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CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures

When estimating yield volatility from historical data, an analyst chooses between daily and monthly observations. Which statement about this choice is most accurate?

Daily observations give more data points but can include short-term noise that reduces stability of the estimates. Volatility must still be annualized whatever the interval, and monthly data do not systematically produce higher annualized volatility than daily data.

  1. ALonger observation intervals eliminate the need to annualize volatility
  2. BDaily observations give more data points but can include noise that reduces the stability of estimatesCorrect
  3. CMonthly observations always give higher volatility than daily observations once annualized

Explanation

Higher-frequency data produce more observations, improving statistical power, but they can include short-term noise. Annualization is always needed to compare volatilities across periods. Annualized volatilities from different frequencies need not differ systematically in one direction.

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