10-59 A disadvantage of the historic or back simulation model for quantifying market risk includes

Question

Quizplus · Accepted Answer

The historic or back simulation model uses past returns to estimate potential future returns, but the relevance of these past returns to current market conditions may be questionable. Therefore, this model has a disadvantage in that estimates of past returns used in the model may not be relevant to the current market returns. The other choices are incorrect because the standard deviation of returns and the correlation between asset returns are both important calculations in the historic simulation model, and the model accounts for non-standard return distributions.

10-59 a Disadvantage of the Historic or Back Simulation Model