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Answer: The confidence level is reset to become lower.
## Explanation Expected Shortfall (ES) is defined as the expected loss conditional on the loss exceeding the VaR level. The magnitude of ES is influenced by: - **Confidence level**: When the confidence level is lowered, the VaR threshold decreases, meaning we're considering less extreme losses. Since ES is the average of losses beyond VaR, lowering the confidence level will result in ES dropping in magnitude because we're averaging over less severe losses. - **Time horizon**: Extending the time horizon typically increases risk measures like VaR and ES due to greater potential for losses over longer periods. - **Sample size**: Increasing sample size provides more data but doesn't necessarily reduce the ES magnitude; it may provide a more accurate estimate but the risk level remains. - **ES as constant**: ES is not a constant measure - it varies with changes in portfolio composition, market conditions, and risk parameters. Therefore, only **lowering the confidence level** will cause ES to drop in magnitude.
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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.
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