SOA ERM EXAM FERM CH. 14 WITH VERIFIED SOLUTIONS!!
Characteristics of a Financial Time Series - ANSWER 1. Serial correlation does not
exist enough to make money
2. Strong serial correlation of absolute/squared terms
3. Distribution of market returns aooear leptokurtic
Characteristics of Multivariate Return Series - ANSWER 1. Correlations do exist
between stocks/asset classes/economic variables
2. Little evidence of cross-correlation
3. Time Series of extreme returns or individually leptokurtic
Ways to Model Market & Economic Risks - ANSWER 1. Factor Based Approaches
2. Data-Based Multivriate Distribution
3. Principle Component Analysis (PCA)
Problem with Data-Based Multivriate Approach - ANSWER As number of asset classes
increase, very large amounts of data need to be calculated
Principle Component Analysis (PCA) - ANSWER - Identifies the the components that
explain the variability in the data as much as possible
- Multivariate normality is required by asset data not always normal
Three Most Common Ways to Measure Credit Spread - ANSWER 1. Nominal Spread
2. Static Spread
3. Option Adjusted Spread
Characteristics of a Financial Time Series - ANSWER 1. Serial correlation does not
exist enough to make money
2. Strong serial correlation of absolute/squared terms
3. Distribution of market returns aooear leptokurtic
Characteristics of Multivariate Return Series - ANSWER 1. Correlations do exist
between stocks/asset classes/economic variables
2. Little evidence of cross-correlation
3. Time Series of extreme returns or individually leptokurtic
Ways to Model Market & Economic Risks - ANSWER 1. Factor Based Approaches
2. Data-Based Multivriate Distribution
3. Principle Component Analysis (PCA)
Problem with Data-Based Multivriate Approach - ANSWER As number of asset classes
increase, very large amounts of data need to be calculated
Principle Component Analysis (PCA) - ANSWER - Identifies the the components that
explain the variability in the data as much as possible
- Multivariate normality is required by asset data not always normal
Three Most Common Ways to Measure Credit Spread - ANSWER 1. Nominal Spread
2. Static Spread
3. Option Adjusted Spread
