hard · FRM Part 1
A risk manager is backtesting a 99% Value-at-Risk (VaR) model over a one-year window of 250 trading days. The manager sets the null hypothesis H₀ that the model is correctly calibrated (p = 0.01) and the significance level at α = 0.05. If the true exception rate of the model is actually 3%, what is the statistical power (1 - β) of this test to reject the flawed model? (Use the normal approximation to the binomial: μ = np, σ = √(np(1-p)); for α=0.05, z_0.95 = 1.645)
- 71.4%
- 5.0%
- 23.0%
- 77.0%
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