PRMIA Exam 8010 Topic 8 Question 59 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 59
Topic #: 8

[All 8010 Questions]

Which of the following statements are true in relation to Historical Simulation VaR?

1. Historical Simulation VaR assumes returns are normally distributed but have fat tails

2. It uses full revaluation, as opposed to delta or delta-gamma approximations

3. A correlation matrix is constructed using historical scenarios

4. It particularly suits new products that may not have a long time series of historical data available

B2 and 3

C1 and 4

DAll of the above

Show Suggested Answer

Suggested Answer: A

Historical Simulation VaR is conceptually very straightforward: actual prices as seen during the observation period (1 year, 2 years, or other) become the 'scenarios' forming the basis of the valuation of the portfolio. For each scenario, full revaluation is performed, and a P&L data set becomes available from which the desired loss quantile can be extracted.

Historical simulation is based upon actually seen prices over a selected historical period, therefore no distributional assumptions are required. The data is what the data is, and is the distribution. Statement I is therefore not correct.

It uses full revaluation for each historical scenario, therefore statement II is correct.

Since the prices are taken from actual historical observations, a correlation matrix is not required at all. Statement III is therefore incorrect (it would be true for Monte Carlo and parametric Var).

Historical simulation VaR suffers from the limitation that if enough representative data points are no available during the historical observation period from which the scenarios are drawn, the results would be inaccurate. This is likely to be the case for new products. Therefore Statement IV is incorrect.

by Ethan at Sep 15, 2024, 04:12 AM

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Irma

2 days ago

Totally agree, it uses full revaluation!

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Chauncey

8 days ago

Historical Simulation VaR doesn't assume normal distribution.

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Dortha

13 days ago

I thought statement 4 was true because Historical Simulation VaR is often used for new products with limited data, but I could be wrong.

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Leonida

19 days ago

I'm not entirely sure about statement 3; I feel like we do use historical scenarios, but I can't recall if it's specifically a correlation matrix.

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Maxima

24 days ago

I practiced a question similar to this, and I think statement 2 is definitely true since it involves full revaluation.

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Stephania

1 month ago

I remember that Historical Simulation VaR doesn't assume normal distribution, so I think statement 1 might be incorrect.

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Lai

1 month ago

The part about new products not having a long data history is interesting. I'll need to think carefully about how that might impact the approach. I'm leaning towards option D, but I want to double-check my understanding.

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Joseph

1 month ago

Okay, I think I've got this. Historical Simulation VaR uses full revaluation and a correlation matrix based on historical scenarios, but it doesn't assume normal returns. I'll go with option B.

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Viva

1 month ago

Hmm, I'm a bit confused about the assumptions behind Historical Simulation VaR. I'll need to review my notes to make sure I understand the differences between the approaches mentioned.

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Sylvie

1 month ago

This question seems pretty straightforward. I'll focus on understanding each statement and then select the option that best matches the true statements.

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Aleta

1 year ago

I think the correct answer is B) 2 and 3. The historical scenarios are used to construct the correlation matrix, and full revaluation is used instead of approximations. The other statements seem a bit questionable to me.

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Emiko

1 year ago

Haha, this question is like a bad joke. 'Historical Simulation VaR assumes returns are normally distributed but have fat tails'? What kind of nonsense is that?

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Leila

12 months ago

Yuette: Agreed, Historical Simulation VaR uses full revaluation and constructs a correlation matrix using historical scenarios.

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Yuette

12 months ago

User 2: Yeah, it's confusing. I think the correct options are 2 and 3.

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Thad

12 months ago

User 1: I know, right? That statement doesn't make any sense.

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Thaddeus

1 year ago

Wow, this is a tricky one. I'm pretty sure the correlation matrix is constructed using historical scenarios, but I'm not sure about the other statements. Maybe I should have studied more for this exam.

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