What should risk managers consider when estimating VAR?

When estimating Value at Risk (VaR), it is crucial for risk managers to consider the possibility of different estimates from various methods. This is because VaR can be calculated using multiple approaches, such as the historical method, variance-covariance method, and Monte Carlo simulations. Each of these methods may produce different risk estimates due to underlying assumptions, data used, and the specific characteristics of the portfolio being analyzed. Understanding how these differing estimates arise and their implications allows risk managers to gauge the uncertainty and potential for loss more effectively.

Incorporating insights from various methods helps provide a more comprehensive view of risk. It also enables managers to assess the robustness of their estimates and make more informed decisions regarding risk management strategies and capital allocation. This consideration ultimately contributes to a more resilient risk management framework, as it allows for better anticipation of potential risks under diverse market conditions.

The other options do not fully address the multifaceted nature of risk estimation. Focusing only on the volatility of selected assets could miss the broader portfolio dynamics. Relying solely on historical performance without adjustments does not account for changing market conditions and may lead to misleading conclusions. Lastly, considering the maximum gain potential of the portfolio is not directly relevant to estimating risks associated with potential losses, as VaR