CTA Statistical & Quantitative Methods 3

Question 1

Why do technical analysts use a logarithmic (semi-log) scale on long-term price charts?

Accepted Answer

To represent equal percentage price changes as equal vertical distances on the chart

Answer

To make large price moves appear visually smaller and less alarming

Answer

To automatically eliminate gaps and discontinuities in the price data

Answer

To more easily calculate compound annual growth rates directly from the chart

Question 2

What does a Monte Carlo simulation provide in the context of trading strategy analysis?

Accepted Answer

A probability distribution of possible strategy outcomes based on random sampling of historical returns

Answer

A mathematically exact prediction of future price movements

Answer

The single optimal parameter set for a given trading system

Answer

A precise measure of correlation between assets within a portfolio

Question 3

What is the primary purpose of 'walk-forward' testing when validating a technical trading system?

Accepted Answer

To validate optimized system parameters on rolling out-of-sample periods that follow the optimization window

Answer

To apply a trading system retroactively to data that predates its development

Answer

To calculate a rolling moving average of the system's trading results over time

Answer

To restrict strategy testing exclusively to the most recent available market data

Question 4

How does the 'random walk hypothesis' challenge the premise of technical analysis?

Accepted Answer

It posits that price changes are essentially random and independent, making past prices unable to predict future prices

Answer

It confirms that technical chart patterns reliably predict future price movements

Answer

It suggests that markets always return to historical price averages over the long run

Answer

It describes the erratic path that a trendline takes through noisy price data

Question 5

What is the key advantage of a Weighted Moving Average (WMA) over a Simple Moving Average (SMA)?

Accepted Answer

A WMA assigns linearly increasing weights to more recent prices, making it more responsive to current price action

Answer

A WMA incorporates a greater total number of historical data points than a same-period SMA

Answer

A WMA completely eliminates all lag inherent in moving average calculations

Answer

A WMA is calculated exclusively from closing prices, making it more standardized than the SMA

Question 6

What does the concept of 'regression to the mean' suggest about extreme price deviations?

Accepted Answer

After significant deviations from historical average levels, prices tend to revert back toward the mean over time

Answer

Prices that deviate strongly from the mean will continue accelerating in the same direction

Answer

Moving averages automatically recalibrate to cross back to their initial starting values

Answer

Markets follow a fixed mathematical progression back to the mean after any price movement

Question 7

In hypothesis testing applied to trading strategy backtests, what is the distinction between a Type I and a Type II error?

Accepted Answer

A Type I error is a false positive (wrongly rejecting a true null hypothesis); a Type II error is a false negative (failing to reject a false null hypothesis)

Answer

A Type I error occurs in trending markets while a Type II error occurs in range-bound markets

Answer

A Type I error involves incorrect trade entries while a Type II error involves incorrect trade exits

Answer

A Type I error relates to return outliers while a Type II error relates to correlated data points