VaR-bases risk decomposition is the calculation that allocates the total VaR of a portfolio to each of its assets or subportfolios. Which of the following statements is most valid?
A) Risk decomposition is based on the fact that VaR is linearly homogeneous in its constituents.
B) Risk decomposition assumes that the assets in a portfolio are distributed multivariate normal.
C) Risk decomposition depends on the sequence in which assets are added to an existing portfolio.
D) Risk decomposition is not possible if Monte Carlo simulation is used to compute VaR.

Question

VaR-bases risk decomposition is the calculation that allocates the total VaR of a portfolio to each of its assets or subportfolios. Which of the following statements is most valid? 
A) Risk decomposition is based on the fact that VaR is linearly homogeneous in its constituents.
B) Risk decomposition assumes that the assets in a portfolio are distributed multivariate normal.
C) Risk decomposition depends on the sequence in which assets are added to an existing portfolio.
D) Risk decomposition is not possible if Monte Carlo simulation is used to compute VaR.

Quizplus · Accepted Answer

Risk decomposition is based on the assumption that VaR is linearly homogeneous in its constituents, meaning that the risk of a portfolio can be decomposed into the risks of its individual assets or subportfolios. This assumption holds regardless of the distributional assumptions or simulation method used to calculate VaR. The other answer choices are not accurate or relevant to the concept of risk decomposition.

VaR-Bases Risk Decomposition Is the Calculation That Allocates the Total