Which of the Following Causes a Volatility Smile That Is

question 1

Multiple Choice

Which of the following causes a volatility smile that is a ``frown``?

• A) There is a small probability of a large stock price decrease in one week
• B) There is a small probability of a large stock price increase in one week
• C) The outcome of a lawsuit (roughly equal chance of being favorable or unfavorable) will create a large movement up or down in one week
• D) None of the above

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Definitions:

Independent

Describes variables in an experiment or study that are manipulated or categorized separately from any other variables.

Normally Distributed

Describes a statistical distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence than data far from the mean.

Mathematical Equation

A statement of equality between two expressions which holds true under certain conditions.

Independent Variable

A variable in an experiment or model that is manipulated to observe its effect on the dependent variable.