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Portfolio Volatility

  • Variance – Covariance Approach
    • Extend the parametric approach to entire portfolio
    • Disadvantage: Correlations tend to increase in periods of stress. This approach might underestimate the portfolio Volatility
  • Extend Historical Simulation Approach
    • Apply current portfolio weight to old period returns
  • Third Approach
    • Aggregate the simulated returns and then apply the parametric approach to aggregated portfolio

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