Read the summary and the most important questions on EFIN Lecture slides

• 1 Introduction Prices and Returns

• 1.1 Prices and Returns

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• Provide the definition of Returns, and how its often is expressed.

  The relative change in the price of an asset over a given time interval.
  Often expressed in %

• How many types of returns are there and what are they?

  Two types of returns
  1. Simple returns - the % change in prices
  2. Continuously compounded returns

• 1.2 Return Characteristics

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• Name the 3 stylized facts about financial returns

  Most financial returns have
  1. Volatility clusters
  2. Fat tails
  3. Non-linear dependence

• Provide a simple definition of Nonlinear dependence

  If returns have non linear dependence than they display a non-linear correlation

• 1.2.1 Volatility

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• Why is volatility considered relevant in finance?

  Because its a measure of market uncertainty (the most common one)

• 1.2.1.1 Volatility clusters

• Whats the relevance of volatility clusters?

  They are partially predictable

• 1.2.1.2 Autocorrelations

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• When do we consider there to be evidence for predictability?

  When autocorrelations are statistically significant

• What does the coefficient of an Autocorrelation function (ACF) gives us?

  It gives us the correlation between returns and its lags (where returns then are the variables)

• 1.2.2 Fat tails

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• What are the 2 implications regarding probability of extreme and non-extreme outcomes about fat tails?

  Fat tails
  probability of
  extreme outcomes: high
  non-extreme outcomes: low

• 1.2.2.1.2 Analyzing fat tails

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• What is the significance of QQ plots (what are they used for specifically)?

  They can be
  1. Used to assess whether a set of observations has a particular distribution 
  2. Used to determine whether two datasets have the same distribution