Which statement about VaR and CVaR is correct?

• A. VaR is the maximum potential loss at a given confidence level.
• B. CVaR is the average loss beyond VaR.
• C. CVaR is the probability of losses exceeding VaR.
• D. VaR estimates potential loss at a given confidence level; CVaR measures expected loss beyond VaR, capturing tail risk.

Answer: (D)

VaR at a chosen confidence level is a threshold loss value that the portfolio is not expected to exceed with that probability. It’s not the absolute worst loss possible, since losses can and do go beyond that threshold in the tail. CVaR, or Expected Shortfall, looks at those tail outcomes and computes the average loss given that losses exceed the VaR threshold, thereby capturing tail risk. The best description ties these ideas together: VaR estimates potential loss at a given confidence level, while CVaR measures the expected loss beyond that level, highlighting what happens in the tail. The other statements either misstate VaR as the maximum possible loss or confuse CVaR with a probability rather than a tail-averaged loss.