Schweser Printable Answers - QM 1 - Webs

Schweser Printable Answers - QM 1

Test ID#: 19

Question 1 - #93586

Given the following table about employees of a company based on whether they are smokers or nonsmokers and whether or not they suffer from any allergies, what is the probability of being either a nonsmoker or not suffering from allergies?

Your answer: A was correct!

The probability of being a nonsmoker is 240 / 300 = 0.80. The probability of not suffering from allergies is 210 / 300 = 0.70. The probability of being a nonsmoker and not suffering from allergies is 185 / 300 = 0.62. Since the question asks for the probability of being either a nonsmoker or not suffering from allergies we have to take the probability of being a nonsmoker plus the probability of not suffering from allergies and subtract the probability of being both: 0.80 + 0.70 − 0.62 = 0.88.

Alternatively: 1 − P(Smoker & Allergies) = 1 − (35 / 300) = 88.3%.

This question tested from Session 2, Reading 8, LOS f, (Part 2).

Question 2 - #93768

There is a 60% chance that the economy will be good next year and a 40% chance that it will be bad. If the economy is good, there is a 70% chance that XYZ Incorporated will have EPS of $5.00 and a 30% chance that their earnings will be $3.50. If the economy is bad, there is an 80% chance that XYZ Incorporated will have EPS of $1.50 and a 20% chance that their earnings will be $1.00. What is the firm’s expected EPS?

Your answer: A was incorrect. The correct answer was B) $3.29.

The expected EPS is calculated by multiplying the probability of the economic environment by the probability of the particular EPS and the EPS in each case. The expected EPS in all four outcomes are then summed to arrive at the expected EPS:

(0.60 × 0.70 × $5.00) + (0.60 × 0.30 × $3.50) + (0.40 × 0.80 × $1.50) + (0.40 × 0.20 × $1.00) = $2.10 + $0.63 + $0.48 + $0.08 = $3.29.

Back to Test Review Hide Questions Print this Page

Suffer from Allergies Don't Suffer from Allergies Total Smoker 35 25 60 Nonsmoker 55 185 240 Total 90 210 300

A) 0.88.B) 0.38.C) 0.50.

A) $5.95. B) $3.29.C) $2.75.

of 46Printable Exams

25/05/2010http://localhost:20511/online_program/test_engine/printable_answers.php

This question tested from Session 2, Reading 8, LOS j.

Question 3 - #93811

A company has two machines that produce widgets. An older machine produces 16% defective widgets, while the new machine produces only 8% defective widgets. In addition, the new machine employs a superior production process such that it produces three times as many widgets as the older machine does. Given that a widget was produced by the new machine, what is the probability it is NOT defective?


The problem is just asking for the conditional probability of a defective widget given that it was produced by the new machine. Since the widget was produced by the new machine and not selected from the output randomly (if randomly selected, you would not know which machine produced the widget), we know there is an 8% chance it is defective. Hence, the probability it is not defective is the complement, 1 – 8% = 92%.

This question tested from Session 2, Reading 8, LOS c.

Question 4 - #93667

Why is the time-weighted rate of return the preferred method of performance measurement?

Your answer: A was incorrect. The correct answer was C) Time-weighted returns are not influenced by the timing of cash flows.

Money-weighted returns are sensitive to the timing or recognition of cash flows while time-weighted rates of return are not.

This question tested from Session 2, Reading 6, LOS c, (Part 1).

Question 5 - #93571

The effective annual yield for an investment is 10%. What is the yield for this investment on a bond-equivalent basis?

Your answer: A was incorrect. The correct answer was C) 9.76%.

A) 0.92.B) 0.76.C) 0.06.

A) Time weighted allows for inter-period measurement and therefore is more flexible in determining exactly how a portfolio performed during a specific interval of time.

B) There is no preference for time-weighted versus money-weighted. C) Time-weighted returns are not influenced by the timing of cash flows.

A) 4.88%.B) 10.00%.C) 9.76%.



First, the annual yield must be converted to a semiannual yield. The result is then doubled to obtain the bond-equivalent yield.

Semiannual yield = 1.10.5 − 1 = 0.0488088.

The bond-equivalent yield = 2 × 0.0488088 = 0.097618.

This question tested from Session 2, Reading 6, LOS e.

