Financial Risk Manager Part 1

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The newly hired CRO of a fast-growing multinational bank is reviewing the bank's stress testing process and VaR-based economic capital framework. The CRO wants to ensure that the bank's framework and methodologies reflect best practices put forward by the Basel Committee. In conducting this review, which of the following statements is most appropriate for the CRO to make?

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Traditional VaR measures can be tested to see how well they would have worked in the past, but stressed VaR cannot be effectively back-tested.

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Typically, a VaR-based calculation for market risk capital estimates losses over a multi-year period, while an enterprise-wide stress test focuses on losses over a shorter time period.

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VaR-based economic capital methods and enterprise-wide stress tests typically look at a similar number of loss scenarios.

Enterprise-wide stress tests typically require modeling the full probability distribution of losses, while VaR-based economic capital estimates do not.

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