Explanation:
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 $20 million 15-day VaR at a 95% confidence level implies that we are 95% confident that the maximum loss over the next 15 days will not exceed $20 million. Conversely, there is a 5% probability that the loss will exceed $20 million over the 15-day period.
Choice D is correct because it accurately states that the loss over the next 15 days is expected to be less than $20 million in 95% of scenarios.
Choice A is incorrect because VaR is a measure of downside risk (losses), not upside potential or gains.
Choice B is incorrect because the VaR over a 15-day horizon cannot be directly stated as the VaR for the following single day without applying time-scaling adjustments (such as the square root of time rule).
Choice C is incorrect because VaR represents the threshold of the maximum expected loss at a given confidence level, not the minimum guaranteed loss.
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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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