Converting a one-day risk figure to a longer horizon by multiplying by the square root of the number of days. It holds only if returns are independent and identically distributed.
Where you will meet it
Square root of time rule comes up in 11 learning outcome notes across the FRM syllabus.
A few of them:
Central Clearing FRM Part I · Financial markets and products
“Exam point: horizon scaling is by the square root of time, not linear.”
Multivariate Random Variables FRM Part I · Quantitative analysis
“This is why risk scales with the square root of time: SD = σ × √n.”
Future Value and Exposure FRM Part II · Credit risk measurement and management
“Scaling a short-horizon VaR by the square root of time ignores amortisation and so overstates long-dated exposure.”
VaR Mapping FRM Part II · Market risk measurement and management
“Relative VaR is scaled to the horizon by the square root of time, RelVaR = z × TEV × V × √T.”
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