17. A large commercial bank is using VaR as its main risk measurement tool. Expected shortfall (ES) is suggested as a better alternative to use during market turmoil. What should be understood regarding VaR and ES before modifying current practices?a. Despite being more complicated to calculate, ES is easier to backtest than VaR.b. Relative to VaR, ES leads to more required economic capital for the same confidence level.c. While VaR ensures that the estimate of portfolio risk is less than or equal to the sum of the risks of that portfolio’s positions, ES does not.d. Both VaR and ES account for the severity of losses beyond the confidence threshold.

A LARGE COMMERCIAL BANK IS USING VAR AS ITS MAIN RISK MEASUREMENT...

2015 FRM PRACTICE EXAM

17.

A large commercial bank is using VaR as its main risk measurement tool. Expected shortfall (ES) is suggested

as a better alternative to use during market turmoil. What should be understood regarding VaR and ES before

modifying current practices?

Despite being more complicated to calculate, ES is easier to backtest than VaR.

Relative to VaR, ES leads to more required economic capital for the same confidence level.

While VaR ensures that the estimate of portfolio risk is less than or equal to the sum of the risks of that

portfolio’s positions, ES does not.

Both VaR and ES account for the severity of losses beyond the confidence threshold.