This is 2010 Mock PM Case 3: 1. A change from 95% confidence level VAR to 99%, would provide a _______ VAR estimate? higher? lower? 2. A change from daily VAR to monthly VAR, the VAR estimate would ________? increase? decrease? According to guideline answer: Question 1, lower;question 2 increase. And: Using a 95% confidence level, the portfolio has an average daily VAR of $1ml. Statement: the VAR represents a maximum loss that will not be exceeded. True/false? My opinion: when VAR comes with 5%, it is minimum loss; when comes with 95%, though same amount, it is maximum loss. Am I correct?
- Higher - I don’t know why the guideline answer says lower 2. Increase False. VAR never gives you the maximum loss, only the maximum loss at a stated probability.
No VAR represents with 95 percent confidence (or whatever the number) the maximum loss. But there is a 5 percent chance that it could be WAY WAY worse than 1 million.
And yes 99 percent shoudl be HIGHER than 95 percent.
Agree… 1. Higher 2. Increase 3. True - assuming that question is asked in context of a previous stmt which does have 95% prob stated
- VAR = Rp - z * Std dev If confidence interval increases from 95% to 99%, then the z score increases from 1.65 to 2.3. This VAR decreases. Thats correct right?
niraj_a Wrote: ------------------------------------------------------- > 1) VAR = Rp - z * Std dev > > If confidence interval increases from 95% to 99%, > then the z score increases from 1.65 to 2.3. > > This VAR decreases. Thats correct right? That’s actually my question. -The value of the VAR decreases. -The magnitude of the VAR increases. So if question simply ask about VAR, shall I say increase? or decrease? Higher? or Lower?
jin, unless they ask about magnitude, don’t worry about it IMO.
The actual number will be more negative (i.e. less) but VAR is measured as a loss number so a lower number indicates a greater loss and hence a higher VAR.
CFAtime - will it always be negative? now i’m starting to get scared about this. cant be sure of any answer!
Just picture a normal distribution. We’re looking at the left tail of this distribution. 95% - there’s 5% to the left of the VAR number. (say the VAR number = -1,000,000) 99% - there’s 1% to the left of the VAR number. (say the VAR number = -1,500,000) What does that mean? The 99% VAR occurs further in the tail i.e. it’s lower in numeric terms. But VAR tells you about the maximum loss at a given % confidence so for 95%, your maximum loss is 1m but for 99%, your max loss is 1.5m. HENCE, higher VAR for higher confidence level.
it depends on the wording. The example given was not precise enough. VAR will increase in MAGNITUDE if you lower the probability. In other words, the lower the probability the higher the expected loss.
P.S.: Just had a look at the 2010 Mock question: Since the related text passages says, “…using a 95% confidence level, the portfolio has an average daily VAR of $1 million.”, the ONLY CORRECT ANSWER must be INCREASE to that specific question because the VAR is stated in absolute terms,i.e. $1 million instead of minus $1 million.
bpdulog, I don’t agree VAR gives you the MINIMUM expected loss given a certain period and %confidence level, loss can alway be higher than stated VAR as the confidence level increases, so does the expected loss as the period (days -> weeks -> months ->…) increases, so does VAR both is logical and easy to remember, as the very highest loss (with either method) is @100% and you get closer if you move towards this …and of course you would expect to get to this highest loss more probable in the next 10 years then by next tuesday re negative and positive values: the thingie is calle “Value at risk”, so it must be a positive number ($$$ or % @risk) otherwise, it would be called “gain at risk” (which would be negative) 
of course, if you develop VAR from historical figures f.e., you look at negative numbers, but the VAR would still be stated positively
Maximum loss? Shouldn’t it be the opposite?
I’m talking about absolute values here, you guys are over analyzing.