theory questions that I mess up from part 1 Flashcards
A distribution with fat tails is most accurately described as:
A
leptokurtic.
B
platykurtic.
C
mesokurtic.
A
leptokurtic.
An analyst covering the oil and gas sector calculates an average leverage ratio of 2.31 for five of the industry’s leading firms. The analyst believes that this measure is representative of leverage ratios for other companies in the industry. The group of five firms is most accurately described as a:
A
sample.
B
sample statistic.
C
statistical inference.
A
sample.
A two-dimensional rectangular array would be most suitable for organizing a collection of raw:
A
panel data.
B
time-series data.
C
cross-sectional data.
A
panel data.
For a risky asset with volatile historical returns, which of the following measures of mean return will be most likely be highest?
A
Harmonic mean
B
Arithmetic mean
C
Geometric mean
B
Arithmetic mean
when we have a mode and a median, when is a distribution most likely positively skewed?
what about negatively skewed?
distribution is positively skewed if the mode is less than the median, which is less than the mean.
A distribution is negatively skewed if the mean is less than the median, which is less than the mode
A tag cloud, or word cloud
used to illustrate the frequency of textual data, which are a type of unstructured data. It allows analysts to quickly spot the most frequently used terms in a report/article
Which of the following most accurately characterizes the relative values of various measures of central tendency for a given data series?
A
arithmetic mean < geometric mean < harmonic mean
B
geometric mean > arithmetic mean > harmonic mean
C
arithmetic mean > geometric mean > harmonic mean
C
arithmetic mean > geometric mean > harmonic mean
A bar chart that orders categories by frequency in descending order and includes a line displaying cumulative relative frequency is best referred to as a:
A
Pareto Chart.
B
grouped bar chart.
C
frequency polygon.
A
Pareto Chart.
Published ratings on stocks ranging from 1 (strong sell) to 5 (strong buy) are most likely examples of which measurement scale?
A
Ordinal
B
Continuous
C
Nominal
A
Ordinal
Ordinal scales sort data into categories that are ordered with respect to some characteristic and may involve numbers to identify categories but do not assure that the differences between scale values are equal
A line chart with two variables—for example, revenues and earnings per share—is best suited for visualizing:
A
the joint variation in the variables.
B
underlying trends in the variables over time.
C
the degree of correlation between the variables.
B
underlying trends in the variables over time
An important benefit of a line chart is that it facilitates showing changes in the data and underlying trends in a clear and concise way. Often a line chart is used to display the changes in data series over time
A heat map is best suited for visualizing the:
A
frequency of textual data.
B
degree of correlation between different variables.
C
shape, center, and spread of the distribution of numerical data.
B
degree of correlation between different variables.
A heat map is commonly used for visualizing the degree of correlation between different variable
he average return for Portfolio A over the past twelve months is 3%, with a standard deviation of 4%. The average return for Portfolio B over this same period is also 3%, but with a standard deviation of 6%. The geometric mean return of Portfolio A is 2.85%. The geometric mean return of Portfolio B is most likely:
A
less than 2.85%.
B
equal to 2.85%.
C
greater than 2.85%.
A
less than 2.85%.
The more disperse a distribution, the greater the difference between the arithmetic mean and the geometric mean
A financial analyst wants to visualize the dispersion of the daily closing price of the FTSE 100 index in the previous year. In order to achieve this purpose, the analyst is least likely to use a:
A
histogram.
B
scatter plot.
C
box and whisker plot.
B
scatter plot.
A histogram uses a chart to present the distribution of numerical data such as the price of FTSE 100. This can show the dispersion in the data. Similarly, a box and whisker plot uses a box, whiskers, and fences to show different quartiles of the data as well as the range.
A scatter plot describes the joint variation in two numerical variables. There is only one numerical variable here, which is the daily closing price of FTSE 100. Therefore, a scatter plot is not an appropriate tool in this problem.
Data values that are categorical and not amenable to being organized in a logical order are most likely to be characterized as:
A
ordinal data.
B
discrete data.
C
nominal data.
C
nominal data.
C is correct. Nominal data are categorical values that are not amenable to being organized in a logical order.
A is incorrect because ordinal data are categorical data that can be logically ordered or ranked.
B is incorrect because discrete data are numerical values that result from a counting process; thus, they can be or- dered in various ways, such as from highest to lowest value.
Which visualization tool is most likely recommended to be used if the goal is to make comparisons of three or more variables over time?
A
13%
Heat map
B
66%
Bubble line chart
C
20%
Scatter plot matrix
An investor purchases a stock and intends to sell it one year from now. The stock will increase or decrease in value only at the end of each month. If the investor wants to find the probability that the stock will increase at the end of the first month, she should most likely use a:
A
uniform distribution.
B
Bernoulli distribution.
C
lognormal distribution.
B
Bernoulli distribution.
Which of the following statements is most likely accurate? When the degrees of freedom increase:
A
the skewness of the F-distribution increases.
B
the mode of the chi-square distribution shifts to the right.
C
the tails of the Student’s-distribution become fatter and longer.
B
the mode of the chi-square distribution shifts to the right.
When the degrees of freedom increase, the shape of the chi-square distribution begins to resemble a bell curve. This shifts the peak of the curve (i.e., the mode) to the righ
A normal distribution is characterized by a mean of 200 and a variance of 100. For an observation with a value of 200, the standardized value is closest to:
A
0
B
1
C
2
Z = (X - u) / (standard deviation)
A
0
With a normal distribution, the standardized value (Z) of a given observation (X) is calculated using the following formula:
Z score formula
basically:
(200 - 200) / Ssqrt(100)
=
0
Which of the following statements is most accurate? Compared to analytical methods, Monte Carlo simulation:
A
provides more precision when valuing options.
