Financial Risk Manager Part 1
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A junior market risk analyst is studying the mechanics of the EWMA approach for estimating volatility. The analyst observes that the approach applies various weights to a series of historical returns, and the return needed to update the EWMA calculation is the most recent day's squared return. Which of the following statements is correct?
A
Daily returns prior to the most recent day have no influence on the current variance rate estimate in the EWMA calculation.
B
Daily returns prior to the most recent day are reflected in the EWMA calculation by the smoothing parameter (λ).
C
Daily returns prior to the most recent day are reflected in the EWMA calculation by the most recent day's squared return.
D
Daily returns prior to the most recent day are reflected in the EWMA calculation by the previous variance rate estimate.