Exercise Solution 14.3

The random losses incurred by a portfolio depend on the riskiness of the portfolio. The riskiness of the portfolio evolves over time, perhaps being higher or lower for extended periods due to such factors as

• the gradual accumulation or liquidation of large positions,
• gradual changes in trading or hedging strategies, or
• periods of high or low volatility in the markets.

Because the impact of such factors persists over extended periods, portfolio losses are not independent from one day to the next, one week to the next, or even one month to the next.