Which of the following is NOT a practical benefit of the value at risk framework?

A) Hedging.

B) Comparability across asset classes.

C) Setting of risk limits.

D) Identification of risk factors.

As a risk measurement, value at risk may be superior to standard deviation because:

A) VAR may capture market participant's attitudes towards risk more completely.

B) the statistical properties of VAR are more widely understood.

C) the required data is available to all market participants.

D) most market participants calculate VAR in the same manner.

An investor hires a portfolio manager and stipulates a maximum value at risk for the portfolio. This is an example of the use of the value at risk framework to:

A) set risk limits.

B) measure performance.

C) build portfolios.

D) maximize returns.

Which of the following is NOT an appropriate application of VAR for portfolio managers?

A) Setting portfolio risk limits.

B) Risk evaluations across asset classes.

C) Peer group risk evaluation.

D) Identification of key portfolio risks.

Regarding the practical application of value at risk (VAR) for portfolio managers, which of the following statements is FALSE? VAR can:

A) be used to compare risk across asset classes.

B) not be used to set risk limits relative to a benchmark.

C) be used to set risk limits on an absolute level.

D) be used to identify the macroeconomic factors that have the greatest impact on overall portfolio performance.

Which of the following statements describes the most unique and practical application of value at risk (VAR) for comparing risky assets? VAR can be used to compare risk:

A) across bond market sectors.

B) between small and large cap equities.

C) across asset classes such as bonds and stocks.

D) between different style equity portfolios.

Value at risk (VAR) is attractive because it:

A) is a measure of the most we can lose.

B) is a single and easily understood measure.

C) has a well-defined method for calculation.

D) all of these choices are correct.

Answer and Explanation

The accuracy of a value at risk (VAR) measure:

A) is included in the statistic.

B) is complete because the process is deterministic.

C) is one minus the probability level.

D) can only be ascertained after the fact.

With respect to value at risk (VAR), regulatory agencies:

A) in some industries require its computation and reporting.

B) dismiss it as a gimmick.

C) are studying it, but none have adopted its use.

D) have mandatory requirements in all financial industries.