Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?

Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?
A . Solve the problem caused by incorrectly assuming that asset returns are normally distributed.
B . Rely on current market data to describe the distribution of returns and determine volatilities.
C . Are believed to be superior in accuracy predicting future levels of realized volatility.
D . Are only using loss probabilities that can be found in tables of the standard normal distribution.

View Answer

Answer: A

Explanation:

The historical simulation method does not assume a normal distribution of asset returns. Instead, it uses actual historical returns to simulate future returns, thereby addressing the problem of incorrect assumptions about the normal distribution of asset returns. This approach can better capture the empirical distribution of returns, including skewness and kurtosis.