Common Probability Distributions Flashcards
A ___________ specifies the probabilities of the possible
outcomes of a random variable.
probability distribution
The building block of the binomial distribution is the _____.
Bernoulli random variable
How to standardize a random variable
Z = (X - E(x))/St(x)
_______ generally considers risk symmetrically in the sense that standard deviation captures variability both above and below the mean.
Mean–variance analysis
_______ focus on _______, the risk that portfolio value will fall below some minimum acceptable level over some
time horizon
Safety- first rules, shortfall risk
Roy’s safety- first criterion - safety- first ratio (SFRatio):
SFRatio = [E(RP) – RL]/σP
a money measure of the minimum value of losses expected
over a specified time period (for example, a day, a quarter, or a year) at a given level
of probability
Value at Risk (VaR)
__________ refers to a set of techniques
for estimating losses in extremely unfavorable combinations of events or scenarios.
Stress testing/scenario analysis
The
Black–Scholes–Merton model assumes that the price of the asset underlying the
option is _______ distributed.
lognormally
The ________, S1/S0, is an ending price, S1, over a beginning price, S0;
it is equal to 1 plus the holding period return on the stock from t = 0 to t = 1:
price relative
The___________ associated
with a holding period is the natural logarithm of 1 plus that holding period return, or
equivalently, the natural logarithm of the ending price over the beginning price (the
price relative)
continuously compounded return
A characteristic feature of ______________ is the generation of a large
number of random samples from a specified probability distribution or distributions
to represent the role of risk in the system
Monte Carlo simulation
European- style option with a value at maturity equal to the difference between the stock price at maturity and
the average stock price during the life of the option, or $0, whichever is greater
Asian call option
Approximately ___ percent of all outcomes of a normal random variable fall
within plus or minus one standard deviation of the mean.
Approximately ____ percent of all outcomes of a normal random variable fall
within plus or minus two standard deviations of the mean.
Approximately ____ percent of all outcomes of a normal random variable fall
within plus or minus three standard deviations of the mean.
68
95
99
A multivariate normal distribution for the
returns on n stocks will have n means, n variances and ______ distinct correlations.
n(n – 1)/2
