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FRM-Quiz 4

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13 views3 pages

FRM-Quiz 4

Uploaded by

buithibinhyen2007
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Risk Management

Quiz 4

1. The probability mass function (PMF) for a discrete random variable that can take on the
values 1, 2, 3, 4, or 5 is P(X = x) = x/15. The value of the cumulative distribution function (CDF)
of 4, F(4), is equal to
A. 26.7%.
B. 40.0%.
C. 66.7%.
D. 75.0%.
2. The probability that a normal random variable will be more than two standard deviations
above its mean is
A. 0.0217.
B. 0.0228. = 1-F(2)
C. 0.4772.
D. 0.9772.

3. Which of the following random variables is least likely to be modeled appropriately by a


lognormal distribution?
A. The size of silver particles in a photographic solution
B. The number of hours a housefly will live
C. The return on a financial security
D. The weight of a meteor entering the earth’s atmosphere

4. A hedge fund manager computed the covariances between two bivariate random variables.
However, she is having difficulty interpreting the implications of the dependency between the
two variables as the scale of the two variables are very different. Which of the following
statements will most likely benefit the fund manager when interpreting the dependency for these
two bivariate random variables?

A. Compute the correlation by multiplying the covariance of the two variables by the product of
the two variables’ standard deviations.
B. Disregard the covariance for bivariate random variables as this data is not relevant due to the
nature of bivariate random variables.
C. Compute the correlation by dividing the covariance of the two variables by the product of the
two variables’ standard deviations.
D. Divide the larger scale variables by a common denominator and rerun the estimations of
covariance by subtracting each variable’s expected mean.

5. A distribution of returns that has a greater percentage of extremely large deviations from the
mean
A. is positively skewed.
B. is a symmetric distribution.
C. has positive excess kurtosis.
D. has negative excess kurtosis.
6. The correlation of returns between Stocks A and B is 0.50. The covariance between these two
securities is 0.0043, and the standard deviation of the return of Stock B is 26%. The variance of
returns for Stock A is
A. 0.0331.
B. 0.0011.
C. 0.2656.
D. 0.0112.
7. The conditions for a time series to exhibit covariance stationarity are least likely to include
A. a stable mean.
B. a finite variance.
C. a finite number of observations.
D. autocovariances that do not depend on time.
8. Which of the following conditions is necessary for an autoregressive (AR) process to be
covariance stationary?
A. The value of the lag slope coefficients should add to 1.
B. The value of the lag slope coefficients should all be less than 1.
C. The absolute value of the lag slope coefficients should be less than 1.
D. The sum of the lag coefficients should be less than 1.
9. Which of the following statements is correct regarding the usefulness of an autoregressive
(AR) process and an autoregressive moving average (ARMA) process when modeling seasonal
data?
I. They both include lagged terms and, therefore, can better capture a relationship in motion.
II. They both specialize in capturing only the random movements in time series data.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
10. An analyst has determined that monthly vehicle sales in the United States have been
increasing over the last 10 years, but the growth rate over that period has been relatively
constant. Which model is most appropriate to predict future vehicle sales?
A. Linear model
B. Quadratic model
C. Log-linear model
D. Log-quadratic model
11. Using data from 2001 to 2020, an analyst estimates a model for an industry’s annual output
as Outputt = 80.163 + 4.248t + εt, from a regression with a residual standard deviation of
107.574. A 95% confidence interval for a forecast of 2021 industry output is closest to
A. 8,374 to 8,796.
B. 8,455 to 8,876.
C. 8,477 to 8,693.
D. 8,557 to 8,773.
12. Jill Williams is an analyst in the retail industry. She is modeling a company’s sales and has
noticed a quarterly seasonal pattern. If Williams includes an intercept term in her model, how
many dummy variables should she use to model the seasonality component?
A. 1
B. 2
C. 3
D. 4
13. A model for the change in a retailer’s quarterly sales, using seasonal dummy variables DQ, is
estimated as:
ΔSalest = 4.9 − 2.1DQ2 − 3.8DQ3 + 6.5DQ4
In the third quarter, sales are forecast to
A. decrease by 3.8.
B. decrease by 1.0.
C. increase by 1.1.
D. increase by 3.8.

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