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Explanation:
The core concept is that a proper VaR model, for risk management purposes, needs to reflect how changes in positions affect risk. Using a "pseudo history" accomplishes this by applying the current positions to all historical scenarios, thus showing the impact of the position change on VaR. This directly addresses the prompt's scenario where a position reduction should be reflected in a lower VaR.
A is incorrect. Using the historical P&L before the position reduction would show no change in VaR, as the historical data hasn't changed. This defeats the purpose of assessing the impact of the manager's actions.
B is incorrect. Using the historical P&L after the position reduction also won't show the impact of the change. The new VaR would simply reflect the new, lower risk level, but not demonstrate the reduction itself.
D is incorrect. Comparing to a previous average VaR doesn't isolate the impact of the specific position change. Other factors could have influenced the previous year's average VaR.
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Q.6467 A portfolio manager is instructed by the risk department to reduce the VaR of their portfolio. The manager reduces their holdings across all assets by 25%. When assessing the impact of this change, which of the following approaches to VaR calculation would MOST effectively demonstrate the reduction in risk?
A
Recalculating VaR based on the historical P&L of the portfolio before the position reduction.
B
Recalculating VaR based on the historical P&L of the portfolio after the position reduction.
C
Recalculating VaR using a "pseudo history" of P&L that reflects the reduced positions across all historical scenarios.
D
Comparing the current VaR to the average VaR over the previous year.