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BU.232.630.W6.SP25 sample_quiz_3
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Consider the following model for the mean of asset returns ð ð¡ : ð ð¡ = ðŒ + ðœ ð§ ð¡ â 1 + ð ð¡ where ð§ ð¡ â 1 is a predictor of the returns. The model for the volatility is ð ð¡ = â ð¡ ð¢ ð¡ â ð¡ = ð * + ð 1 * ð ð¡ â 1 2 + ð 2 * ð ð¡ â 2 2 + ð 3 * ð ð¡ â 3 2 ðŒ ð¡ â 1 ( ð¢ ð¡ ) = 0 ðŒ ð¡ â 1 ( ð¢ ð¡ 2 ) = 1 What is the conditional expected value of the returns ðŒ ð¡ â 1 ( ð ð¡ ) ? Choose the best answer below.
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We begin by restating the problem setup to be clear: the return at time t is modeled as
r_t = α + β z_{t-1} + ε_t,
with the conditional mean of ε_t given information up to tâ1 being zero, i.e., E_{tâ1}(ε_t) = 0. The volatility model provides that ε_t = h_t u_t, and E_{tâ1}(u_t) = 0, E_{tâ1}(u_t^2) = 1, but the key for the conditional mean of r_t is the mean of ε_t conditional on the information set, which is zero by assumption.
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If the conditional variance for tomorrow's return is 0.0004, ð ð ð ð¡ ( ð ð¡ + 1 ) = ( 0.02 ) 2 = 0.0004 , then the conditional expectation for tomorrow's return is 2% or -2%.
Consider the following model for the mean of asset returns rt: rt=α+βztâ1+εt where ztâ1 is a predictor of the returns. The model for the volatility is εt= â ht ut ht=ÎŒ*+Ï * 1 ε 2 tâ1 +Ï * 2 ε 2 tâ2 +Ï * 3 ε 2 tâ3 ðŒtâ1(ut)=0 ðŒtâ1(u 2 t )=1 What is the conditional expected value of the returns ðŒtâ1(rt)? Choose the best answer below.
Consider the following model for the mean and volatility of asset returns ð ð¡ : ð ð¡ = ðœ â ð¡ + ð ð¡ ð ð¡ = â ð¡ ð¢ ð¡ â ð¡ = ð * + ð 1 * ð ð¡ â 1 2 + ð 2 * ð ð¡ â 2 2 + ð 3 * ð ð¡ â 3 2 ðŒ ð¡ â 1 ( ð¢ ð¡ ) = 0 ðŒ ð¡ â 1 ( ð¢ ð¡ 2 ) = 1 What is the conditional expectation ðŒ ð¡ â 1 ( ð ð¡ ) ?
Consider the following model for the mean and volatility of asset returns ð ð¡ : ð ð¡ = ðœ â ð¡ + ð ð¡ ð ð¡ = â ð¡ ð¢ ð¡ â ð¡ = ð * + ð 1 * ð ð¡ â 1 2 + ð 2 * ð ð¡ â 2 2 + ð 3 * ð ð¡ â 3 2 ðŒ ð¡ â 1 ( ð¢ ð¡ ) = 0 ðŒ ð¡ â 1 ( ð¢ ð¡ 2 ) = 1 What is the conditional expectation ðŒ ð¡ â 1 ( ð ð¡ ) ?
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