hard · FRM Part 1 Valuation and Risk Models
A risk analyst is checking a VAR model's performance via backtesting. Over the last 250 days, the portfolio experienced 8 exceptions at the 99% confidence level.
If the expected number of exceptions is 2.5, what is the likely conclusion?
- The model is well calibrated overall, since eight exceptions is a fairly small number.
- No firm conclusion can be drawn without also knowing the dollar size of each loss exceedance recorded.
- The model is overstating portfolio risk, since there were too many exceptions for this confidence level chosen.
- The model is understating risk, as the number of exceptions is significantly higher than expected.
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