Financial Risk Manager Part 2
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A financial analyst at LKS Bank is responsible for validating the bank's Value at Risk (VaR) model by employing the backtesting method. In this context, the analyst plans to use two different datasets of return information to compare the expected losses with the actual losses effectively. Which of the following options correctly represents the two most appropriate datasets of return information for the purpose of backtesting?
A
The cleaned returns, which are the actual returns minus any profit and loss from intraday trades, and the actual returns, which correspond to the total returns on the bank's trading portfolio
B
The actual returns, which correspond to the total return on the bank's trading portfolio, and the hypothetical returns, which represent the returns obtained from freezing the starting positions in the bank's trading portfolio
C
The hypothetical returns, which represent the returns obtained from freezing the starting positions in the bank's trading portfolio, and the cleaned returns, which are the actual returns minus any profit and loss from intraday trades
D
The trading returns, which are the actual returns minus any fees and commissions, and the hypothetical returns, which represent the actual returns obtained from freezing the starting positions in the bank's trading portfolio