Financial Risk Manager Part 2
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Ultimate access to all questions.
A portfolio manager, believing that globalization is causing the correlations of equity and fixed-income returns across different markets to rise over time, decides to adjust the correlations in his VaR analysis for the coming year to reflect the higher correlations he expects. If his expectation turns out to be incorrect, what is the most likely result?
A
There will be no impact on the portfolio because VaR is only a prediction, and portfolio return depends on what actually happens.
B
The portfolio return will be lower than it should have been, given the expected risk level, because asset allocation will not have been optimal.
C
The risk of the portfolio will have been understated because of the incorrect estimate of correlation among global markets.
D
The portfolio return will be higher than it should have been, given the expected risk level, because of the higher correlation among asset classes