qingshu

 

The correct answer is B

A regime-switching volatility model assumes different market regimes exist with high or low volatility.  The mean is assumed constant, but the volatility depends on the regime.  Conditional on the fact that interest rates are drawn from one regime, the distribution is normally distributed.  If interest rates are drawn from more than one regime, this unconditional distribution need not be normally distributed.

qingshu

 

The correct answer is C

A distribution is left skewed when the distribution is asymmetrical and there is a higher probability of large negative returns than there is for large positive returns.

qingshu

 

3、All of the following are examples of why returns distributions can deviate from the normal distribution EXCEPT the distributions:

A) are symmetrical.

B) are fat tailed.

C) are skewed.

D) have unstable parameters.

qingshu

 

The correct answer is A

Examples of common deviations from the normal distribution are fat tails and skewed and/or unstable parameters. The normal distribution is symmetrical.

qingshu

 

4、Which of the following statements regarding fat-tail distributions is/are TRUE? A fat-tailed distribution: I. most likely results from time-varying volatility for the unconditional distribution. II. has a lower probability mass around one standard deviation from the mean than a normal distribution. III. has a lower probability mass around the mean than a normal distribution. IV. most likely results from time-varying means for the conditional distribution.

A) I only. 

B) I and II.

C) I and III.

D) II and IV.

qingshu

 

The correct answer is B

Fat-tailed distributions typically have less probability mass in the intermediate range, around +/– one standard deviation, compared to the normal distribution. The first two moments (mean and variance) of the distributions are similar for the fat-tailed and normal distributions. Fat-tailed distributions have greater mass in the tails and a greater probability mass around the mean than the normal distribution.

qingshu

 

2、A distribution of asset returns that has a significantly higher probability of obtaining large losses is described as:

A) right skewed.

B) fat tailed.

C) left skewed.

D) symmetrical.