In calculating the value at risk (VAR) of fixed-income securities in the RiskMetrics model,
A)the VAR is related in a linear manner to the DEAR.
B)the price volatility is the product of the modified duration and the adverse yield change.
C)the yield changes are assumed to be normally distributed.
D)All of the options.
E)the price volatility is the product of the modified duration and the adverse yield change and the yield changes are assumed to be normally distributed.

Question

Quizplus · Accepted Answer

The RiskMetrics model for calculating VAR of fixed-income securities assumes that price volatility is the product of the modified duration and the adverse yield change, and also assumes that yield changes are normally distributed. Therefore, option E is the correct choice. Option A is incorrect as there is no mention of DEAR in the calculation of VAR. Option B is incorrect as it only describes a component of the calculation of price volatility, not VAR. Option C is incorrect as it is only a part of the assumption made in the RiskMetrics model, but not the complete calculation of VAR.

In Calculating the Value at Risk (VAR) of Fixed-Income Securities