Question #1
Reading: Reading 37 Measuring and Managing Market Risk
PDF File: Reading 37 Measuring and Managing Market Risk.pdf
Page: 1
Status: Correct
Correct Answer: A
Question
Which of the following is most accurately a limitation of the historical simulation method?
Answer Choices:
A. The size of the lookback period may be too small
B. The behavior of returns over the lookback period may not accurately capture the future behavior
C. Estimates of mean and standard deviation may be inaccurate
Explanation
A drawback of the historical simulation method is that the past (i.e., the lookback period)
may not be indicative of the future.