Explanation:
Scenario analysis often requires trading benefits and detriments. Although depending on accurately incorporating comprehensive risk driving inputs is correct, it is somewhat of a disadvantage. Requiring the frequency of tail risk events to be considered and focusing on the cause of historical tail events are not required when conducting scenarios; hence, scenario analysis affording an ability to discover unforeseen tail events is the best answer.
(Book 1, Module 8.2, LO 8.e)
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Question 82
A risk manager recently attended a conference on scenario analysis and how it can be used to stress test exposures in financial markets, especially when it comes to evaluating potential weaknesses in traditional credit modeling, which she conducts for the consulting clients of RiskRevealers. Which of the following should the manager consider when explaining the benefits of implementing scenario analysis to her clients?
A
Scenario analysis requires the frequency of tail risk events to be considered.
B
Scenario analysis focuses mainly on the cause of historical tail events.
C
Scenario analysis affords the ability to discover unforeseen tail events.
D
Scenario analysis depends on accurately incorporating comprehensive risk-driving inputs.
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