medium · FRM Part 2 Market Risk
A desk head argues that a new 'market-neutral' trade has a Marginal VaR of zero and therefore consumes no capital.
What is the most critical risk-management rebuttal to this 'free risk' claim based on the properties of Marginal VaR?
- Marginal VaR only captures idiosyncratic, asset-specific risk, which by construction can never mathematically be zero.
- Zero Marginal VaR implies perfect positive correlation with the existing portfolio, which is actually the more dangerous scenario.
- Marginal VaR is only a valid risk measure under normal return distributions, so it structurally misses fat-tail and jump risk entirely.
- Marginal VaR is a local derivative; as the trade is scaled, the portfolio composition changes and Marginal VaR will rise.
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