medium · FRM Part 1 Valuation and Risk Models
Expected Shortfall is considered a 'coherent' risk measure because it satisfies subadditivity.
Which of the following best describes the practical implication of subadditivity for a risk manager?
- The risk of a combined portfolio is less than or equal to the sum of the risks of the individual parts.
- If a position is scaled by a factor λ, the risk measure is also scaled by exactly λ.
- Adding a riskless cash amount to the portfolio reduces the risk measure by that exact amount.
- The risk measure must increase if the portfolio's potential losses at all states of the world increase.
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