medium · FRM Part 1 Quantitative Analysis
If a correlation matrix is NOT positive semidefinite, what is the consequence for a Cholesky-based Monte Carlo simulation?
- The standard error of the VaR estimate will become infinite.
- The simulation will run but will generate zero correlation between assets.
- The algorithm will fail because it would require taking the square root of a negative number.
- The resulting portfolio variance will always be equal to one.
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