SECTION 3.11 SECTION 3.11

1.) Pearson's clarification of the meaning of the VaR measure in Varnet's monthly report is

most likely:

A.

correct.

B.

incorrect because over a full year, the VaR will be exceeded on five or fewer days.

C.

incorrect because VaR represents a maximum loss that will not be exceeded.

Answer = A

Assuming 250 trading days per year, if daily VaR at 95% confidence level (violated 5% of

the time) is $1 million, over one year, a daily loss exceeding $1 million should occur

approximately 5% of 250 days, or 12.5 days.

“Risk Management,” by Don M. Chance, Kenneth Grant, and John Marsland