A client has a globally diversified portfolio with significant exposure to emerging markets. The manager determines the 1-day 95% historical VaR to be $25,000. If the portfolio size is $2,500,000, what is the expected maximum percentage loss that should not be exceeded 95% of the time, given the VaR estimate?

Question: A client has a globally diversified portfolio with significant exposure to emerging markets. The manager determines the 1-day 95% historical VaR to be $25,000. If the portfolio size is $2,500,000, what is the expected maximum percentage loss that should not be exceeded 95% of the time, given the VaR estimate?

Answer options: ✅ 1.0%

• 2.5%
• 0.5%
• 5.0%

Correct answer: 1.0%

Explanation: The expected maximum percentage loss is calculated by dividing the VaR by the total portfolio size. So, $25,000 / $2,500,000 = 0.01 or 1%. This indicates that 95% of the time, the daily loss is not expected to exceed 1% of the portfolio value.