A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence level based on the number of observations.

Question

Quizplus · Accepted Answer

Back simulation approach relies on historical observations to simulate future scenarios and estimate market risk exposure. However, the confidence level of the estimate is limited by the number of observations available in the historical data. If there are too few observations or if the historical data does not capture all possible outcomes, the estimate may not be reliable or accurate.

A Disadvantage of the Back Simulation Approach to Estimate Market