8008 Exam Dumps | An assumption of normality when returns data have fat tails leads to: I. underestimation of VaR at high

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 113

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Question 113/125

An assumption of normality when returns data have fat tails leads to:
I. underestimation of VaR at high confidence levels
II. overestimation of VaR at low confidence levels
III. overestimation of VaR at high confidence levels
IV. underestimation of VaR at low confidence levels

A. I and II

B. I, II, III and IV

C. I, II and III

D. II, III and IV

Correct Answer: A

Explanation
When returns are non-normal and have fat tails, an assumption of normality in returns leads to underestimation of VaR at high confidence levels. At the same time, at lower confidence levels the normal distribution may give higher VaR estimates. Therefore Choice 'a' is correct. The other choices are incorrect.
Also refer to the tutorial about VaR and heavy tails.

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