A financial risk manager is evaluating the market risk of a portfolio using two methods: arithmetic returns under the assumption of a normal distribution and geometric returns under the assumption of a lognormal distribution. The following information has been gathered for this assessment:

• The average annual arithmetic return is 12%.
• The annual standard deviation of arithmetic returns is 30%.
• The average annual geometric return is 11%.
• The annual standard deviation of geometric returns is 41%.
• The current portfolio is valued at EUR 5,200,000.
• There are 252 trading days in a year.

Considering that daily arithmetic and geometric returns are independently and identically distributed, identify which of the following statements is correct.

Section to focus on: Market Risk Measurement and Management

Reference material: Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: John Wiley & Sons, 2005). Chapter 3, Estimating Market Risk Measures: An Introduction and Overview

Learning Objective: Calculate Value at Risk (VaR) using a parametric approach for both normal and lognormal return distributions.