The Use of Expected Shortfall (ES) Is Most Appropriate When

question 65

Multiple Choice

The use of expected shortfall (ES) is most appropriate when

• A)there is a small sample size used to estimate probability distributions.
• B)the VAR indicates there is no possibility of losses so another method must be used to determine market risk.
• C)the probability distribution is skewed to the right.
• D)a continuous probability distribution cannot be constructed.
• E)The probability distribution indicates there is a possibility of a "fat tail" loss.

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Definitions:

Corrective Taxes

Taxes designed to correct the effects of negative externalities, often imposed to encourage or discourage certain behaviors.

Social Optimum

A state in which resources are allocated in the most efficient way from the perspective of society as a whole.

Economic Efficiency

A state where all resources in an economy are optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency.

Transaction Cost

Expenses incurred when buying or selling goods or services, including fees, taxes, and other charges.