Carnoustie Capital Management, Ltd. (CCM), a UK-based global investment advisory firm, is considering adding an emerging market currency product to its offerings. CCM has for the past three years managed a “model” portfolio of emerging market currencies using the same investment approach as its developed economy currency products. The risk and return measures of the “model” portfolio compare favorably with the one- and three-year emerging market benchmark performance net of CCM’s customary advisory fee and estimated trading costs. Mindful of the higher volatility of emerging market currencies, CCM management is particularly pleased with the “model” portfolio’s standard deviation, Sharpe ratio, and value at risk (VAR) in comparison to those of its developed economy products.

Recognizing that market conditions have been stable since the “model” portfolio’s inception, CCM management is sensitive to the consequences of extreme market events for emerging market risk and return.

Evaluate the application of emerging market and developed market investment return probability distributions for CCM’s potential new product.