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PRMIA Exam 8010 Topic 1 Question 4 Discussion

Actual exam question for PRMIA's Operational Risk Manager (ORM) Exam exam
Question #: 4
Topic #: 1
[All Operational Risk Manager (ORM) Exam Questions]

Which of the following are valid criticisms of value at risk:

1. There are many risks that a VaR framework cannot model

2. VaR does not consider liquidity risk

3. VaR does not account for historical market movements

4. VaR does not consider the risk of contagion

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Suggested Answer: A

Risks such as abrupt changes to a firm's business model caused by legislation, or the introduction of capital controls in foreign countries where a firm in invested, geo-political risks etc are not modelable in the traditional sense. These risks cannot be modeled using VaR. Therefore statement I is correct.

VaR indeed does not consider liquidity risk, it is only concerned with the standard deviation of portfolio returns. Statement II is a valid criticism.

Statement III is not correct, as VaR can consider historical price movements.

Statement IV is correct, as VaR does not consider systemic risk or the risk of contagion.


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