Answer-first summary for fast verification
Answer: The volatility-weighted approach adjusts historical returns in the sample by increasing them if the historical volatility forecast was higher than the current volatility forecast, and decreasing them if the historical volatility forecast was lower than the current volatility forecast.
## Explanation **Option B is correct** because it accurately describes the volatility-weighted approach in historical simulation: - The volatility-weighted approach adjusts historical returns based on the ratio of current volatility to historical volatility - If historical volatility was higher than current volatility, returns are decreased (scaled down) - If historical volatility was lower than current volatility, returns are increased (scaled up) - This approach helps account for changing market volatility conditions **Option A is incorrect** because: - The age-weighted approach typically gives higher weights to more recent observations and lower weights to older observations - It does not use a simple cutoff date with zero weights for older observations - Instead, it uses a decay factor that gradually reduces weights as observations get older This question tests understanding of different weighting schemes in historical simulation methods for VaR and ES estimation.
Author: LeetQuiz .
Ultimate access to all questions.
An analyst is evaluating how the bank applies historical simulation (HS) to estimate VaR and ES. The analyst focuses on the approaches used for weighting past return observations, including the age-weighted, volatility-weighted, correlation-weighted, and filtered HS approaches. Which of the following statements is correct regarding the given weighting approach?
A
The age-weighted approach typically specifies that observations that occurred after the cutoff date are given an equal weight while observations that occurred before the cutoff date are given a weight of zero.
B
The volatility-weighted approach adjusts historical returns in the sample by increasing them if the historical volatility forecast was higher than the current volatility forecast, and decreasing them if the historical volatility forecast was lower than the current volatility forecast.
No comments yet.