QFC Quantitative Finance Algorithmic Trading & Data Science 2

Question 1

In pairs trading, what statistical condition must hold between two assets for the strategy to be theoretically sound?

Accepted Answer

The asset price series must be cointegrated

Answer

Cointegration ensures a stable long-run relationship between asset prices, meaning deviations from equilibrium are mean-reverting.

Question 2

Which order type is most commonly used in algorithmic trading to avoid market impact when executing large orders?

Accepted Answer

TWAP or VWAP sliced child orders

Answer

TWAP/VWAP algorithms slice large parent orders into smaller child orders over time to minimize market impact and tracking error.

Question 3

What does the Sharpe ratio measure in the context of a trading strategy?

Accepted Answer

Risk-adjusted return per unit of total volatility

Answer

The Sharpe ratio is calculated as (portfolio return - risk-free rate) / standard deviation of excess returns.

Question 4

In the context of high-frequency trading (HFT), what is 'latency arbitrage'?

Accepted Answer

Using faster data feeds to trade ahead of slower market participants acting on stale prices

Answer

Latency arbitrage involves HFT firms using speed advantages to detect and trade before slower participants can update their orders.

Question 5

Which machine learning technique is best suited for predicting a continuous financial variable like next-day stock returns?

Accepted Answer

Random forest regression

Answer

Random forest regression is an ensemble method well-suited for continuous output prediction with non-linear feature relationships common in financial data.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Quantitative Finance Algorithmic Trading & Data Science 2