Explanation:
With regard to an increase in the holding period, if the return distribution has a mean greater than zero, then VaR rises at a lower rate (and will eventually decrease). With regard to an increase in the confidence interval, VaR increases when the confidence level increases. In addition, VaR will increase at an increasing rate as the confidence level increases.
(Book 4, Module 47.1, LO 47.c)
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Question 77
There are two arbitrary parameters used to calculate value at risk (VaR): the holding period and the confidence level. Assume that the given return distribution has a mean greater than zero. Which of the following pairs correctly describes the impact on VaR for increases in the holding period and increases in the confidence level, respectively?
A
Holding period increases: VaR increases at a higher rate | Confidence interval increases: VaR increases at an increasing rate
B
Holding period increases: VaR increases at a lower rate | Confidence interval increases: VaR increases at an increasing rate
C
Holding period increases: VaR increases at a higher rate | Confidence interval increases: VaR increases at a decreasing rate
D
Holding period increases: VaR increases at a lower rate | Confidence interval increases: VaR increases at a decreasing rate
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