4. A risk analyst is estimating the variance of stock returns on day n, given by , using the equation where and represent the return and volatility on day n-1, respectively. If the values of αand βare as indicated below, which combination of values indicates that the variance follows a stable GARCH (1,1) process?a. α = 0.084427 and β = 0.909073b. α = 0.084427 and β = 0.925573c. α = 0.084427 and β = 0.925573d. α = 0.090927 and β = 0.925573The following information applies to questions 5 and 6.A portfolio manager holds three bonds in one of his portfolios and each bond has a 1-year default probability of15%. The event of default for each of the bonds is independent.

A RISK ANALYST IS ESTIMATING THE VARIANCE OF STOCK RETURNS ON DAY N...

2015 FRM PRACTICE EXAM

A risk analyst is estimating the variance of stock returns on day n, given by , using the equation

where and

represent the return and volatility on day n-1, respectively.

If the values of

and

are as indicated below, which combination of values indicates that the variance

follows a stable GARCH (1,1) process?

= 0.084427 and

= 0.909073

= 0.084427 and

= 0.925573

= 0.084427 and

= 0.925573

= 0.090927 and

= 0.925573

The following information applies to questions 5 and 6.

A portfolio manager holds three bonds in one of his portfolios and each bond has a 1-year default probability of

15%. The event of default for each of the bonds is independent.