CTA Statistical & Quantitative Methods 2

Question 1

How does an Exponential Moving Average (EMA) differ most significantly from a Simple Moving Average (SMA)?

Accepted Answer

The EMA gives progressively greater weight to more recent price data

Answer

The EMA applies equal weight to all data points in the calculation period

Answer

The EMA requires significantly more historical data points to calculate

Answer

The EMA is only calculated using opening rather than closing prices

Question 2

In hypothesis testing for trading system validation, what does a p-value of 0.05 indicate?

Accepted Answer

There is a 5% probability the results occurred by chance, indicating statistical significance

Answer

The trading results have a 95% probability of being due to chance

Answer

The system will generate a 5% annual return in the future

Answer

The strategy data contains significant autocorrelation at the 5% level

Question 3

What does the Sharpe Ratio specifically measure in trading strategy evaluation?

Accepted Answer

The excess return earned per unit of total risk (standard deviation)

Answer

The total cumulative return generated by a portfolio

Answer

The maximum peak-to-trough drawdown of a trading strategy

Answer

The portfolio's correlation to its designated benchmark index

Question 4

What does the Coefficient of Variation (CV) measure in financial analysis?

Accepted Answer

The relative variability of returns expressed as a percentage of the mean return

Answer

The absolute level of portfolio risk in dollar terms

Answer

The statistical correlation between two different asset classes

Answer

The rate of change in implied volatility over time

Question 5

What is 'overfitting' in the context of developing a technical trading system?

Accepted Answer

Optimizing a model so precisely to historical data that it captures noise rather than true patterns, reducing future predictive power

Answer

Allocating positions across too many uncorrelated asset classes in a single portfolio

Answer

Setting initial stop-loss levels too close to entry prices relative to market volatility

Answer

Simultaneously applying an excessive number of technical indicators to a single price chart

Question 6

In a linear regression channel applied to a price chart, what do the outer channel lines represent?

Accepted Answer

Price boundaries set at a specified number of standard deviations above and below the regression line

Answer

Fibonacci retracement levels calculated from the regression trendline

Answer

The average true range of price movement over the regression period

Answer

Moving average crossover levels relative to the regression midline

Question 7

What is the primary limitation of backtesting a technical trading strategy on historical data?

Accepted Answer

Past performance does not guarantee future results as market conditions and regimes change over time

Answer

Historical price data cannot be analyzed using standard statistical methods

Answer

Historical data is generally insufficient in length to provide any meaningful results

Answer

Moving average calculations cannot be accurately applied to historical price data