qingshu

 

10、You estimate the following GARCH model:

σ2n = 0.04 + 0.30μ2t-1 + 0.50σ2n-1

If the most recent volatility estimate and error term are 0.15 and 0.02, respectively, the long-run average volatility is closest to:

A) 0.16.

B) 0.23.

C) 0.20.

D) 0.04.

qingshu

 

The correct answer is C

 

 

 

[attach]13893[/attach]

qingshu

 

11、A portfolio manager is using an exponentially weighted moving average (EWMA) model to forecast volatility for a particular market parameter. What is the implication of an EWMA weighting parameter value of 0.84?

A) A greater weight is placed on the most recent change in parameter value than on the previous volatility estimate.

B) An equal weight is placed on the previous volatility estimate as on the most recent change in parameter value.

C) A greater weight is placed on the previous volatility estimate than on the most recent change in parameter value.

D) More information is required to determine the implication.

qingshu

 

The correct answer is C

The EWMA weighting parameter of 0.84 indicates that a weighting of 0.84 will be placed on the previous volatility estimate and a weighting of 0.16 will be placed on the most recent change in the parameter value.

qingshu

 

12、When using an EWMA model to estimate portfolio volatility, the method used to estimate the portfolio covariance matrix should be the:

A) historical method.

B) EWMA method.

C) GARCH(1,1).

D) hyper geometric method.

qingshu

 

The correct answer is B

For internal consistency, the covariance consistency condition requires that the method that is used to estimate portfolio volatility also has to be the method used to estimate the portfolio covariance matrix.

qingshu

 

13、Which of the following is/are a shortcoming(s) when using the normal distribution for estimating GARCH(1,1) parameters?

I. Parameters such as volatility often exhibit mean reverting characteristics. 

II. Maximum likelihood estimation with a normal distribution is not tractable.

III. Financial and economic data series often do not follow a normal distribution.

IV. Maximum likelihood estimation with a normal distribution will never generate a local maxima.

A) III only.

B) I, III, and IV only.

C) II and IV only.

D) I and II only.

qingshu

 

The correct answer is A

Using a normal distribution as the assumed probability generating process is only appropriate if the underlying data follow a normally distributed process. Most financial and economic time series exhibit substantial deviations from normally distributed processes. Note that maximum likelihood estimators select values for model parameters that maximize the likelihood that observed data will occur in a sample. The maximum likelihood method can be used with any type of probability distribution. Mean reversion characteristics of parameters would not be considered a shortcoming for using the normal distribution.

qingshu

 

14、RiskMetrics uses the following value for the decay factor of daily data:

A) 0.92.

B) 0.94.

C) 0.95.

D) 0.97.

qingshu

 

The correct answer is B

RiskMetrics uses a decay factor of 0.94 for daily data and 0.97 for monthly data.