medium · FRM Part 1 Valuation and Risk Models
A portfolio has a daily Value-at-Risk (VaR) of 2.5 million at the 99% confidence level.
If the returns exhibit a skewness of -0.6 and an excess kurtosis of 1.5, which of the following is true regarding the relationship between the parametric VaR (assuming normality) and the true risk?
- Expected Shortfall will be lower than the parametric VaR under the normal distribution assumption.
- Parametric VaR will overstate the position's true risk simply because the return skewness is negative here.
- The square-root-of-time scaling rule will fully correct for negative skewness once the horizon is extended out further.
- Parametric VaR will significantly understate the risk because it ignores the fat tails and negative asymmetry.
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