Explanation:

Option B is correct. Filtered historical simulation (FHS) combines historical simulation with conditional volatility models like GARCH. These models capture volatility clustering, and when using asymmetric extensions (such as EGARCH or GJR-GARCH), they allow positive and negative returns to impact the forecasted volatility differently (capturing the leverage effect).

Option A is incorrect because "correlation-weighted HS" is not a standard approach as described.
Option C is incorrect. In volatility-weighted HS, returns are adjusted by multiplying them by the ratio of current volatility to historical volatility ( $r_{adj} = r \times (\sigma_{current} / \sigma_{historical})$ ). If current volatility is lower than the historical volatility, the return is adjusted downward, not upward.
Option D is incorrect because the age-weighted HS approach assumes that the weight of past observations declines exponentially, not linearly.

Question A junior risk analyst is asked to prepare a report comparing the various weighted historical simulation (HS) approaches. The analyst focuses on the ways the different HS approaches adjust the returns observed in the data set. Which of the following statements is correct for the analyst to make?

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Last updated: July 5, 2026 at 07:29

The correlation-weighted HS approach adjusts the return observations by multiplying each return by the current correlation divided by the historical correlation.

The filtered HS approach accommodates volatility clustering and allows positive and negative returns to impact volatility differently.

The volatility-weighted HS approach adjusts returns upward when the current volatility is below the long-term average volatility.

The age-weighted HS approach assumes that the value of the information contained in a return observation declines in a linear manner starting from the date it is first observed.

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