Explanation:
Expected shortfall measures the expected loss conditional on losses exceeding VaR, while VaR measures a loss threshold at a given confidence level. The VaR will sometimes violate the principle of subadditivity when the calculated risk exceeds the risk of constituent assets in the portfolio. ES does not violate the principle of subadditivity.
(Book 4, Module 47.2, LO 47.d)
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Question 27
Value at risk (VaR) and expected shortfall (ES) are both measures of risk that can be applied at the portfolio level. Which of the following statements is most correct?
A
ES does a better job than VaR at communicating the potential dollar loss below a given threshold.
B
VaR will typically exceed the ES.
C
ES does a better job than VaR at estimating the probability of loss.
D
Both VaR and ES can show risk that is additively higher than the sum of the risks of constituent assets in the portfolio.
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