What is a common implicit assumption that is made when computing VaR using parametric methods?

What is a common implicit assumption that is made when computing VaR using parametric methods?
A . The expected returns are constant, but the standard deviation changes over time.
B . The standard deviations of returns are constant, but the mean changes over time.
C . The mean of and the standard deviations of returns are both constant.
D . The mean and standard deviation of returns change periodically in response to crises.

View Answer

Answer: C

Explanation:

When computing VaR using parametric methods, a common implicit assumption is that both the mean and standard deviation of returns are constant over time.

Constant Mean: The expected return of the asset or portfolio does not change over the time period considered.

Constant Standard Deviation: The volatility of returns, which measures the dispersion of returns from the mean, is assumed to be constant.

This assumption simplifies the calculations as it allows the use of historical data to estimate future risks. However, it may not always hold true in real-world scenarios where markets can exhibit changing

volatility and return patterns.

References

How Finance Works.pdf, p. 201