10-60 Which of the following is a method that may overcome weaknesses in the historic or back simulation model?

Question

Quizplus · Accepted Answer

Weighting the more recent observations more heavily than older observations can help the model better reflect current market conditions and trends. This is known as a rolling window approach or exponentially weighted moving average (EWMA) method. Using smaller sample sizes (A) may lead to inaccurate estimates of return distributions, while increasing the number of assets in the trading portfolio (D) may not necessarily improve the accuracy of the model. Decreasing the number of assets (C) would limit diversification and increase idiosyncratic risk, which is generally not desirable. Finally, it is not necessarily true that the weaknesses in the model cannot be overcome (E).

10-60 Which of the Following Is a Method That May