Variance Decompositions

question 2

Multiple Choice

Variance decompositions

• A) Trace out the responsiveness of the dependent variables in the VAR to shocks to each of the variables
• B) Will always give the same conclusions as impulse responses
• C) Trace out the responsiveness of the residuals in the VAR to shocks to each of the variables
• D) Give the proportion of the movements in the dependent variables that are due to their own shocks versus shocks to other variables

Understand the Arbitrage Pricing Theory (APT) and its comparison with CAPM.

Explain the practical applications and limitations of CAPM in financial decision-making.

Analyze how changes in risk aversion impact the security market line (SML) and stock prices.

Understand the concept of arbitrage and its role in ensuring market efficiency.

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Definitions:

Confidence Interval

A spectrum of figures, taken from sample observations, possibly enclosing the value of an undetermined population characteristic.

Margin Of Error

An expression of the amount of random sampling error in a survey's results, indicating the confidence in the reliability of the results.

Sample Standard Deviations

A measure that quantifies the amount of variation or dispersion of a set of data values from its sample mean.

Equal Sample Sizes

A condition in statistical analysis where the number of observations in each group being compared is the same.