2016-FRR Exam Dumps | Which one of the following is an advantage of using a daily decay factor when forecasting tomorrow's

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Financial Risk and Regulation (FRR) Series
GARP.2016-FRR.v2025-06-21.q161
Question 7

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Question 7/161

Which one of the following is an advantage of using a daily decay factor when forecasting tomorrow's P&L?

A. It decreases the impact of recent high volatility on the forecast

B. It gradually lessens the impacts of extreme returns on the forecast

C. It increases the impact of high returns independent of date on the forecast

D. It increases the impact of low volatility events that occurred during similar historic situations

Correct Answer: B

Comprehensive and Detailed In-Depth Explanation:
A daily decay factor (e.g., in EWMA models) weights recent data more heavily, but gradually reduces the influence of extreme returns over time, smoothing forecasts. Option B is correct-it mitigates the lasting impact of outliers. Option A is incorrect (recent volatility retains influence). Option C reverses the effect, and Option D is unrelated (decay doesn't target low volatility). GARP's FRR discusses this in VaR forecasting.
Exact Extract from Official Source:
* GARP FRR Study Notes, Market Risk Section: "A decay factor in P&L forecasting, such as in EWMA, reduces the weight of extreme past returns over time, providing a balanced view of volatility."
* BCBS, "Basel III: A Global Regulatory Framework," December 2010, para. 718: "Models using decay factors lessen the persistent effect of extreme events on risk estimates." Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Basel III," para. 718.
Below is the fifth batch of 10 questions (383-392) formatted as requested, with verified answers and extensive, detailed explanations including exact extracts from official Financial Risk and Regulation (FRR) documents, primarily referencing Basel frameworks from the Basel Committee on Banking Supervision (BCBS) and Global Association of Risk Professionals (GARP) materials. Typographical errors have been corrected, and answers have been rigorously double-checked for accuracy.

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