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Home  >> Volatility Today September 5, 2008, 10:56 pm
Quiz on Volatility & Correlation
Team Latte
Dec 30, 2005

Quiz # 1

This quiz tests basic knowledge of volatility and correlation as applied in financial engineering and derivatives.

1) Volatility is the statistical measure:
a) mean.
b) standard deviation
c) standard error
d) covariance

2) Square of volatility is:
a) variance
b) covariance
c) standard error
d) beta

3) Price of a certain stock can be either $15 or $8 in the next
    one year. The volatility of the stock (in dollar terms) is:
a) $2.50
b) $3.50
c) $1.50
d) $4.50

4) If we have to bet on volatility then the following products are
    suitable:
a) volatility swaps
b) straddles
c) log forward
d) All of the above

5) The annualized volatility of an asset is 10%. If there are 252
    trading days in a year then the daily volatility is:
a) 0.56%
b) 0.85%
c) 0.63%
d) 0.72%

6) Correlation can be geometrically represented as:
a)
b)
c)
d)

7) Let us say that the price of Yahoo! is currently $40. In the next
    period (time t = 1) it can either go up to $50 or go down to $30.
    The probability of going up is 35% and that of going down is 65%.
    Then the volatility of Yahoo! stock would be:
a) $6.24
b) $8.15
c) $9.54
d) $10.18

8) Which of the following is not a measure of historical volatility:
a) 30 day ATM vol of USD/JPY
b) GARCH measure for USD/JPY
c) EWMA vol (decay factor = 0.97) of USD/JPY
d) 1 year Parkinson's Number of USD/JPY

9) The volatility of asset 1 is 10% and that of asset 2 is 15%. The
    covariance between them is 0.38%. If the covariance jumps to
    0.75% without any change in the levels of volatility of the two
    assets then the correlation must have:
a) doubled
b) halved
c) increased by 50%
d) decreased by 25%

10) If volatility can be traded using a single asset then correlation:
a) can be traded using a single asset;
b) can be traded using at least two assets;
c) cannot be traded at all;
d) can be traded only if volatility of a single asset remains constant;

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