4.3: Lognormal, T, Chi-Square, and F Distributions Flashcards
The two parameters of a lognormal distribution are the … and … of its associated normal distribution.
The mean and standard deviation (or variance)
Price relative - a ratio of an ending price over a … it is equal to … plus the holding period return on the asset.
A beginning price;
1
Continuously compounded return - the natural logarithm of…
1 plus the holding period return.
Continuously compounded rate of return formula:
rt,t+1 = ln(St+1/St) = ln(1 + Rt,t+1)
Volatility is…
The standard deviation of the continuously compounded returns on the underlying asset.
Annualizing is typically done on the basis of …
250 days in a year, the approximate number of days markets are open for trading.
Steps towards calculating Volatility:
rt,t+1 = ln(St+1/St) = ln(1 + Rt,t+1)
1 - Use equation above to calculate the continuously compounded daily returns; then, find their standard deviation in the usual way.
2 - Use the following equation that states that σˆ(r0,T)=σˆ√T . In this example, σˆ is the sample standard deviation of one-period continuously compounded returns.
Degrees of freedom (df), the number of independent variables used in …
Defining sample statistics, such as variance, and the probability distributions they measure.
n − 1 (n is sample size)
The chi-square distribution, unlike the normal and t-distributions, is …
Asymmetrical.
Which distributions do not take negative values?
Chi-square and F-distributions.
The F-distribution is a family of …
Each F-distribution is defined by …
Asymmetrical distributions bounded from below by 0.
Two values of degrees of freedom, called the numerator and denominator degrees of freedom.
Monte Carlo Simulation - a mathematical …
Technique that predicts possible outcomes of an uncertain event.
Contingent claim -a type of derivative in which …
One of the counterparties determines whether and when the trade will settle. An option is a common type of contingent claim.
