CFA Level 2 Exam 2025 – 400 Free Practice Questions to Pass the Test

The requirement for an appropriate calculation of Value at Risk (VaR) includes having securities with a known history of returns. This is crucial because VaR is a statistical measure that assesses the potential loss in value of a portfolio over a defined period for a given confidence interval. In order to generate accurate and reliable risk estimates, historical return data of the securities in the portfolio is needed to calculate the volatility and the distribution of returns, which are foundational to VaR calculations.

Having a known history allows analysts to understand past performance trends and enables them to forecast potential future losses accurately, making the VaR calculation more robust. A lack of historical data would hinder the ability to assess risk appropriately and could lead to misleading results.

In contrast, using illiquid securities could pose significant challenges in the accuracy of the VaR calculation due to limited price information. The assumption of constant volatility may simplify calculations but does not reflect market realities where volatility can change. Lastly, data availability is essential in calculating VaR effectively; without it, accurate measurement of risk cannot be achieved.