A relative value hedge fund manager holds a long position in Asset A and a short position in Asset B of roughly equal principal amounts. Asset A currently
has a correlation with Asset B of 0.97. The risk manager decides to overwrite this correlation assumption in the variance-covariance based VAR model to a
level of 0.30. What effect will this change have on the resulting VAR measure?
A. It increases VAR.
B. It decreases VAR.
C. It has no effect on VAR but changes profit or loss of strategy.
D. Do not have enough information to answer.