Quantative Methods

Question 1

Nominal risk free rate approx

Answer 1

Real risk free rate + expected inflation rate

Question 2

Types of risks affecting securities (3)?

Answer 2

1) Default risk
2) Liquidity risk
3) Maturity risk

Question 3

Real interest rate

Answer 3

Interest rate before taking inflation into account

Question 4

Holding period return

Answer 4

Percentage increase in value of investment over that period

Question 5

Internal rate of return (IRR)

Answer 5

Interest rate at which a series of cash inflows and outflows sum to zero when discounted to present value. (E.g. NPV of zero)

Question 6

Money weighted rate of return

Answer 6

IRR on a portfolio

Question 7

Winsorised mean

Answer 7

Substitute % of extreme values for those at the boundary at the %

Question 8

Properties of central limit theorem (3)

Answer 8

• If n>=30 distribution of sample means is normal
• Mean of population = mean of sample means
• Variance of sample = variance of population/ sample size n

Question 9

Type 1 and type 2 error hypothesis testing

Answer 9

Type 1: H0 true and we reject
Type 2: H0 false and we don’t reject

Question 10

Hypothesis testing for dependant and independent samples.

Answer 10

Independent: Test differences between means
Dependant: Test significance of the mean of the differences between paired sample s