Explanation:

Cash flow mapping provides more accurate risk measurement because:

• Cash flow mapping: Maps each individual cash flow to its corresponding maturity point on the yield curve
• Duration mapping: Maps the entire bond to a single maturity point (duration)
• Principal mapping: Maps only the principal payment

With a flat yield curve and constant volatility, the diversification benefit comes from imperfect correlations between different maturity points. Cash flow mapping captures these diversification benefits more accurately because:

• It recognizes that cash flows at different maturities have less than perfect correlation
• This diversification reduces the overall portfolio VaR
• Duration and principal mapping oversimplify by aggregating cash flows, losing this diversification benefit

Therefore, the lower diversified VaR is due to imperfect correlations between pairwise risk factors.