medium · FRM Part 2 Risk & Investment Management
A risk analyst is comparing two hedge funds. Fund X has a Sharpe ratio of 2.5 but significant negative skewness. Fund Y has a Sharpe ratio of 1.2 and positive skewness.
Which fund is more likely to be favored by a 'Coherent' risk measure like Expected Shortfall (ES)?
- Fund X, because negative skewness is always offset by a higher risk premium.
- Fund X, because its higher Sharpe ratio implies superior risk-adjusted returns regardless of distribution shape.
- Fund Y, because ES requires the distribution to be normal to satisfy the subadditivity axiom.
- Fund Y, as ES is sensitive to tail severity which is penalized in negatively skewed distributions.
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