The Use of Expected Shortfall (ES) to Measure Market Risk

question 86

Multiple Choice

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?

• A)There is a very small sample size (<30 observations) used to estimate probability distributions.
• B)That the probability distribution is skewed to the left.
• C)That changes in asset prices are normally distributed but with fat tails.
• D)That the probability distribution is skewed to the right.
• E)That changes in asset prices follow a standard normal probability distribution.

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Definitions:

Business Cycle

The fluctuation of economic activity that an economy experiences over a period of time, marked by phases of expansion and contraction.

Interest Rate Fluctuations

Variations in the interest rate over time, which can affect the value of investments, loans, and savings.

No-Arbitrage Condition

A theoretical situation where there is no possibility of risk-free profits – prices in the financial markets should exclude the possibility of arbitrage opportunities.

Risk-Return Dominance

A principle stating that an investment or portfolio is more desirable if it has a higher expected return for a given level of risk, or lower risk for a given level of expected return.