Why is the lognormal distribution so relevant in applied finance?
The lognormal distribution is extensively used in applied finance. Which of the following sentences is more appropriate in relation to this well-known distribution? a) It is useful for simulating financial asset returns because it has no negative values, and positive skewness. b) It is useful for representing the returns of underlying assets in some
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What are the main limitations of Pearson correlation analysis?
The Pearson correlation coefficient is a number between -1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined. Which of the following sentences better represents the limitations of the correlation analysis implemented
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How are expected values and variances calculated in ex-ante scenarios?
Suppose that you have estimated the probability distribution of a hedge fund for next year considering three different scenarios. There is a 40% probability of generating a 30% return (optimistic scenario), a 25% probability of generating a 5% return (flat scenario), and a pessimistic scenario with a negative return of 10%. Calculate with these inputs,
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What are the main advantages and disadvantages of the arithmetic mean?
In statistics, within the measures of central tendency we can find the median, the mode, and the mean, and inside this last measure, we can differentiate between arithmetic, geometric, weighted, and harmonic mean. Mark the correct sentence regarding the main advantages of the arithmetic mean? a) Given a population or a sample, both the
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What is the difference between an ordinary annuity and an annuity due?
How can we calculate the value of an annuity due taking the value of an ordinary annuity, if both annuities have the same number of years, and the same value year after year? a)We need to divide the value of the ordinary annuity by the gross rate of return. b) We need to add
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What is the difference between the inflation premium and the inflation rate?
Which of the following sentences better represent the difference between the inflation rate and the inflation premium? a) The inflation premium is an extra return that compensates investors for expected inflation. b) The inflation premium is monitored by central banks and it impacts the real value of money over time. c) The inflation rate
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