medium · FRM Part 1 Valuation and Risk Models
A bank calculates that its Component VaR for the Fixed Income desk is $2 million and for the Equities desk is $3 million.
If the desks are the only two in the bank, what is the total bank VaR, and what property does this demonstrate?
- The total VaR cannot be determined without knowing the correlation between the two desks.
- The total VaR is $13 million; this demonstrates the subadditivity violation where combining desks increases total risk.
- The total VaR is $3.6 million; this demonstrates the diversification benefit which makes the total VaR less than the sum of its parts.
- The total VaR is $5 million; this demonstrates the additivity property of Component VaR (Euler's Theorem).
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