medium · FRM Part 1 Valuation and Risk Models
A 99% VaR is calculated for a single stock using the delta-normal method.
If the stock's return distribution has a skewness of -1.5 and an excess kurtosis of 5.0, what is the most likely risk management concern regarding the VaR estimate?
- The model will require too much capital, reducing the firm's efficiency.
- The model will produce a zero VaR for high confidence levels.
- The model will systematically understate the frequency and magnitude of large losses.
- The diversification benefit will be over-recognized, leading to concentration risk.
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