CFA Practice Question

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CFA Practice Question

To calculate the historical annual yield volatility of a bond, an investor should decide:

I. How many daily observations to use.
II. Which calculation method to use.
III. How many days in a year to use to annualize the daily standard deviation.
Correct Answer: I and III

There is only one calculation method. If you have daily yield: annual standard deviation = daily one x (number of days in a year)1/2

User Contributed Comments 4

User Comment
katybo and implied volatility? I think the question was not how to anualize std dev.
bmeisner Yes there are also many different assumptions to be made such as if X-avg should be set to 0.
ljamieson There was no mention of implied vol, only historical vol.
ericczhang Even if the question didn't make it clear that they were talking about historical volatility, you wouldn't really annualize a less than 1-year option implied volatility to get a 1-year option implied volatility.

It would either be a) the market for the options you choose to use assume volatility is constant, so your implied 1-year volatility should be the same as your less-than-1-year volatility or b) you have 1-year options available to directly take the 1-year implied volatility.
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