Explanation:
The correct answer is C.
The choice of primitive risk factors in mapping involves finding the optimal balance between a better quality of approximation and faster processing. Choosing more risk factors increases the accuracy (better quality of approximation) but requires more computational resources and time to measure risk (slower processing). On the other hand, using fewer risk factors speeds up the processing time but might sacrifice the exactness of the risk estimate. Thus, finance experts must balance the time devotion against the accuracy of risk measurement.
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Q.1514 In the process of mapping, finance experts first need to choose the most effective set of primitive risk factors against which the market instrument will be positioned to measure risk. This choice of factors must be balanced between time devotion and accurate risk measurement. In short, the choice of primitive risk factors should reflect:
A
The easiest way to get better results in the least amount of time.
B
The trade-off between models with a large number of factors and less complex models.
C
The trade-off between better quality of approximation and faster processing.
D
The trade-off between specific risks with significant effects and those with insignificant effects.