Understanding Value at Risk Interpretation

Easy Risk Management Applications Value At Risk

In a recent analysis, a portfolio manager at Alpha Investments assessed the Value at Risk (VaR) of a diversified equity portfolio. The portfolio has a one-day VaR of $500,000 at a 95% confidence level. This means that with 95% confidence, the manager expects that the portfolio will not lose more than this amount in a single trading day.

Given this information, which of the following statements regarding the interpretation of the VaR is correct?

There is a 5% chance that the portfolio will lose more than $500,000 in one day.

The portfolio is expected to lose exactly $500,000 on 5% of the trading days.

The portfolio will not lose more than $500,000 on 95% of the trading days.

Hint

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