medium · FRM Part 1 Quantitative Analysis
A risk analyst is performing a bootstrap of a historical return series to estimate the 99% Value-at-Risk (VaR).
What is a primary limitation of this non-parametric approach?
- It assumes, incorrectly, that historical returns are normally distributed.
- It requires calculating a full Cholesky matrix to decompose the historical covariance structure.
- It fails to capture the serial correlation and volatility clustering in the underlying data series.
- It cannot generate outcomes more extreme than those present in the historical sample.
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