FRM Level 1 Mock 2 Paper 1

vandana.jain
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FRM Level 1 Mock 2 Paper 1

Postby vandana.jain » Sat Nov 10, 2012 2:05 pm

In the equation for forecasting stock price Yt = .7Yt-1 + et + .6et-1 the correlation between Tuesday’s price on Thursday of the same week is
Choose one answer. a. 0.3
b. 0.49
c. 0.51
d. 0.7
How to solve this?


Country X is located at (GMT+4:00) time zone
Country Y is located at (GMT +10:00) time zone
Country Z is located at (GMT 00:00) time zone

If markets of Y at 8:00 AM as per their local time zone and Z opens at 00:00 according to GMT (00:00). What is the true covariance between the markets if the information flow is assumed to be constant and the observed covariance between Y and Z is (Y+Z)
Choose one answer. a. 1.5 *(Y+Z)
b. 3*(Y+Z)
c. 1.5*(YZ)
d. 3*(YZ)

The Correct answer is 1.5 *(Y+Z)

what is observed covariance?

how to calculate,


The covariance between the markets A and B is Cov(A,B). The closing time for market A is 1 PM EST and that of market B is 1 AM EST. Assuming the daily returns of the markets A and B to be independent and information flow to be constant, the true covariance between the two markets is:
Choose one answer. a. Cov(A,B)
b. 2*Cov(A,B)
c. 0.5*Cov(A,B)
d. Can’t be determined but definitely lower than Cov(A,B)

The Correct answer is 2*Cov(A,B)

True covariance is 24/(24-12)* Cov(A,B)= 2* Cov(A,B)
what is true covariance?

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