*Spoiler* VAR Question

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Given a daily 5% VAR of $5 million, which of these statements is correct and why?
“VAR is a measure of maximum loss, which in this case means we are 95% confident that the maximum 1-day loss is $5 million.”
“VAR is a measure that combines probabilities over a certain time horizon with dollar amounts, which in this case means that one expects to lose a minimum $5 million five trading days out of every 100.”
 
The second one
5/100 is 5%
Var is a measure over a period of time - agree
in dollar amounts - agree
Arghh! Why can’t I put down a good reason to support my choice. I am just repeating the Qn
 
VAR combines probabilities ( ie. confidence intervals) with dollar amounts (IE value at risk)
Second is correct
5% VAR means a 90% confidence interval , but because we are interested only on the down side of the confidence interval we can state that probability as being 5 days out of 100.
 
That’s what I said too. Maybe Schweser is wrong.
This is from the sample exam afternoon session. Explanation given is this:
“Both are correct.
VAR can be considered a minimum loss expected over a time horizon at a given probability. In this particular case, one would expect to exceed the VAR 5% of the time. Watch the wordings in VAR questions.
VAR is a measure that combines probabilities over a certain time horizaon with dollar amounts, which in the statement means that one expects to lose at least $5 million in five trading days out of 100.”
I’m not getting anything out of the explanation. Anyone care to take a crack at it?
 
VAR is the minimum loss ( alternately maximum loss) for a given probability and time period–So first one is correct also
2nd is definitely correct
 
they are both right.
1. 5% prob of minimum loss is $x, 95% sure that maximum loss is $x
 
wvhome Wrote:
——————————————————-
> how are minimum loss and maximum loss
> interchangeable??
Exactly. How?
 
KRochelli Wrote:
——————————————————-
> 1. 5% prob of minimum loss is $x,
I think I am starting to get it.
So we are sure that 95% of the time that the maximum loss is $5 million. 5% of the time the loss will exceed that. We don’t know what the maximum loss will be during that 5% of the time.
Quite confusing.
 
no, i don’t read it that way…………… yes, it’s the 95th percentile, but that is not the same as saying i’m 95% confident
if i got 95% percentile on GMAT (say i got 700), i wouldn’t say “i’m 95% confident that the maximum score is 700”
very bad wording IMHO
 
GMAT is different. That is a set score and you fall in a certain percentile. There is no confidence interval or loss, etc.
In case 1, VAR tells us the probability of maximum loss. 95% of the time we will NOT LOSE MORE than $5 million.
It can also tell us the probability of minimum loss. In case 2, 5% of the time we will lose AT LEAST $5 million.
Now that I understand it I think it was a solid question.
 
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