Question 6 - #93625

An investor makes the following investments:

� She purchases a share of stock for $50.00. � After one year, she purchases an additional share for $75.00. � After one more year, she sells both shares for $100.00 each. � There are no transaction costs or taxes.

During year one, the stock paid a $5.00 per share dividend. In year 2, the stock paid a $7.50 per share dividend. The investor’s required return is 35%. Her money-weighted return is closest to:


To determine the money weighted rate of return, use your calculator's cash flow and IRR functions. The cash flows are as follows:

CF0: initial cash outflow for purchase = $50 CF1: dividend inflow of $5 - cash outflow for additional purchase of $75 = net cash outflow of -$70 CF2: dividend inflow (2 × $7.50 = $15) + cash inflow from sale (2 × $100 = $200) = net cash inflow of $215

Enter the cash flows and compute IRR: CF0 = -50; CF1 = -70; CF2 = +215; CPT IRR = 48.8607


Question 7 - #93997

Jamie Morgan needs to accumulate $2,000 in 18 months. If she can earn 6% at the bank, compounded quarterly, how much must she deposit today?


Each quarter of a year is comprised of 3 months thus N = 18 / 3 = 6; I/Y = 6 / 4 = 1.5; PMT = 0; FV = 2,000; CPT → PV = $1,829.08.

A) 48.9%.B) -7.5%.C) 16.1%.

A) $1,829.08.B) $1,832.61.C) $1,840.45.



This question tested from Session 2, Reading 5, LOS d.

Question 8 - #94000

If a $45,000 car loan is financed at 12% over 4 years, what is the monthly car payment?

Your answer: A was incorrect. The correct answer was C) $1,185.

N = 4 × 12 = 48; I/Y = 12/12 = 1; PV = –45,000; FV = 0; CPT → PMT = 1,185.02


Question 9 - #93702

The covariance of the returns on investments X and Y is 18.17. The standard deviation of returns on X is 7%, and the standard deviation of returns on Y is 4%. What is the value of the correlation coefficient for returns on investments X and Y?

Your answer: A was incorrect. The correct answer was B) +0.65.

The correlation coefficient = Cov (X,Y) / [(Std Dev. X)(Std. Dev. Y)] = 18.17 / 28 = 0.65

This question tested from Session 2, Reading 8, LOS k.

Question 10 - #93828

In 10 years, what is the value of $100 invested today at an interest rate of 8% per year, compounded monthly?


N = 10 × 12 = 120; I/Y = 8/12 = 0.666667; PV = –100; PMT = 0; CPT → FV = 221.96.



Use the following probability distribution to calculate the standard deviation for the portfolio.

A) $985.B) $1,565.C) $1,185.

A) +0.85.B) +0.65.C) +0.32.

A) $222.B) $216.C) $180.




[0.30 × (0.15 − 0.066)2 + 0.70 × (0.03 − 0.066)2]1/2 = 5.5%.

This question tested from Session 2, Reading 8, LOS l.


A Treasury bill (T-bill) with a face value of $10,000 and 44 days until maturity has a holding period yield of 1.1247%. Which of the following is closest to the effective annual yield on the T-bill?

Your answer: A was incorrect. The correct answer was B) 9.72%.

The formula for the effective annual yield is: ((1 + HPY)365/t) − 1. Therefore, the EAY is: ((1.011247)(365/44)) − 1 = 0.0972, or 9.72%



The value in 7 years of $500 invested today at an interest rate of 6% compounded monthly is closest to:

Your answer: A was incorrect. The correct answer was B) $760.

PV = -500; N = 7 × 12 = 84; I/Y = 6/12 = 0.5; compute FV = 760.18

This question tested from Session 2, Reading 5, LOS e, (Part 1).


A stock had the following returns over the last five years: 15%, 2%, 9%, 44%, 23%. What is the respective geometric mean and arithmetic mean for this stock?

State of the Economy Probability Return on Portfolio

Boom 0.30 15%

Bust 0.70 3%

A) 5.5%.B) 6.0%.C) 6.5%.

A) 12.47%.B) 9.72%.C) 8.76%.

A) $780.B) $760.C) $750.




Geometric mean = [(1.15)(1.02)(1.09)(1.44)(1.23)]1/5 − 1 = 1.17760 = 17.76%.

Arithmetic mean = (15 + 2 + 9 + 44 + 23) / 5 = 18.6%.



