In calculating the value at risk (VAR) of fixed-income securities in the Risk Metrics model

Question

Quizplus · Accepted Answer

In the Risk Metrics model, the value at risk (VAR) of fixed-income securities is calculated as the product of the modified duration and the adverse yield change, and the yield changes are assumed to be normally distributed. This means that choice E, which combines these two statements, is the correct answer. Choice A is incorrect because the VAR is not directly related to the DEAR, although they are both measures of risk. Choice B is partially correct, as the price volatility is indeed calculated based on the modified duration and adverse yield change, but it does not mention the assumption of normality for yield changes. Choice C is also partially correct, as the model does make the assumption of normality for yield changes, but it does not mention the calculation of price volatility.

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