Financial Risk Management Market Risk Measurement

Question 1

What does Value at Risk (VaR) measure?

Accepted Answer

The maximum loss not exceeded at a given confidence level over a specified period

Answer

VaR estimates the maximum potential loss at a specified confidence level (e.g., 95% or 99%) over a defined time horizon.

Question 2

Which method of VaR calculation uses the actual historical returns of a portfolio?

Accepted Answer

Historical simulation

Answer

Historical simulation applies past observed returns directly to the current portfolio to estimate the VaR distribution without assuming normality.

Question 3

What is the main limitation of VaR as a risk measure?

Accepted Answer

It does not capture losses beyond the confidence threshold (tail risk)

Answer

VaR tells you nothing about the severity of losses that exceed the confidence level, which is why Expected Shortfall (CVaR) is often used as a complement.

Question 4

Expected Shortfall (ES), also called CVaR, measures which of the following?

Accepted Answer

The average loss given that the loss exceeds the VaR threshold

Answer

Expected Shortfall is the mean of all losses that fall beyond the VaR cut-off, providing a fuller picture of tail risk.

Question 5

Delta-normal VaR assumes portfolio returns follow which distribution?

Accepted Answer

Normal (Gaussian) distribution

Answer

The delta-normal (parametric) approach linearizes portfolio sensitivities and assumes returns are normally distributed to compute VaR analytically.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Market Risk Measurement