Question

It has been found that the correlations across country indexes increase during adverse market events (e.g., severe volatility, market crash). You are assessing the risks of a long-only global equity portfolio and are asked to describe for your boss the implications adverse market events might have in a VaR context. Which of the following statements is correct about the impact of the finding on future estimates of VaR for a long-only global equity portfolio? Multiple Choice Following the onset of adverse market events, future VaR estimates will increase if VaR is estimated using the historical method compared to what would have happened had there been no adverse events. The effect of increased correlation on future VaR estimates cannot be estimated because, by definition, a crisis is a unique event with no comparable period. Following the onset of adverse market events, future VaR estimates will decrease if VaR is estimated using a historical average model compared to what would have happened had there been no adverse events. The performance of future VaR estimates will remain unaffected since by definition a crisis has a probability that is much lower than the probability level typically used to estimate VaR.

          It has been found that the correlations across country indexes increase during adverse market events (e.g., severe volatility, market crash). You are assessing the risks of a long-only global equity portfolio and are asked to describe for your boss the implications adverse market events might have in a VaR context. Which of the following statements is correct about the impact of the finding on future estimates of VaR for a long-only global equity portfolio?
Multiple Choice
Following the onset of adverse market events, future VaR estimates will increase if VaR is estimated using the historical method compared to what would have happened had there been no adverse events.
The effect of increased correlation on future VaR estimates cannot be estimated because, by definition, a crisis is a unique event with no comparable period.
Following the onset of adverse market events, future VaR estimates will decrease if VaR is estimated using a historical average model compared to what would have happened had there been no adverse events.
The performance of future VaR estimates will remain unaffected since by definition a crisis has a probability that is much lower than the probability level typically used to estimate VaR.

Added by Dana G.

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