In order to calculate the net present value (NPV) of a project, an analyst would least likely need to know the:


The NPV is calculated using the opportunity cost, discount rate, expected cash flows, and timing of the expected cash flows from the project. The project’s IRR is not used to calculate the NPV.

This question tested from Session 2, Reading 6, LOS a, (Part 1).


The owner of a company has recently decided to raise the salary of one employee, who was already making the highest salary in the company, by 40%. Which of the following value(s) is (are) expected to be affected by this raise?

Your answer: A was incorrect. The correct answer was C) mean only.

Mean is affected because it is the sum of all values / number of observations. Median is not affected as it the midpoint between the top half of values and the bottom half of values.



Which of the following is most accurate with respect to the relationship of the money-weighted return to the time-weighted return? If funds are contributed to a portfolio just prior to a period of favorable performance, the:

A) 17.76%; 18.6%.B) 17.76%; 23.0%.C) 0.18%; 18.6%.

A) internal rate of return (IRR) of the project. B) timing of the expected cash flows from the project. C) opportunity cost of capital for the project.

A) mean and median only.B) median only.C) mean only.

A) time-weighted rate of return will tend to be elevated.



Your answer: A was incorrect. The correct answer was C) money-weighted rate of return will tend to be elevated.

The time-weighted returns are what they are and will not be affected by cash inflows or outflows. The money-weighted return is susceptible to distortions resulting from cash inflows and outflows. The money-weighted return will be biased upward if the funds are invested just prior to a period of favorable performance and will be biased downward if funds are invested just prior to a period of relatively unfavorable performance. The opposite will be true for cash outflows.



Which of the following statements about the defining properties of probability is most accurate?


Even if the device that generates an event is not fair, the events can be mutually exclusive and exhaustive. Consider a standard die with the possible outcomes of 1,2,3,4,5 and 6. The P(2 or 4 or 6) = 0.50 and P(1 or 3 or 5) = 0.50, and thus the probabilities sum to 1 and are mutually exclusive and exhaustive. An unfair die would not change this.

Both remaining statements are false. The probability of any event is between 0 and 1, inclusive. It is possible that the probability of an event could equal 0 or 1, or any point in between. The sum of the probabilities of events E1 though Ex equals 1 if the events are mutually exclusive and exhaustive.

This question tested from Session 2, Reading 8, LOS b.


A distribution of returns that has a greater percentage of small deviations from the mean and a greater percentage of large deviations from the mean compared to a normal distribution:


A distribution that has a greater percentage of small deviations from the mean and a greater percentage of large deviations from the mean will be leptokurtic and will exhibit positive excess kurtosis. The distribution will be taller (more peaked) with fatter tails than a normal distribution.


B) money-weighted rate of return will tend to be depressed.C) money-weighted rate of return will tend to be elevated.

A) If the device that generates an event is not fair, the events can be mutually exclusive and exhaustive.B) The probability of any event is between 0 and 1, exclusive.

C)The sum of the probabilities of events E1 though Ex equals one if the events are mutually exclusive or exhaustive.

A) has positive excess kurtosis. B) is positively skewed. C) has negative excess kurtosis.




Steve Hall wants to give his son a new car for his graduation. If the cost of the car is $15,000 and Hall finances 80% of the value of the car for 36 months at 8% annual interest, his monthly payments will be:


PV = 0.8 × 15,000 = -12,000; N = 36; I = 8/12 = 0.667; CPT → PMT = 376.

This question tested from Session 2, Reading 5, LOS f.


When Annette Famigletti hears that a baseball-loving friend is coming to visit, she purchases two premium-seating tickets for $45 per ticket for an evening game. As the date of the game approaches, Famigletti’s friend telephones and says that his trip has been cancelled. Fortunately for Famigletti, the tickets she holds are in high demand as there is chance that the leading Major League Baseball hitter will break the home run record during the game. Seeing an opportunity to earn a high return, Famigletti puts the tickets up for sale on an internet site. The auction closes at $150 per ticket. After paying a 10% commission to the site (on the amount of the sale) and paying $8 total in shipping costs, Familgletti’s holding period return is approximately:


The holding period return is calculated as: (ending price − beginning price +/- any cash flows) / beginning price. Here, the beginning and ending prices are given. The other cash flows consist of the commission of $30 (0.10 × 150 × 2 tickets) and the shipping cost of $8 (total for both tickets). Thus, her holding period return is: (2 × 150 − 2 × 45 − 30 − 8) / (2 × 45) = 1.91, or approximately 191%.



