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CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns

A risk analyst compares a histogram of daily returns with a Q-Q plot against the normal distribution. The plotted points curve upward above the reference line at the right end and fall below the line at the left end. This pattern most likely indicates returns that are:

The pattern indicates fat-tailed returns. When Q-Q points lie below the line on the left and above it on the right, extreme outcomes are larger than a normal distribution implies. Normal data would track the straight reference line.

  1. Aapproximately normal
  2. Bmore peaked with thinner tails
  3. Cfat-tailed relative to the normal distributionCorrect

Explanation

In a Q-Q plot, points that fall below the line at the left end and above it at the right end mean the extreme observations are more extreme than a normal distribution would give. This indicates fat tails. Normal data would follow the line closely, and thinner tails would produce the opposite pattern.

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