medium · Frm Part 2 Market Risk
An analyst applies the Cornish-Fisher expansion to adjust the 99% VaR of a portfolio with negative skewness S = -0.5 and positive excess kurtosis K = 2.0.
If the normal z-score is -2.326, how will the adjusted q_CF compare to the original z?
- The adjusted q_CF will be more negative than -2.326, increasing the VaR.
- The adjustment for kurtosis will offset the adjustment for skewness, leaving q_CF ≈ -2.326.
- The adjusted q_CF will be less negative, reflecting a diversification benefit from non-normality.
- The q_CF will remain unchanged because the Cornish-Fisher expansion only applies to the 95% confidence level.
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