--- title: Chapter 1 Financial markets, prices and risk layout: default ---

Financial markets, prices and risk

  1. What is the difference between a price weighted and a value weighted stock market index? Which type is more useful for financial analysis? Give one example of each.

  2. What are simple and continuously compounded returns?

  3. What are the advantages and disadvantages of using continuously compounded returns?

  4. Under what conditions are continuously compounded returns equivalent to simple returns?

  5. What are the three main stylized facts of financial returns?

  6. How can we identify the presence of volatility clusters?

  7. What are fat tails?

  8. Describe two graphical methods to detect the presence of fat tails.

  9. What are the implications of fat tails in financial returns?

  10. Goldman Sachs’s Global Alpha fund suffered very large losses in the summer of 2007. This was described by the bank as “We were seeing things that were 25–standard deviation moves, several days in a row.” What does this say about the type of models used by Goldman Sachs?

  11. Why is it possible for two random variables to have a Pearson’s correlation coefficient of zero while being perfectly dependent? Give an example of how this may happen.

  12. Copulas can be useful to model the dependence between financial returns. Explain how this can be done.