Question #1 of 8 Question ID: 1256924

Which of the following items accurately describe a disadvantage of non-parametric

methods?

A) Quiet data periods lead to VaR and ES estimates that are too high.

B) Volatile data periods lead to VaR and ES estimates that are too low.

C) Analysis depends critically on forecasted data.

D) Di cult to estimate losses signi cantly larger than the maximum loss within the
data set

Explanation

Disadvantages of non-parametric methods include the following:

Analysis depends critically on historical data.

Volatile data periods lead to VaR and ES estimates that are too high.
Quiet data periods lead to VaR and ES estimates that are too low.
Di cult to detect structural shifts/regime changes in the data.
Cannot accommodate plausible large impact events if they did not occur within the
sample period.
Di cult to estimate losses signi cantly larger than the maximum loss within the
data set (historical simulation cannot; volatility-weighting can, to some degree).
Need su cient data, which may not be possible for new instruments or markets

(Book 1, Module 2.1, LO 2.d)

Question #2 of 8 Question ID: 1256923

Suppose that 25 days ago the observed market variable percentage change was 2.3% with a
daily volatility estimate of 2%. What is the sample percentage change using the Hull and
White (HW) approach if the current daily volatility is estimated at 2.8%?

A) 0.3%.

B) 0.8%.

C) 2.2%.

D) 3.2%.

Explanation
The historical percentage change is adjusted based on the ratio of current daily volatility
to historically observed daily volatility 25 days ago. The sample percentage change is 3.2%
and is calculated as follows:

σN × (ht / σt) = 2.8% × (2.3% / 2.0%) = 3.2%

(Book 1, Module 2.1, LO 2.c)

Question #3 of 8 Question ID: 1256920

Which of the following statements is least accurate regarding non-parametric density

estimation?

A) The major downfall of the non-parametric approach compared to the traditional

historical simulation approach is that VaR can only be calculated for a continuum
f i i h d
B) One of the advantages of non-parametric density estimation is that the
underlying distribution is free from restrictive assumptions.

C) Makes an adjustment that connects the midpoints between successive

histogram bars in the original data set’s distribution.

D) existing data points can be used to “smooth” the data points to allow for VaR
calculation at all con dence levels.

Explanation

The major improvement of the non-parametric approach over the traditional historical
simulation approach is that VaR can be calculated for a continuum of points in the data
set.

(Book 1, Module 2.1, LO 2.b)

Question #4 of 8 Question ID: 1256926

Which of the following statements regarding disadvantages of non-parametric methods is

least accurate?

A) Cannot accommodate plausible large impact events outside of the sample

period.

B) Di cult to detect structural shifts/regime changes in the data.

C) Analysis depends critically on historical data.

D) Volatile data periods lead to VaR and ES estimates that are too low.

Explanation

One of the disadvantages of non-parametric methods is that volatile data periods lead to
VaR and ES estimates that are too high.

(Book 1, Module 2.1, LO 2.d)

Question #5 of 8 Question ID: 1256919

Which of the following statements is incorrect regarding bootstrap historical simulation? The
bootstrapping technique:

A) provides less precise estimates of coherent risk measures than historical

simulation on raw data alone.

B) can be performed to estimate the expected shortfall (ES).

C) is a simple and intuitive estimation procedure.

D) draws a sample from the original data set, records the VaR from that particular
sample and “returns” the data.

Explanation

Empirical analysis demonstrates that the bootstrapping technique consistently provides

more precise estimates of coherent risk measures than historical simulation on raw data
alone.

(Book 1, Module 2.1, LO 2.a)

Question #6 of 8 Question ID: 1256921

Which of the following statements accurately describe ltered historical simulation? Filtered
historical simulation:

A) is not exible enough to capture conditional volatility and volatility clustering.

B) is the most comprehensive, and hence most complicated, of the parametric

estimators.

C) is only reasonable for small portfolios, and empirical evidence does not support
its predictive ability.

D) combines the historical simulation model with conditional volatility models.

Explanation

The ltered historical simulation is the most comprehensive, and hence most complicated,
of the non-parametric estimators. The process combines the historical simulation model
with conditional volatility models (like GARCH or asymmetric GARCH). Thus, the method
contains both the attractions of the traditional historical simulation approach with the
sophistication of models that incorporate changing volatility. In simpli ed terms, the
model is exible enough to capture conditional volatility and volatility clustering as well as
a surprise factor that could have an asymmetric e ect on volatility. From a computational
standpoint, this method is very reasonable even for large portfolios, and empirical
evidence supports its predictive ability.

(Book 1, Module 2.1, LO 2.c)

Question #7 of 8 Question ID: 1256922

Which of the following non-parametric estimators combines the historical simulation model
with conditional volatility models?

A) Volatility-weighted historic simulation.

B) Correlation-weighted historic simulation.

C) Age-weighted historic simulation.

D) Filtered historical simulation.

Explanation

The ltered historical simulation is the most comprehensive and most complicated of the
non-parametric estimators. It contains both the attractions of the traditional historical
simulation approach with the sophistication of models that incorporate changing volatility.

(Book 1, Module 2.1, LO 2.c)

Question #8 of 8 Question ID: 1256925

Which of the following items is not one of the advantages of non-parametric simulation
methods?

A) Can accommodate more complex analysis.

B) Not hindered by parametric violations of skewness.

C) Data is not often readily available.

D) Intuitive and often computationally simple.

Explanation

An advantage of non-parametric methods is that data is often readily available and does
not require adjustments (e.g., nancial statements adjustments).

(Book 1, Module 2.1, LO 2.d)