Risk Latte - Quiz#1

a) 50 Volatility and 50 Correlation parameters
b) 100 Volatility and 4050 Correlation parameters;
c) 100 Volatility and 20 Correlation parameters;
d) 3000 Volatility and 1050 Correlation parameters;

3) Suppose You are an index fund manager and you are going to be penalized if your
    portfolio's value ever penetrates a level that is 10% below its initial level. Assume
    that the stock index has a 10.63% continuous expected return and a 19.34%
    continuous standard deviation. Then what is the probability of your portfolio fall
    to 90% or less of its initial value in a 10-year horizon?

a) 28.5%
b) 10.0%
c) 48.65%
d) 54.52%

4) An investment in one time period either generates a particular gain with a probability p
    or a loss with a probability (1 - p). If there are six time periods in entire investment
    period then how many total paths are there for the investment from start to
    the terminal value?

a) 12
b) 24
c) 64
d) 48

5) Siegel's paradox refers to the fact that:

a) The expectation of the reciporcal of an exchange rate is greater than the reciporcal
          of the expectation of the exchange rate.
b) The expectation of the reciporcal of an exchange rate is equal to the reciporcal of
          the expectation of the exchange rate.
c) The exchange rates fall to adjust in a manner so that the cost of similar
          goods and services remains same in all countries.
d) None of the above.

6) If you are only care about expected wealth and ignore risk and utility then:

a) You are better off by investing half of your wealth in stocks and the other half in
riskless asset all of the time;
b) You are better off by investing all of your wealth in stocks half of the time and
all of it in riskless asset the other half of the time;
c) You are indifferent between the two above strategies;
d) You will have a definite preference amongst the above strategies;

7) A Differential Equation is an equation :

a) which is the difference between two equations;
b) which contains one or more mathematical derviatives;
c) which is a system of linear equations;
d) None of the above.

8) A 10% periodic return is equivalent to a continuous return of :

a) 8.45%
b) 9.12%
c) 9.53%
d) 10.33%

9) Bootstapping is a numerical procedure and differs from Monte Carlo Simulation
in an important way:

a) It assumes that the theoretical distribution is only an approximation of the reality.
b) It assumes implicitly that the shape of our sample distribution is an
approximation of the shape of the true observable distribution of all returns,
past and future;
c) It imposes constraints on Monte Carlo Simulation to create a simple distribution;
d) None of the above.

10) A mean reverting return process will cause:

a) Variance to increase at a decreasing rate with time;
b) Variance to increase at an increasing rate with time;
c) Variance to alternate between increasing and decreasing with time;
d) None of the above;

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