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Explanation:
Since the test is being conducted at the two-tailed 95% level, the cutoff value for the test will be 1.96. To test whether the model is accurate, the following hypothesis is tested:
In this case, the acceptable number of exceptions allowed for Black to conclude that the model is correctly calibrated is 9.
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Q.2637 Jason Black, a risk analyst at a large multinational bank, is backtesting the VaR model of the bank. The model being tested is a daily, 98% VaR model. If the backtest is conducted for one year at a two-tailed 95% test confidence level, and assuming that a year has 252 trading days, what is the least acceptable number of daily losses that will lead Black to conclude that the model is calibrated correctly?
A
12
B
9
C
10
D
11