Quantitative Methods & Statistics for Fund Management Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Quantitative Methods & Statistics for Fund Management flashcards as text
How does the Sortino ratio differ from the Sharpe ratio in risk measurement?
Answer: It uses downside deviation instead of total standard deviation
The Sortino ratio replaces total standard deviation with downside deviation (only negative return deviations), making it more appropriate for return distributions that are asymmetric.
What does Value at Risk (VaR) at a 95% confidence level represent?
Answer: The loss not expected to be exceeded with 95% probability over a given time horizon
VaR at 95% confidence means there is only a 5% probability that the actual loss will exceed the VaR estimate over the specified time period.
In the Capital Asset Pricing Model (CAPM), what does beta represent?
Answer: A measure of a security's sensitivity to market movements
Beta measures systematic risk relative to the market; a beta of 1.0 means the security moves in line with the market, while beta greater than 1 indicates higher sensitivity to market movements.
In portfolio optimization, what does the efficient frontier represent?
Answer: The set of portfolios offering the maximum expected return for a given level of risk
The efficient frontier, derived from Modern Portfolio Theory, is the set of optimal portfolios that offer the highest expected return for each defined level of risk.
What does positive skewness in a fund's return distribution indicate?
Answer: The distribution has a longer right tail, indicating occasional large positive returns
Positive skewness means the right tail is longer, indicating occasional extreme positive returns, with the mean typically exceeding the median.
What does high kurtosis (leptokurtosis) indicate about a fund's return distribution?
Answer: The distribution has fat tails with more probability of extreme outcomes than a normal distribution
High kurtosis (leptokurtic) indicates fat tails, meaning the distribution has more extreme outcomes (both gains and losses) than a normal distribution — a key risk consideration for fund managers.
In time series analysis, what is autocorrelation?
Answer: The correlation of a return series with its own lagged values
Autocorrelation (serial correlation) measures the degree to which a time series is correlated with its own past values, revealing patterns such as return momentum or mean-reversion.