Exam 2016-FRR Topic 1 Question 35 Discussion

Actual exam question for GARP's 2016-FRR exam
Question #: 35
Topic #: 1

Which of the following statements represents a methodological difference between variance-covariance and full revaluation methods?

A. Variance-covariance approach provides computational advantages over the full revaluation approach. B. Variance-covariance approach computes the VAR for each position separately, while the full revaluation method computes the VAR on a portfolio basis. C. Variance-covariance approach prices positions more accurately than the full revaluation approach. D. Variance-covariance approach uses only historic data to compute the covariance matrix.

Suggested Answer: A Vote an answer

The variance-covariance approach, also known as the parametric approach, simplifies calculations by assuming that returns are normally distributed and by using the covariance matrix of asset returns to estimate portfolio risk. This approach provides significant computational advantages because it reduces the complexity involved in risk calculations. On the other hand, the full revaluation method (often used in Monte Carlo simulations) involves revaluing the entire portfolio under various simulated scenarios, which is computationally intensive. Thus, option A correctly identifies a key methodological difference.

by Kerr at Aug 26, 2024, 01:16 AM

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