8010 Exam Dumps | Which of the following are valid criticisms of value at risk: I. There are many risks that a VaR framework

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Operational Risk Manager (ORM) Exam
PRMIA.8010.v2022-06-27.q87
Question 72

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Question 72/87

Which of the following are valid criticisms of value at risk:
I. There are many risks that a VaR framework cannot model
II. VaR does not considerliquidity risk
III. VaR does not account for historical market movements
IV. VaR does not consider the risk of contagion

A. I, II and IV

B. I and III

C. II and IV

D. All of the above

Correct Answer: A

Explanation
Risks such as abrupt changes to a firm's businessmodel caused by legislation, or the introduction of capital controls in foreign countries where a firm in invested, geo-political risks etc are not modelable in the traditional sense. These risks cannot be modeled using VaR. Therefore statement I is correct.
VaR indeed does not consider liquidity risk, it is only concerned with the standard deviation of portfolio returns. Statement II is a valid criticism.
Statement III is not correct, as VaR can consider historical price movements.
Statement IV is correct,as VaR does not consider systemic risk or the risk of contagion.

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