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FRM Part II · FRM Exam Part II · Non-parametric Approaches

Which statement best describes a key drawback of the age-weighted (BRW) historical simulation approach relative to equally weighted historical simulation?

Age weighting reduces the effective sample size because older observations carry little weight, so the tail estimate relies on fewer data points and can be noisier. It remains non-parametric and does not ignore recent data.

  1. AIt cannot produce an estimate of expected shortfall
  2. BIt requires a parametric distribution assumption for returns
  3. CIt reduces the effective sample size, so estimates can become noisierCorrect
  4. DIt ignores the most recent observations

Explanation

Giving small weights to older data means fewer observations effectively influence the tail estimate, so the effective sample size falls and sampling error can rise. The approach remains non-parametric, can compute ES from weighted tail losses, and emphasizes rather than ignores recent data.

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