Which of the following statements about skewness and kurtosis is least accurate?

Your answer: A was incorrect. The correct answer was B) Positive values of kurtosis indicate a distribution that has fat tails.

Positive values of kurtosis do not indicate a distribution that has fat tails. Positive values of excess kurtosis (kurtosis > 3) indicate fat tails.

A) $413.B) $376.C) $289.

A) 191%.B) 182%.C) 202%.

A) Kurtosis is measured using deviations raised to the fourth power.B) Positive values of kurtosis indicate a distribution that has fat tails.C) Values of relative skewness in excess of 0.5 in absolute value indicate large levels of skewness.





Which of the following statements about statistical concepts is least accurate?


A population is defined as all members of a specified group, but a sample is a subset of a population.



What is the coefficient of variation for a distribution with a mean of 10 and a variance of 4?


Coefficient of variation, CV = standard deviation / mean. The standard deviation is the square root of the variance, or 4½ = 2. So, CV = 2 / 10 = 20%.

This question tested from Session 2, Reading 7, LOS i, (Part 1).


Given the following annual returns, what are the median and mode returns, respectively?


Median: Arrange the return values from largest to smallest and take the middle value: (7%), 0%, 2%, 5%, 15%. The middle value is 2.00%. Mode: The mode is defined as the value that most often shows up in a distribution. Because no return value shows up more than once, this distribution has no mode.


A) A sample contains all members of a specified group, but a population contains only a subset.

B) A frequency distribution is a tabular display of data summarized into a relatively small number of intervals.

C) A parameter is any descriptive measure of a population characteristic.

A) 20%.B) 40%.C) 25%.

1995 1996 1997 1998 1999

15% 2% 5% -7% 0%

A) 2.00%; no mode exists.B) 2.00%; 3.00%.C) no median exists; no mode exists.




In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution’s mode, mean, and median values?


In a positively skewed distribution, the mode is less than the median, which is less than the mean.

This question tested from Session 2, Reading 7, LOS j, (Part 2).


Which one of the following statements best describes the components of the required interest rate on a security?

Your answer: A was incorrect. The correct answer was B) The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

The required interest rate on a security is made up of the nominal rate which is in turn made up of the real risk-free rate plus the expected inflation rate. It should also contain a liquidity premium as well as a premium related to the maturity of the security.



An investor has the choice of two investments. Investment A offers interest at 7.25% compounded quarterly. Investment B offers interest at the annual rate of 7.40%. Which investment offers the higher dollar return on an investment of $50,000 for two years, and by how much?

Your answer: A was incorrect. The correct answer was B) Investment A offers a $53.18 greater return.

Investment A: I = 7.25 / 4; N = 2 × 4 = 8; PV = $50,000; PMT = 0; CPT → FV = $57,726.98 Investment B: I = 7.40; N = 2; PV = $50,000; PMT = 0; CPT → FV = $57,673.80 Difference = investment A offers a $53.18 greater dollar return.

A) Mode, median, mean.B) Mean, median, mode.C) Mode, mean, median.

A) The nominal risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

B) The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

C) The real risk-free rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

A) Investment B offers a $36.92 greater return.B) Investment A offers a $53.18 greater return.C) Investment A offers a $122.18 greater return.





If the money market yield is 3.792% on a T-bill with 79 days to maturity, what is the holding period yield?


The holding period yield can be calculated from the money market yield as: (money market yield) ÷ (360 ÷ t). Therefore, the HPY is (0.03792) × (79 ÷ 360) = 0.0083 = 0.83%.



A distribution with a mean that is less than its median most likely:

Your answer: A was incorrect. The correct answer was B) is negatively skewed.

A distribution with a mean that is less than its median is a negatively skewed distribution. A negatively skewed distribution is characterized by many small gains and a few extreme losses. Note that kurtosis is a measure of the peakedness of a return distribution.



Compute the standard deviation of a two-stock portfolio if stock A (40% weight) has a variance of 0.0015, stock B (60% weight) has a variance of 0.0021, and the correlation coefficient for the two stocks is –0.35?


The standard deviation of the portfolio is found by:

[W12σ1

2 + W22σ2

2+ 2W1W2σ1σ2ρ1,2]0.5

= [(0.40)2(0.0015) + (0.60)2 (0.0021) + (2)(0.40)(0.60)(0.0387)(0.0458)(–0.35)]0.5

A) 0.77%.B) 0.89%.C) 0.83%.

