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Answer: Strategy Y
## 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.
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82 An analyst backtests three investment strategies X, Y, Z over the last ten years and gathers the following summary about their monthly returns:
| Strategy X | Strategy Y | Strategy Z |
|---|---|---|
| Mean | 1.1% | 1.0% |
| Standard deviation | 2.0% | 0.5% |
| Kurtosis | 3.5 | 4.2 |
| VaR (95%) | -1.0% | -0.5% |
Based on the above summary, which strategy most likely has the lowest risk?
A
Strategy X
B
Strategy Y
C
Strategy Z
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