Answer: daily holding period returns.

## Explanation When a VaR model is complicated by intraday changes and profit/loss factors, the most effective backtesting approach is to use **daily holding period returns** (Option B). Here's why: ### Key Issues: 1. **Intraday changes**: VaR models typically assume positions are held constant throughout the day, but intraday trading can create discrepancies between the model's assumptions and actual trading activity. 2. **Profit and loss factors**: These include fees, commissions, and other transaction costs that may not be fully captured in the VaR calculation. ### Why Option B is Correct: - **Daily holding period returns** capture the actual end-of-day portfolio performance, which naturally incorporates intraday changes and P&L factors - This approach tests the model against real-world outcomes rather than theoretical assumptions - It provides a more realistic assessment of whether the VaR model accurately captures the portfolio's risk profile ### Why Other Options Don't Address the Issues: - **Option A (shorter time periods)**: Doesn't specifically address intraday or P&L complications - **Option C (higher confidence level)**: Increases model sensitivity but doesn't resolve the fundamental intraday/P&L issues - **Option D (lower confidence level)**: Reduces model sensitivity but doesn't address the underlying complications By using daily holding period returns for backtesting, the risk manager can better evaluate whether the VaR model remains valid despite intraday trading activity and various P&L components.

Author: LeetQuiz .