Financial Risk Manager Part 1

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A manager at an asset management firm relies on a VaR-based risk measurement system that calculates VaR for each of the firm's portfolios as well as an aggregate firm-wide VaR. The CRO proposes implementation of a stress testing approach to supplement the VaR system. Which of the following statements best supports the CRO's proposal?

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In practice, stress tests utilize a great number of scenarios while VaR measures rely on just a few scenarios to create their loss estimates.

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Stress testing makes it possible to capture dependencies between asset classes in specific scenarios that cannot be captured well through a VaR-based system.

Stress testing is more accurate than a VaR-based system in predicting the probability of losses at a point in time.

While stress testing is similar to VaR, it is restricted to using only distributions of macroeconomic variables to generate its predictions.