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Answer: The daily loss on the portfolio will not exceed $1 million 95% of time.
## Explanation Value at Risk (VaR) at 95% confidence level means that there is a 95% probability that the portfolio loss will not exceed the VaR amount over the specified time horizon. - **Option A is incorrect** because it states the opposite - that losses will exceed $1 million 95% of the time, when actually losses should exceed $1 million only 5% of the time. - **Option B is correct** because it accurately describes VaR: with 95% confidence, the daily loss will not exceed $1 million. - **Option C is incorrect** because VaR is not the maximum possible loss - it's a probabilistic measure, and losses can exceed VaR in extreme cases. - **Option D is incorrect** because VaR is a statistical measure, not a consensus among risk managers. The correct interpretation is that over a 1-day period, there is a 95% probability that the portfolio loss will be less than or equal to $1 million, and a 5% probability that it will exceed $1 million.
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A risk manager states that the VaR of the portfolio at 95% confidence interval and 1-day holding period is $1 million. Which of the following statement is TRUE?
A
The daily loss on the portfolio will exceed $1 million 95% of time.
B
The daily loss on the portfolio will not exceed $1 million 95% of time.
C
The maximum loss that the portfolio can incur is $1 million at any point in time.
D
95% of risk managers will agree that the maximum loss on the portfolio will be $1 million.
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