Explanation:
Given that the return distribution of stock A is negatively skewed, it displays a long left tail. This implies large potential losses for a long position and large potential gains for a short position. Therefore, |VaR (P1)| will be expected to be higher.
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Q.3011 Assume you are dealing with a stock “ A” that displays a highly negatively skewed distribution comprised of the past 260-days returns. Suppose you have P1 = A and P2 = -A, meaning P1 is long stock A and P2 is short stock A. Which statement is most likely to be accurate about a 99% VaR?
A
|VaR (P1)| > |VaR (P2)|.
B
|VaR (P1)| < |VaR (P2)|.
C
VaR (P1) = VaR (P2).
D
Cannot be concluded from the given information.
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