Which of the following is a method that may overcome weaknesses in the historic or back simulation model?
A)The use of smaller sample sizes to estimate return distributions.
B)Weight sample size observations so that the more recent observations contribute a larger amount to the model.
C)Decrease the number of assets in the trading portfolio so that past returns will provide more accuracy to the model.
D)Increase the number of assets in the trading portfolio in order to benefit from higher levels of diversification.
E)The weaknesses in the model cannot be overcome.

Question

Quizplus · Accepted Answer

By weighting recent observations more heavily, the model will be updated more frequently and therefore may better reflect current market conditions. A smaller sample size may actually increase the level of error in the model, and decreasing the number of assets in the trading portfolio may limit diversification benefits. Increasing the number of assets in the trading portfolio may not necessarily improve the accuracy of the model. Option E is incorrect because there are ways to potentially overcome weaknesses in the model.

Which of the Following Is a Method That May Overcome