easy · FRM Part 2 Market Risk
A bank uses a 95% VaR model for its internal risk limits but is required by the regulator to backtest at 99%.
What is the main statistical reason for using the 95% level internally for validation?
- To meaningfully decrease the probability of Type I errors, or false alarms.
- To ensure actual portfolio P&L always exceeds the modeled VaR.
- To increase the power of the backtest and reduce Type II errors.
- Because the 95% VaR is always a fully coherent risk measure.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Market Risk practice
- Which of the following statements correctly identifies a structural deficiency of the Gaus
- If the shape parameter is ξ = 0.25, what is the tail index α?
- A leptokurtic distribution, often modeled by EVT, is characterized by which of the followi
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- A fund manager calculates the 'Marginal VaR' for an equity p… — What does this metric spec
- Which fixed-income mapping technique treats a bond portfolio as a single zero-coupon bond
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?