medium · FRM Part 1 Valuation and Risk Models
An investor holds a long-only portfolio of corporate bonds. This portfolio typically displays negative skewness and positive excess kurtosis.
What is the primary risk of using a normal-distribution VaR for this portfolio?
- It assumes the portfolio is well diversified across sectors.
- It overstates the odds of an issuer default event.
- It understates the frequency and severity of large losses.
- It substantially overestimates the amount of capital that must be held.
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