One of Rebecca Wang’s portfolios is diversified. She is trying to determine which formal measure of risk is appropriate for determining the contribution of each asset to the overall portfolio VaR in a diversified portfolio. Rebecca is considering the following measures: conditional value at risk (CVaR), incremental value at risk (IVaR), and marginal value at risk (MVaR).
Which risk measure is most appropriate for Wang’s purposes?
I just saw this question on Schweser Exam 2 PM. I think the answer is marginal because you are determining the contribution of each asset to the overall diversified portfolio. Incremental risk is used whenever you want to see how adding an specific asset will affect the portfolio’s VAR (doing it incrementally).
Not really sure though and would love to hear other’s insights.
Answer: MVaR is the most appropriate because it measures the impact of a very small change in the position size. In a diversified portfolio, MVaR is appropriate to calculate the contribution of each asset to the total portfolio VaR.
But the question does not say a very small change in position size. It says an asset is added in the portfolio. The asset added may be a large position size.