Which of the following statements is true?
A)The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes.
B)The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes.
C)The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes.
D)Assumptions regarding the distribution of yields are not significant in market risk measurement models.

Question

Quizplus · Accepted Answer

The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes since the normal distribution underestimates the probability of extreme events. Therefore, using alternative distributions such as the student t-distribution or the lognormal distribution may be more appropriate for modeling market risk.

Which of the Following Statements Is True