Chapter 5 · Section 6 practice

Model Uncertainty and Portfolio Evidence

0 of 2 answered

These questions review the examples in the companion slides. Choose an answer, then check the explanation.

Question 1

A model has posterior model probability 0.90 within a three-model comparison. What does 0.90 describe?

  • Its probability of positive net profit next year
  • Its relative posterior probability within the declared model set and priors
  • Its probability of being the true causal mechanism
  • Its expected annual return

Question 2

You retain last year’s posterior and also refit on every historical observation, including last year’s data. What is the problem?

  • No problem: more repetitions always improve precision
  • Old observations are counted again through both the prior and likelihood
  • The posterior must become uniform
  • Walk-forward prohibits any refitting