medium · FRM Part 2 Risk & Investment Management
A desk head argues that Asset X should be exempted from capital charges because its current Marginal VaR is zero.
What is the CRO's most likely rebuttal based on the decomposition framework?
- Zero Marginal VaR only implies zero covariance with the current portfolio composition, not that the asset itself is uncorrelated with the broader market index.
- A zero Marginal VaR reflects only current market price covariance and tells us nothing about the asset's standalone liquidity or funding risk.
- Marginal VaR is a local derivative; as the position size increases, the Marginal VaR will likely rise as the asset becomes a larger part of the portfolio.
- Capital should instead be allocated strictly on Individual VaR, since diversification benefits from correlation let desks understate their true standalone risk.
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