Financial Risk Manager Part 2
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A risk analyst is evaluating the market risk associated with a financial portfolio by utilizing two distinct statistical return models: arithmetic returns under the presumption of a normal distribution, and geometric returns under the presumption of a lognormal distribution. Here, the normal distribution implies that returns can take any value in a symmetrical manner around the mean, while the lognormal distribution indicates that returns are positively skewed and multiplicative over time.
The analyst has acquired the following data about the portfolio's performance:
- The annual average of arithmetic returns is 12%.
- The annual standard deviation of arithmetic returns is 30%.
- The annual average of geometric returns is 11%.
- The annual standard deviation of geometric returns is 41%.
- The current value of the portfolio is EUR 5,200,000.
- There are 252 trading days in a year.
Based on the premise that daily arithmetic and geometric returns are uncorrelated over time (serial independence), which of the subsequent statements is correct?
A risk analyst is evaluating the market risk associated with a financial portfolio by utilizing two distinct statistical return models: arithmetic returns under the presumption of a normal distribution, and geometric returns under the presumption of a lognormal distribution. Here, the normal distribution implies that returns can take any value in a symmetrical manner around the mean, while the lognormal distribution indicates that returns are positively skewed and multiplicative over time.
The analyst has acquired the following data about the portfolio's performance:
- The annual average of arithmetic returns is 12%.
- The annual standard deviation of arithmetic returns is 30%.
- The annual average of geometric returns is 11%.
- The annual standard deviation of geometric returns is 41%.
- The current value of the portfolio is EUR 5,200,000.
- There are 252 trading days in a year.
Based on the premise that daily arithmetic and geometric returns are uncorrelated over time (serial independence), which of the subsequent statements is correct?