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FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

Which is the main advantage of using a QQ plot rather than a histogram overlaid with a fitted density to assess whether returns follow a given distribution for risk measurement purposes?

A QQ plot makes tail departures easier to see. Histograms are dominated by the central mass of observations, whereas QQ plots compare quantiles directly and highlight differences in the extreme tails, which are what drive VaR and expected shortfall.

  1. AIt gives a formal p-value for rejecting the distribution
  2. BIt makes departures in the tails easier to see, where VaR and expected shortfall are determinedCorrect
  3. CIt automatically estimates the distribution's parameters without any fitting
  4. DIt removes the effect of outliers from the sample

Explanation

Histograms emphasize the center of the distribution, where most observations lie, so tail discrepancies are hard to see. A QQ plot compares quantiles directly and magnifies tail differences relevant to VaR and ES. It is a graphical tool, provides no p-value, does not estimate parameters by itself, and does not remove outliers.

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