Discuss PRMIA 8010 Exam Topic 1 Question 4

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

A1, 2 and 4

B1 and 3

C2 and 4

DAll of the above

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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13 comments · newest first

Veronika 11 months ago

All of these criticisms are valid, for sure.

Tarra 11 months ago

Wait, it doesn't account for contagion? That's wild!

Rasheeda 12 months ago

I think it does consider historical movements, though.

Val 12 months ago

Totally agree, liquidity risk is a big one!

Jeannetta 12 months ago

VaR can't model all risks, that's a fact.

Tonette 1 year ago

I recall that VaR does have limitations, but I’m confused about how it relates to historical market movements. Does it really not account for those?

Frank 1 year ago

I practiced a question similar to this, and I think 1, 2, and 4 are definitely valid points against VaR.

Cherilyn 1 year ago

I’m not entirely sure, but I think option D might be too broad. I feel like not all criticisms apply equally.

Shayne 1 year ago

I remember discussing how VaR doesn't capture all types of risks, especially liquidity risk. That seems like a valid criticism.

Diego 1 year ago

This one's pretty straightforward. Since the vendor promised full compatibility, I'd just go ahead and run the entire test suite. No need to mess around with partial testing - let's get it all done at once.

Dewitt 1 year ago

Okay, I remember learning about job worth hierarchies in class. I believe the key is that they illustrate the relative value of different jobs within an organization, which then forms the basis for a salary structure. I'll go with option C on this one.

Dottie 1 year ago

I'm not sure about this. The question seems to be implying that web-based communication is not essential, but I'm not sure if that means the statement is true or false.

Quentin 1 year ago

The "From field" seems like the most logical choice here. That's usually the first thing I look at when deciding which emails to prioritize or read first.

PRMIA 8010 Exam - Topic 1 Question 4 Discussion