Which measure describes the maximum potential loss at a given confidence level over a defined horizon?

• A. Value at Risk
• B. Expected Shortfall
• C. Beta
• D. Alpha

Answer: (A)

Value at Risk describes the maximum potential loss over a defined horizon for a given confidence level. It sets a threshold such that, over the specified period, the probability of losses exceeding that amount is limited to the remaining tail probability. For example, a one-day VaR at 95% implies there’s a 5% chance the loss will be larger than the VaR amount on that day; on 95% of days, losses stay at or below that level. This directly answers the idea of a worst-case loss within a known probability and time frame.

Expected Shortfall, by contrast, looks at the average loss in the tail beyond the VaR threshold, providing information about tail risk beyond the cutoff. Beta measures how responsive a portfolio is to overall market movements, not the size of potential losses, and Alpha reflects excess return relative to a benchmark, not risk of loss. So the measure that best fits the description is Value at Risk.