Question #12
Reading: Reading 37 Measuring and Managing Market Risk
PDF File: Reading 37 Measuring and Managing Market Risk.pdf
Page: 5
Status: Correct
Correct Answer: A
Question
Which of the following is a limitation of scenario analysis?
Answer Choices:
A. Scenario analysis does not provide the probability of a specific scenario occurring
B. Scenario analysis does not account for “fat tail” problem of the return distribution
C. The relationship between portfolio value and the risk factors used may not be static
Explanation
While scenario analysis can be used to measure the impact of a scenario, it can't provide
the probability of the scenario actually occurring. Since scenario analysis does not assume
a normal (or any other) distribution of asset returns, the question of fat tails does not
arise. Assumption of static relationship between individual risk factors and portfolio value
is a limitation of sensitivity analysis.