Financial Risk Manager Part 1

Explanation

Financial asset return time series do not exhibit any trend. This means that there is no consistent pattern of increase or decrease in the returns over time. The returns are random and unpredictable, which is a key characteristic of financial markets. This lack of trend is due to the efficient market hypothesis, which states that current prices fully reflect all available information. Therefore, future price movements are independent of past price movements, resulting in a lack of trend in asset returns. This characteristic is observed across different types of financial assets, making it a common characteristic of financial asset return time series.

Why other options are incorrect:

• Choice A is incorrect: Financial asset return time series are often weakly stationary, meaning that their mean and variance remain constant over time and the value of covariance between two-time periods depends only on the distance or gap between the two-time periods, not on the actual time at which the covariance is computed.

• Choice B is incorrect: The correlation of financial asset return time series can vary greatly depending on a multitude of factors such as market conditions, type of assets, geographical location etc. Therefore, it cannot be generalized that they are highly correlated.

• Choice D is incorrect: Financial asset return time series often exhibit distributions with fat tails (kurtosis), indicating a higher probability of extreme outcomes compared to a normal distribution. This means they do not have thin tails as suggested in this option.