QA 12. Measuring Returns, Volatility, and Correlation

Learning Objectives

1) Calculate, distinguish, and convert between simple and continuously compounded returns.

2) Define and distinguish between volatility, variance rate, and implied volatility.

3) Describe how the first two moments may be insufficient to describe non-normal distributions.

4) Explain how the Jarque-Bera test is used to determine whether returns are normally distributed.

5) Describe the power law and its use for non-normal distributions.

6) Define correlation and covariance and differentiate between correlation and dependence.

7) Describe properties of correlations between normally distributed variables when using a one-factor model.

8) Compare and contrast the different measures of correlation used to assess dependence.