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FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

Which statement about using QQ plots to assess whether a return sample follows a hypothesised distribution is most accurate?

A QQ plot is a visual diagnostic. Linearity shows the sample and reference differ at most by location and scale, while curvature at the ends reveals tail differences. It gives no formal p-value and does not compare means across periods.

  1. AA QQ plot is a visual tool that can reveal tail differences and whether the distributions differ only in location and scaleCorrect
  2. BA QQ plot provides a formal p-value for rejecting the hypothesised distribution
  3. CA QQ plot is only meaningful when the sample has more than 10,000 observations
  4. DA QQ plot compares sample means across time periods

Explanation

QQ plots are graphical: linearity indicates the same distribution family up to location and scale, and departures at the ends reveal tail differences. They give no formal test statistic or p-value, work with modest samples (though noisier tails), and compare quantiles rather than means.

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