Non-normal distribution models are used more and more in order to price financial assets. We provide some basic questions and their respective answers on non-normal distributions:
(1) What is the distribution skewness when you see more returns on the left of the mean?
(2) What is the probability of having a return lower than -2.33 standard deviations?
(3) What is the kurtosis of a normal distribution ?
(4) Which is the less dangerous for a risk averse investor?
a) Positive skewness with kurtosis>3
b) Negative skewness with kurtosis>3
c) Negative skewness with kurtosis<3
(5) Assume a normally distributed fund with an historical annualized return of 10% and an annualized volatility of 5%. How many years should you wait in order to have a monthly return of -5%?
a) 37 years
b) 137 years
c) 3137 years
(6) Assume you invested in the 3 best S&P500 monthly returns and you have shorted the 3 worst S&P500 monthly returns, since 1990. What is this 6 dates cumulative return?