Explanation:
The correct answer is D.
The Value at Risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. A 15-day VaR of $20 million with a confidence level of 95% indicates that, under normal market conditions, there is a 95% probability that the portfolio will not lose more than $20 million over the 15-day period. This aligns perfectly with the statement that the loss is expected to be less than $20 million in 95 percent of case scenarios.
Choice A is incorrect because VaR measures potential loss, not potential gain.
Choice B is incorrect because a 15-day VaR does not translate directly to a one-day VaR of the same amount; scaling would be necessary.
Choice C is incorrect because it misinterprets the confidence level and loss bound. The minimum loss in the worst 5% of cases is $20 million, not in 95% of cases.
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Q.1502 Matthew Hopkins is invited to interview for a position as a financial risk manager. After completing an initial set of questions, the interviewer asks for the interpretation of the following case: a $20 million 15-day VAR figure having a confidence level of 95%. Which of the following represents the CORRECT interpretation?
A
There is a 5 percent chance that there will be a gain of greater than $20 million in a time period of 15 days.
B
The corresponding VAR of the following day is $20 million, with a confidence interval of 95%.
C
The amount of minimum loss spread over the next 15 days is at least $20 million with a confidence of 95%.
D
The amount of loss spread over the next 15 days is expected to be less than $20 million in 95 percent of case scenarios.
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