Explanation

Correct Answer: B

Reasoning:

Risk Assessment by Strategy:

• Strategy Y:

  • Lowest standard deviation (0.5%) - indicating lowest volatility
  • Lowest VaR (95%) at -0.5% - indicating smallest potential loss at 95% confidence level
  • Moderate kurtosis (4.2) - slightly higher than normal distribution but manageable

• Strategy Z:

  • Low standard deviation (0.6%) but very high kurtosis (18.5) - indicating extreme tail risk
  • VaR of -0.8% - higher potential loss than Strategy Y

• Strategy X:

  • Highest standard deviation (2.0%) - highest volatility
  • Highest VaR (-1.0%) - largest potential loss
  • Normal kurtosis (3.5)

Key Analysis:

• While Strategy Z has low standard deviation, its extremely high kurtosis (18.5) suggests significant tail risk and potential for extreme losses that aren't captured by standard deviation alone.
• Strategy Y has the best combination of low volatility, low VaR, and reasonable kurtosis, making it the lowest risk strategy overall.

Key Concept: Risk assessment should consider multiple measures including volatility (standard deviation), tail risk (kurtosis), and potential losses (VaR) to get a comprehensive view of risk.