medium · FRM Part 2 Risk & Investment Management
A portfolio manager is considering adding a new position to an existing book. The 'Marginal VaR' of the asset is 0.15 and the current portfolio VaR is 10 m. The manager plans to add 1 m of the new asset.
Which of the following is the most significant limitation of using Marginal VaR to estimate the new portfolio VaR?
- Marginal VaR does not account for the standalone volatility of the new asset, its liquidity, or correlation shifts.
- Marginal VaR is always higher than Incremental VaR for any trade size, which leads to overly conservative position sizing decisions.
- Marginal VaR is a first-order derivative and only provides an accurate estimate for infinitesimal changes in position size.
- Marginal VaR can only be calculated for assets whose return distributions are perfectly normal and stationary.
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