The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
A)There is a very small sample size (

Question

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
A)There is a very small sample size (<30 observations) used to estimate probability distributions.
B)That the probability distribution is skewed to the left.
C)That changes in asset prices are normally distributed but with fat tails.
D)That the probability distribution is skewed to the right.
E)That changes in asset prices follow a standard normal probability distribution.

Quizplus · Accepted Answer

ES assumes that changes in asset prices are normally distributed but with fat tails, meaning that extreme events occur more frequently than what is predicted by a normal distribution. This assumption is consistent with empirical evidence, and allows for a more accurate estimation of downside risk in a portfolio.

The Use of Expected Shortfall (ES) to Measure Market Risk