VaR question from past GARP sample exam

[monachima505]

See attached. I thought that the question suggested that the 5 losses given were daily losses, collected on a daily basis over the past 100 trading days, and so I went with D. But the answer suggests that these are losses over the entire 100-day period. Do you agree that it is a poorly worded question?

 

[Dr. Jayanthi Sankaran]

Hi @monachima505,

I don't find any problem with the wording of the question. It says that the "worst 5 losses in the past 100 trading days". Also, although not explicitly mentioned in the question, sometimes the portfolio is traded less actively, and some of the instruments in the portfolio are less liquid. Also, in the Fundamental Review of the Trading Book (FRTB), regulators plan to relate time horizon to the liquidity of the relevant asset.

Hope that explains your doubt!

 

[monachima505]

Hi @monachima505,

I don't find any problem with the wording of the question. It says that the "worst 5 losses in the past 100 trading days". Also, although not explicitly mentioned in the question, sometimes the portfolio is traded less actively, and some of the instruments in the portfolio are less liquid. Also, in the Fundamental Review of the Trading Book (FRTB), regulators plan to relate time horizon to the liquidity of the relevant asset.

Hope that explains your doubt!

Thank you!

 

[David Harper CFA FRM]

Maybe @Dr. Jayanthi Sankaran sees something I don't (entirely possible!!) but we actually reported this to GARP as a mistake in 2011 (see https://forum.bionicturtle.com/threads/frm-2011-practice-exam-part-1-exam-2-question-24.4488/) The question, to me at least, implies the given losses are already daily, so why is the scaling down per 1/sqrt(100) required? The answer means that the $422 is a 100-day loss, but the language of the question does not tell me that

Further, and this part is well established with GARP: the 98% VaR here can also be third worst loss (among 100); for those who are following the assigned Dowd, $412 is a naturally good answer (because the two worst losses then occupy the 2% tail). Thanks,