Financial Risk Manager Part 1
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A hedge fund's risk manager is currently using historical data to predict the future volatility of their U.S. equities portfolio. They are considering enhancing their strategy by incorporating implied volatility from the equity assets. However, they are also assessing potential drawbacks to using this metric. Which of the following statements accurately describes a limitation of using implied volatility to predict future volatility?
A
Broad indexes of implied volatility do not exist, making forecasting the volatility of broad asset classes difficult.
B
Implied volatility is a backward-looking measure, which limits its usefulness in estimating future volatility.
C
Options are not actively traded on all assets; in these instances, reliable implied volatilities are not available.
D
In practice, implied volatilities differ for options with different maturities on the same underlying asset, even though theory suggests they should be the same.