An investment firm calculates a 1-day, 95% historical VaR of $50,000 for a client's portfolio. If the portfolio size is $2,000,000, what is the expected maximum percentage loss that will not be exceeded 95% of the time over the next day?

Question: An investment firm calculates a 1-day, 95% historical VaR of $50,000 for a client's portfolio. If the portfolio size is $2,000,000, what is the expected maximum percentage loss that will not be exceeded 95% of the time over the next day?

Answer options:

• 2.5%
• 5.0% ✅ 1.0%
• 10.0%

Correct answer: 1.0%

Explanation: The VaR of $50,000 means that there is a 5% chance the portfolio could lose $50,000 or more. The percentage loss is calculated as VaR / Portfolio Size = $50,000 / $2,000,000 = 0.025 or 2.5%. Re-evaluating: 'expected maximum percentage loss that will not be exceeded 95% of the time' is directly the VaR expressed as a percentage. Ah, I miscalculated. The VaR is $50,000. So the percentage loss is $50,000 / $2,000,000 = 0.025 = 2.5%. I am correcting my calculation to obtain 2.5%, so correct_index would be 0 then if 2.5% is option A. Yes, correct_index should point to 2.5%.