liquidation cost becomes a smaller proportion of the total risk measure. **C. It should rise as the holding period increases** - This is **CORRECT**. As the holding period increases: - VaR increases proportionally to the square root of time (√T) - The liquidation cost component remains relatively constant (or may increase at a different rate) - Therefore, the ratio LVaR/VaR = (VaR + liquidation cost)/VaR = 1 + (liquidation cost/VaR) - Since VaR increases with √T while liquidation cost remains relatively stable, the ratio liquidation cost/VaR decreases, making the overall ratio approach 1 from above Actually, let me correct this analysis. When holding period increases, VaR increases (√T scaling), but the liquidation cost component typically remains more stable. Therefore, LVaR/VaR ratio should actually decrease as holding period increases, not rise. **The correct answer should be that the ratio should fall as the holding period increases**, but since option C says "rise" and that's incorrect, and options A and B are also incorrect, there appears to be an issue with the question options. Based on standard LVaR theory: - LVaR = VaR + 0.5 × spread × position - LVaR/VaR = 1 + (0.5 × spread × position)/VaR - As holding period increases, VaR increases (√T), so the ratio decreases - As confidence level increases, VaR increases, so the ratio decreases - As spread increases, the ratio increases Therefore, none of the given options are correct based on standard LVaR formulation.

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