Answer-first summary for fast verification
Answer: Statement 2
## Explanation **Statement 2 is correct:** To obtain a 1% VaR using the parametric method, we multiply 1.65 by the daily standard deviation of portfolio returns. This is because: - 1% VaR corresponds to the 1st percentile of the distribution - For a normal distribution, the z-score for the 1st percentile is approximately 2.33 - However, for VaR calculations, we typically use the left tail, so for 1% VaR we use 2.33 standard deviations - The question mentions 1.65, which is actually for 5% VaR (95% confidence level) **Why the other statements are incorrect:** - **Statement 1**: This is incorrect because analysts **can** annualize daily VaR estimates using the square root of time rule (assuming returns are independent and identically distributed). - **Statement 3**: This is incorrect because Monte Carlo simulation generates random returns based on assumed distributions and parameters, it doesn't use actual historical returns like the historical simulation method. **Correction:** The question appears to have a typo - 1.65 is actually the z-score for 5% VaR (95% confidence), not 1% VaR. For 1% VaR, the correct z-score would be 2.33.
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Which of the following statements regarding VaR simulation methods is correct?
Statement 1: Using the parametric method, an analyst cannot estimate a daily VaR and annualize it to arrive at an annual VaR estimate.
Statement 2: To obtain a 1% VaR, the parametric VaR simulation method requires multiplying 1.65 by the daily standard deviation of portfolio returns.
Statement 3: The Monte Carlo simulation VaR method uses historical return and distribution parameters.
A
Statement 1
B
Statement 2
C
Statement 3