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 implies the asset is perfectly uncorrelated with the market index.
- A zero Marginal VaR means the asset has no liquidity 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 is allocated based on Individual VaR to prevent desks from hiding risk behind correlations.
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