What does 95% Value at Risk (VaR) refer to?

Value at Risk (VaR) is a statistical measure used to assess the level of financial risk associated with an investment portfolio. Specifically, a 95% VaR indicates that there is a 95% probability that the portfolio will not lose more than a specified amount over a given time horizon.

To achieve this, the calculation typically involves determining the mean return and adjusting it by a certain multiple of the standard deviation, which represents the risk (or volatility) of the portfolio. For a 95% confidence level, the appropriate z-score from the standard normal distribution is approximately 1.65. This means that you would take the mean return of the portfolio and subtract 1.65 times the standard deviation to estimate the VaR.

This provides a threshold such that you would expect the portfolio to incur losses exceeding this value only 5% of the time, which aligns with the definition of a 95% VaR. Thus, the correct statement reflects this calculation, capturing the essence of 95% VaR as it draws upon both the average return and the associated risk as quantified by the standard deviation.

The other choices involve either incorrect use of mean and standard deviation in relation to the z-scores for confidence intervals or incorrect interpretation of the