B
provides more insight into causal relationships.
C
can be used to value a wider variety of options than analytical methods.
C
can be used to value a wider variety of options than analytical methods.
Monte Carlo simulation can only provide statistical estimates, not precise valuations. And, unlike analytical methods, Monte Carlo simulation does not provide insight into the causal relationships between variables.
However, Monte Carlo simulation can be used to value many types of options that cannot be priced with analytical methods (e.g., Asian call options)
The value of the cumulative distribution function
, where
is a particular outcome, for a discrete uniform distribution:
A
sums to 1.
B
lies between 0 and 1.
C
decreases as
increases.
B
lies between 0 and 1.
Which of the following statements is most accurate? A probability distribution:
A
predicts the value of a discrete random variable.
B
lists the potential outcomes of a random variable.
C
specifies the probabilities of the value of a random variable.
C
specifies the probabilities of the value of a random variable.
An investor purchases a stock and intends to sell it one year from now. The stock can increase or decrease in value only at the end of each month. If the investor wants to find the probability that the stock will go up in value more times than it falls in value during the year, he should most likely use a:
A
Binomial distribution
B
Bernoulli distribution
C
Lognormal distribution
A
Binomial distribution
There are two possible outcomes at the end of each month, either the stock increases or decreases in value. Thus, the random variable could be assigned a value of 1 when the stock price increases and a value of 0 when it decreases.
Because the investor wants to look at how many months the stock increased versus how many months the stock decreased, a distribution that counts the number of up months in over a year (
= 12) should be used. This would be the binomial distribution.
Which parameter equals zero in a normal distribution?
A
Kurtosis
B
Skewness
C
Standard deviation
B
Skewness
The lognormal distribution is a more accurate model for the distribution of stock prices than the normal distribution because stock prices are most likely:
A
symmetrical.
B
unbounded.
C
non-negative.
C
non-negative.
Which of the following events can be best represented as a Bernoulli trial?
A
The flip of a coin
B
The closing price of a stock
C
The picking of a random integer between 1 and 10
A
The flip of a coin
A trial, such as a coin flip, will produce one of two outcomes. Such a trial is a Bernoulli trial.
Compared to Monte Carlo simulation, which of the following is most likely to be cited as an advantage of the Black-Scholes-Merton (BSM) option pricing model?
A
The BSM model can be used to value any European-style option.
B
The BSM model is more efficient for pricing European-style options.
C
Monte Carlo simulation cannot be used to value newer, more complex options.
B
The BSM model is more efficient for pricing European-style options.
The total number of parameters that fully characterizes a multivariate normal distribution for the returns on two stocks is:
A3.
B4.
C5.
C5.
A bivariate normal distribution (two stocks) will have:
2 means
2 variances
2(2 – 1)/2 = 1 correlation
So, there are 2 + 2 + 1 = 5 parameters in total.
Which one of the following statements concerning chi-square and F-distributions is most likely false?
A
They are both asymmetric distributions.
B
The domains of their pdfs are positive and negative numbers.
C
As their degrees of freedom increase, the shapes of their pdfs become more bell curve–like.
B
The domains of their pdfs are positive and negative numbers.
Both chi-square and F-distributions are bounded from below by zero, so the domains of their pdfs are restricted to positive numbers.
A random variable with an infinite number of possible values can be classified as:
A
a lognormal random variable only.
B
a continuous random variable only.
C
either a continuous or a discrete random variable.
C
either a continuous or a discrete random variable
a discrete random variable can have an infinite number of possibilities. Notably, stock prices are often discrete random variables in the sense that they may only have certain incremental values (e.g., $0.01, $0.02, $0.03, etc.).
However, because there is no upward limit on its potential value, a stock’s price can be modeled as a continuous random variable with a lognormal distribution.
A Monte Carlo simulation can most likely be used to:
A
directly provide precise valuations of call options.
B
simulate a process from historical records of returns.
C
test the sensitivity of a model to changes in assumptions—for example, on distributions of key variables.
C
test the sensitivity of a model to changes in assumptions—for example, on distributions of key variables.
A characteristic feature of Monte Carlo simulation is the generation of a large number of random samples from a specified probability distribution or distributions to represent the role of risk in the system. Therefore, it is very useful for investigating the sensitivity of a model to changes in assumptions—for example, on distributions of key variables.
In contrast to normal distributions, lognormal distributions most likely:
A
are skewed to the left.
B
have outcomes that cannot be negative.
C
are more suitable for describing asset returns than asset prices.
B
have outcomes that cannot be negative.
A limitation of Monte Carlo simulation is:
A
its failure to do “what if” analysis.
B
that it requires historical records of returns.
C
its inability to independently specify cause-and-effect relationships.
C
its inability to independently specify cause-and-effect relationships.
Which of the following is most likely one of the parameters required to completely describe a multivariate normal distribution?
A
Kurtosis
B
Skewness
C
Correlation
C
Correlation
Safety-first rules are most likely to be used by investors who:
A
consider risk symmetrically.
B
are concerned about shortfall risk.
C
do not consider the correlations of returns on assets within a portfolio.
B
are concerned about shortfall risk.
