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Hi Tutor, I have a question regarding the concept of confidence levels. From my understanding, when we say the confidence level is 95%, it means there is a 2.5% chance that the value might fall below the lower tail, and a 2.5% chance that it might exceed the upper tail, assuming a standard normal distribution.
However, during the lecture, we considered only the lower tail, where the probability of the value falling below this threshold is 5%. This seems different from what I expected, as I thought it should only be 2.5% for the lower tail, with the remaining 2.5% corresponding to the upper tail. I understand that we are measuring the value at risk, but I’m curious as to why the lower tail is assigned a 5% probability in this context.
Could you please clarify this? Thank you so much for your help in advance!
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My own opinion on your question is that you are right about standard normal distributions but with value at risk the concentration is on adverse outcomes.
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