Financial Risk Manager Part 1
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A risk analyst at a bank is assessing the suitability of applying modern portfolio theory (MPT) in portfolio analysis. The analyst starts by evaluating the assumptions underlying MPT. Which of the following is correct for the analyst to identify as a concern about the application of MPT in practice?
A
MPT assumes asset returns are asymmetric with fat tails, but empirical evidence shows that return distributions are typically normally distributed.
B
MPT assumes asset returns are normally distributed, but empirical evidence shows that return distributions are typically asymmetric with fat tails.
C
MPT assumes asset returns are normally distributed, but empirical evidence shows that return distributions are typically asymmetric with thin tails.
D
MPT assumes asset returns have negative skewness, but empirical evidence shows that return distributions typically exhibit positive skewness and fat tails.