Financial Risk Manager Part 1

Explanation

The correct answer is D - Generating a set of a random collection of m integers (1,2,3...n) with replacement.

Why D is correct:

• This is the fundamental first step in iid bootstrapping
• The generated integers serve as indices to select observations from the original dataset
• The process is done with replacement, allowing for:
  • Creation of bootstrap samples the same size as the original dataset
  • Some observations to be repeated
  • Some observations to be omitted

Why other options are incorrect:

A is incorrect - Generating data according to an assumed distribution is not part of bootstrapping. Bootstrapping works with the original dataset, not assumed distributions.

B is incorrect - While constructing a bootstrap sample is part of the process, it's not the initial step. The random integer generation comes first to determine which observations will be in the bootstrap sample.

C is incorrect - Block size selection relates to block bootstrapping methods used for time-dependent or non-iid data, not standard iid bootstrapping where all observations are treated as independent.

Key Concept:

The iid bootstrapping method relies on resampling with replacement from the original dataset, and the random integer generation step is essential for creating representative bootstrap samples that preserve the statistical properties of the original data.