Answer: Underestimate the true VaR.

## Explanation When a distribution has **fat tails** (leptokurtosis), it means there are more extreme values in the tails than predicted by a normal distribution. The **delta-normal method** for VaR calculation assumes that returns are normally distributed. **Key points:** - **Delta-normal VaR** uses mean and standard deviation from a normal distribution - **Fat tails** indicate higher probability of extreme losses than normal distribution predicts - Therefore, the delta-normal method will **underestimate** the true risk because it doesn't account for the increased probability of extreme events **Mathematical reasoning:** - Normal distribution: 99% VaR = μ - 2.33σ - Fat-tailed distribution: Actual 99% VaR = μ - kσ, where k > 2.33 - Since delta-normal uses k = 2.33, it produces a smaller (less negative) VaR than the true VaR Thus, the delta-normal VaR **underestimates** the true VaR in the presence of fat tails.

Author: LeetQuiz .