VaR-bases risk decomposition is the calculation that allocates the total VaR of a portfolio to each of its assets or subportfolios.Which of the following statements is most valid?
A)Risk decomposition is based on the fact that VaR is linearly homogeneous in its constituents.
B)Risk decomposition assumes that the assets in a portfolio are distributed multivariate normal.
C)Risk decomposition depends on the sequence in which assets are added to an existing portfolio.
D)Risk decomposition is not possible if Monte Carlo simulation is used to compute VaR.

Question

Quizplus · Accepted Answer

See Chapter 20 for a proof that risk decomposition is derived using the linear homogeneity property.It does not require normality.Risk decomposition in fact shows that the sequence in which assets are added to a portfolio is irrelevant,and the same decomposition is arrived at no matter the sequence.Risk decomposition requires computing first derivatives of total VaR with respect to each asset dollar weight in the portfolio.These first derivatives may also be computed in a simulation setting.

VaR-Bases Risk Decomposition Is the Calculation That Allocates the Total