medium · FRM Part 2 Market Risk
Under the Euler decomposition of portfolio risk, what does 'Component VaR' represent?
- The part of the total portfolio VaR that is additively attributed to a specific position, such that the sum of components equals the total.
- It measures the sensitivity of total portfolio VaR to a small, marginal per-unit change in one position's size in the book.
- The standalone VaR of one position held in isolation, ignoring diversification benefits and correlation with the rest of the portfolio.
- The discrete change in total portfolio VaR observed from fully adding or removing one specific position from the overall trading book entirely.
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