8008 Exam Dumps | If the systematic VaR for an equity portfolio is $100 and the specific VaR is $80, then which of the

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 117

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Question 117/125

If the systematic VaR for an equity portfolio is $100 and the specific VaR is $80, then which of the following is true in relation to the total VaR:

A. Total VaR is greater than $180

B. Total VaR is $20

C. Total VaR is $180

D. Total VaR is less than $180

Correct Answer: D

Explanation
Choice 'd' is correct because VaR is sub-additive in cases where correlation is less than one.
Specific VaR refers to the risk in the portfolio from security selection, ie the risk from holding the specific equities in the portfolio, while systematic risk refers to the market risk. Definitionally, specific risk and systematic risk are uncorrelated, ie their correlation is zero. Since their correlation is zero, combining them will produce a VaR number lower than their stand alone aggregate. Total risk includes both specific risk and systematic risk, and can be calculated taking into account the specific and systematic VaRs and their correlation.
All other answers are therefore incorrect.

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