Risk Assessment Approach and VaR Interpretation

Very Hard Risk Management Measuring Risk

Henry is an experienced portfolio manager overseeing a diversified fund that primarily invests in equities and fixed income. Recently, he has been tasked with evaluating the overall risk profile of the portfolio following an increase in market volatility. He decides to employ the Value at Risk (VaR) methodology to ascertain the potential loss that could occur under normal market conditions over a specified time frame.

After analyzing his portfolio, Henry finds that the current 1-day VaR at a 95% confidence level is $500,000. In addition, he is also interested in assessing other risk metrics, such as the portfolio's standard deviation and maximum drawdown, to gain a deeper understanding of the risks involved.

Which of the following statements about Henry's risk assessment approach and the interpretation of VaR is correct?

A VaR of $500,000 indicates that there is a 5% chance the portfolio could lose more than $500,000 in one day.

VaR is a measure of the maximum potential gain in the portfolio at a given confidence level.

The VaR calculation requires the assumption that asset returns are normally distributed.

Hint

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