Question

Which of the following statements is incorrect regarding the use of historical data and weighting schemes to estimate volatility?

Group of answer choices

1. If an analyst's goal is to estimate the current level of volatility, she may want to weight recent data more heavily.

2. The volatility estimate from an autoregressive conditional heteroskedasticity model is a function of a short-run variance level and a series of squared variance observations.

3. Straightforward volatility estimation approaches weight each observation equally in that more distant past returns have the same influence on estimated volatility as observations that are more recent.

4.An example of a volatility estimation weighting scheme is to assume a long-run variance level in addition to weighted squared return observations.

Answer 1

B)The volatility estimate from an autoregressive conditional heteroskedasticity model is a function of a short-run variance level and a series of squared variance observations.

Explanation 

An extension to a weighting scheme that weighs recent data more heavily is to assume a long-run variance level in addition to 
weighted squared return observations. The most frequently used model for this extension is an autoregressive conditional 
heteroskedasticity model, ARCH(m).