Explanation:
In a Quantile-Quantile (QQ) plot against a theoretical normal distribution, a perfectly straight line indicates that the empirical data is perfectly normally distributed. If the points generally follow a straight line but exhibit slight deviations—particularly at the tails, which is a common characteristic of financial returns—it suggests that while the distribution is not perfectly normal, assuming normality serves as a very reasonable approximation or estimation for modeling purposes.
Ultimate access to all questions.
No comments yet.
Q.12 Richard Wayne, FRM, is examining a sample of return data which follows normal distribution. He constructs a QQ plot of the data as shown below:
[QQ Plot: Sample Quantiles vs. Theoretical Quantiles — points generally follow a straight line but with slight deviations, especially at the tails]
Based on your examination of the QQ plot above, which of the following statements is most likely correct?
A
The returns are normally distributed
B
The return has fat tails relative to the normal distribution
C
The return distribution is negatively skewed relative to the normal distribution
D
The return distribution isn’t normal, but normality would be a reasonable estimation