Answer: The parametric method only

## Explanation **Option A is correct:** Only the parametric method assumes that return distributions for risk factors are normal. **Key differences between VaR methods:** **Parametric Method (Variance-Covariance Method):** - **Assumes normal distribution** of returns - Uses mean, variance, and covariance of returns - Relies on the assumption that returns follow a normal distribution - Most efficient computationally but may be inaccurate if returns are not normally distributed **Historical Simulation Method:** - **Does NOT assume any specific distribution** - Uses actual historical returns to simulate future outcomes - Captures non-normal characteristics like fat tails and skewness - More realistic but requires sufficient historical data **Monte Carlo Simulation:** - Can assume various distributions (not necessarily normal) - More flexible in modeling complex distributions Therefore, only the parametric method explicitly assumes normal distribution of returns for risk factors.

Author: LeetQuiz Editorial Team