2016-FRR Exam Dumps | Which of the following statements defines Value-at-risk (VaR)?

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GARP.2016-FRR.v2025-06-21.q161
Question 139

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Question 139/161

Which of the following statements defines Value-at-risk (VaR)?

A. VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.

B. VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.

C. VaR is the maximum of past losses over a given period of time.

D. VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.

Correct Answer: D

Value-at-Risk (VaR) is a statistical measure used to assess the risk of loss on a specific portfolio of financial assets. It estimates the maximum potential loss with a given confidence level over a defined period.
* Maximum Likely Loss: VaR calculates the worst expected loss under normal market conditions at a specific confidence level.
* Time Period: VaR is assessed over a specified time horizon, such as a day, week, or month.
* Confidence Level: VaR is defined at a certain confidence level, typically 95% or 99%. This means there is a 95% (or 99%) probability that the loss will not exceed the VaR estimate.
For instance, a daily VaR of $1 million at a 99% confidence level implies that there is only a 1% chance that the portfolio will lose more than $1 million in a day.
References
* How Finance Works.pdf, p. 201

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