Unit 3

Question 1

Define VaR

Answer 1

maximum loss not exceeded with a given probability alpha over a defined time horizon

Question 2

Define TVaR

Answer 2

expected loss given the VaR limit has been exceeded over a given time horizon

Question 3

Define Probability of Ruin

Answer 3

the probability that the assets of the firm fall below their liabilities

Question 4

Define Expected Shortfall

Answer 4

The expected loss given that a loss has occurred

expected loss over a given confidence level for a defined time period

Question 5

State the 4 axioms of coherence

Answer 5

1. Monotonicity - riskier expected greater cost
   L(1) =0
2. Translation Invariance
   F(L+k) = F(L) + k , k is constant

Question 6

State the condition for convexity

Answer 6

F(aL1 + (1-a)L2) =< aF(L1) + (1-a)F(L2), a E [0,1]

Question 7

what are 2 factors affecting the time horizon choice?

Answer 7

1. Time to recover from loss event

2. time to reinstate risk mitigation process

Question 8

What is the formula for the Akaike Information Criterion (AIC)?

Answer 8

2N-2lnL
N=number of variables
L = likelihood functions

Question 9

What is the formula for Bayesian Information Criterion (BIC)?

Answer 9

NlnT-2lnL
N = number of variables
L = likelihood functions
T = number of observations

Question 10

Which information Criterion penalises the introduction of an additional variable?

Answer 10

BIC