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FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction

A chief risk officer wants stress testing to complement VaR. Which statement best explains the role of scenario analysis relative to VaR?

Scenario analysis complements VaR by examining specific severe but plausible events that may lie outside the range captured by statistical models, giving management information on vulnerabilities and actions that VaR alone would not reveal.

  1. AScenario analysis replaces VaR because it assigns exact probabilities to losses
  2. BScenario analysis examines specific, severe but plausible events that may lie beyond the range captured by statistical models, informing decisions that VaR alone would notCorrect
  3. CScenario analysis is only useful when historical data is unavailable
  4. DScenario analysis measures expected losses under normal market conditions

Explanation

Scenario analysis explores specific severe yet plausible events, including those outside the historical distribution used by VaR, and supports management action. It does not assign exact probabilities or replace VaR.

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