FIN420_Quiz 7

Which of the following statements about stress testing are true?

I. Stress testing can complement VAR estimation in helping risk managers identify crucial vulnerabilities in a portfolio.

II. Stress testing allows users to include scenarios that did not occur in the lookback horizon of the VAR data but are nonetheless possible.

III. A drawback of stress testing is that it is highly subjective.

IV. The inclusion of a large number of scenarios helps management better understand the risk exposure of a portfolio.

 

• I and II only

• III and IV only

• I, II, and III only   

• I, II, III, and IV

A large, international bank has a trading book whose size depends on the opportunities perceived by its traders. The market risk manager estimates the one-day VAR, at the 95% confidence level, to be USD 50 million. You are asked to evaluate how good a job the manager is doing in estimating the one-day VAR. Which of the following would be the most convincing evidence that the manager is doing a poor job, assuming that losses are identical and independently distributed (i.i.d.)?

• Over the past 250 days, there are eight exceptions

• Over the past 250 days, the largest loss is USD 500 million

• Over the past 250 days, the mean loss is USD 60 million

• Over the past 250 days, there are about 12.5 exceptions

Which of the following statements regarding extreme value theory (EVT) is incorrect?

• In contrast to conventional approaches for estimating VAR, EVT considers only the tail behavior of the distribution

• Conventional approaches for estimating VAR that assume that the distribution of returns follows a unique distribution for the entire range of values may fail to properly account for the fat tails of the distribution of returns.

• EVT attempts to find the optimal point beyond which all values belong to the tail an then models the distribution of the tail separately.

• By smoothing the tail of the distribution, EVT effectively ignores extreme events and losses that can generally be labeled outliers

When data is good, it is better to use

•  Parametric VaR

   

• Historical VaR

• None of above

Dynamic VaR is important because it allows

• Dynamic hedging

• To better follow market movements and their impact on risk

• Computing VaR more efficiently

Assume that portfolio daily returns are independent and identically normally distributed. Sam Neil, a new quantitative analyst, has been asked by the portfolio manager to calculate portfolio VARs over 10, 15, 20, and 25 days. The portfolio manager notices something amiss with Sam’s calculations, displayed here. Which one of the following VARs on this portfolio is inconsistent with the others?

• VAR(10-day) = USD 316M

   

• VAR(15-day) = USD 465M

       

• VAR(20-day) = USD 537M 

• VAR(25-day) = USD 600M