CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

Which of the following do you expect to be true?

I. Financial models computed in the early 1990s are still valid.
II. Because computers are faster and more powerful in this new century, financial relationships discovered will hold during longer periods of time.
III. Whenever a new law is passed that affects the stock market, we can still use models computed before the legal change to make valid predictions.
A. III only
B. I and II
C. None of these answers
Explanation: None of the above statements seems plausible. Financial models computed in the early 1990s will likely not be valid anymore because in the meantime there was a technology boom and the widespread of the Internet, which affected financial markets. Faster computers do not imply that the relationships will last longer. Actually, faster and cheaper computers mean that the public has access to better information, which may affect its behavior and the statistical relationships found. Finally, laws that have an effect on financial markets will change the behavior of agents, which affects the validity of the statistical models found.

User Contributed Comments 5

User Comment
tkorchmaros the BSM model was first presented in the '70s and we are still using it....
snider according to the book, most of these financial models are not valid anymore. There I is false.
wollogo How does the 'technology boom' make financial models no longer valid. Sure you would change model paramters but the fundamentals are still the same.
nike wollogo: I agree with you. I do have a different opinion but that's what the textbook says: to pass the exam you have to agree with the book.
chriswwu Honestly, none of the academic models work in the real world, historical or not. That's why they are just talking about models being valid in an academic sense.
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