Reading 22 EOC # 25. I picked A because his comment is correct?? Why is it incorrect?
A is incorrect because VaR does NOT determine the most the portfolio can lose in any month. [The Answer C reflects this view]
Reference in textbook Pg 113
Deficiency [of VaR]: VaR does not indicate the magnitude of the very worst possible outcomes
Elaborating on Kevin’s answer, VaR determines the _ minimum _ amount a portfolio can lose in a given timeframe, with a given probability. A 1-month, 5% VaR of $10,000,000, for example, means that there is a 5% probability that the portfolio will lose at least $10,000,000 within a month; the maximum loss could be $10,000,001, or it could be $10,000,000,000: VaR doesn’t tell you that.