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QUIZ: Correlations, Portfolio Optimization & Risk Management
22 Questions (One Correct Answer per Question)
Correlations
Q1: What does a Pearson correlation coefficient of 1 indicate?
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Q2: When using the Pearson correlation coefficient, what assumption about the data is typically made?
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Q3: What is the primary objective of pairs trading in relation to asset correlations?
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Q4: Why is the Johansen cointegration test particularly useful in pairs trading strategies?
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Q5: In a cointegration test using the Johansen method, what is the role of the Augmented Dickey-Fuller (ADF) test on the cointegrated time series?
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Q6: What does a significant p-value (less than 0.05) in the Granger causality test suggest about the relationship between Asset 1 and Asset 2?
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Q7: Which of the following financial techniques is used to capture extremal correlations, particularly during crisis periods?
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Portfolio Optimization
Q8: In portfolio diversification, how do low or negative correlations between assets help reduce overall risk?
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Q9: In the context of portfolio optimization, which of the following metrics is used to measure the risk-adjusted return of an asset, considering both its return and volatility?
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Q10: What does the efficient frontier in portfolio theory represent?
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Q11: What type of risk is eliminated through diversification in portfolio theory?
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Q12: In the context of portfolio optimization, why is the covariance matrix critical for constructing an optimal portfolio?
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Q13: What challenge arises in the computation of covariance matrices in big data scenarios, specifically when dealing with high-dimensional data?
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Q14: Which of the following is a solution for addressing ill-conditioned covariance matrices in portfolio optimization?
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Q15: What is the key advantage of using factor-based investing (smart beta) compared to traditional capitalization-weighted indexing?
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Risk Management
Q16: What does Professor Nassim Taleb argue about short-term market observations?
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Q17: According to the "Misbehavior of Markets" book by Professor Benoit Mandelbrot, which of the following is true about higher-order moments in finance?
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Q18: Professor Fisher Black's early work on risk/reward relationships suggests that:
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Q19: Why might reducing market exposure in response to rising volatility improve investment performance?
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Q20: Why is the VVIX often referred to as the "volatility of volatility" index?
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Q21: What is the primary goal of active risk management in a passive investing strategy?
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Q22: What does the Adaptive Markets Hypothesis (AMH) by Professor Andrew Lo suggest about risk-reward trade-offs?
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