A) is positively skewed.B) is negatively skewed.C) has negative excess kurtosis.

A) 1.39%.B) 0.07%.C) 2.64%.



= 0.0264, or 2.64%.



Which of the following statements about the arithmetic mean is least accurate?

Your answer: A was incorrect. The correct answer was C) If the distribution is skewed to the left then the mean will be greater than the median.

If the distribution is skewed to the left, then the mean will be less than the median.



The weights and returns for individual positions in a portfolio are shown below:

What is the return on the portfolio?

Your answer: A was incorrect. The correct answer was C) +1.18%.

The return is equal to sum of the products of each position’s value and return divided by the beginning portfolio value.

A) The arithmetic mean of a frequency distribution is equal to the sum of the class frequency times the midpoint of the frequency class all divided by the number of observations.

B) The arithmetic mean is the only measure of central tendency where the sum of the deviations of each observation from the mean is always zero.

C) If the distribution is skewed to the left then the mean will be greater than the median.

Position Mkt. Value at 1/1/05($MM) Return for 2005(%)

A 1.3 –2.0

B 1.4 –4.2

C 2.2 +6.4

D 3.9 +2.1

E 1.7 –0.8

A) +1.50%.B) -1.20%.C) +1.18%.

Position Mkt. Value at 1/1/05($MM)

Return for 2005(%) Position Value × Return ($MM)

A 1.30 –2.0 -0.0260 B 1.40 –4.2 -0.0588 C 2.20 +6.4 0.1408 D 3.90 +2.1 0.0819 E 1.70 –0.8 -0.0136



This question tested from Session 2, Reading 7, LOS g.


What is the effective annual yield of a T-bill that has a money market yield of 5.665% and 255 days to maturity?


Holding Period Yield = 4.0127% = 5.665% × (255 / 360)

Effective Annual Yield = (1.040127)365/255 = 1.0571 − 1 = 5.79%.



Use the results from the following survey of 500 firms to answer the question.

The width of each interval (class) for this frequency table is:

Your answer: A was incorrect. The correct answer was B) 100.

Max of interval − Min of interval = 100



Which of the following statements is least accurate regarding covariance?

Total 10.50 0.1243 0.1243 / 10.5($MM) = +1.1838%

A) 5.79%.B) 5.92%.C) 4.01%.

Number of Employees Frequency

300 up to 400 40

400 up to 500 62

500 up to 600 78

600 up to 700 101

700 up to 800 131

800 up to 900 88

A) 101.B) 100.C) 50.



Your answer: A was incorrect. The correct answer was B) A covariance of zero rules out any relationship.

A covariance only measures the linear relationship. The covariance can be zero while a non-linear relationship exists. Both remaining statements are true.



What is the maximum an investor should be willing to pay for an annuity that will pay out $10,000 at the beginning of each of the next 10 years, given the investor wants to earn 12.5%, compounded annually?

Your answer: A was incorrect. The correct answer was C)

$62,285.

Using END mode, the PV of this annuity due is $10,000 plus the present value of a 9-year ordinary annuity: N=9; I/Y=12.5; PMT=-10,000; FV=0; CPT PV=$52,285; $52,285 + $10,000 = $62,285.

Or set your calculator to BGN mode then N=10; I/Y=12.5; PMT=-10,000; FV=0; CPT PV= $62,285.



An annuity will pay eight annual payments of $100, with the first payment to be received three years from now. If the interest rate is 12% per year, what is the present value of this annuity? The present value of:

Your answer: A was incorrect. The correct answer was B) a lump sum discounted for 2 years, where the lump sum is the present value of an ordinary annuity of 8 periods at 12%.

The PV of an ordinary annuity (calculation END mode) gives the value of the payments one period before the first payment, which is a time = 2 value here. To get a time = 0 value, this value must be discounted for two periods (years).


A) Covariance can only apply to two variables at a time.B) A covariance of zero rules out any relationship.C) Covariance can exceed one.

A) $52,285. B) $55,364. C) $62,285.

A) a lump sum discounted for 3 years, where the lump sum is the present value of an ordinary annuity of 8 periods at 12%.

B) a lump sum discounted for 2 years, where the lump sum is the present value of an ordinary annuity of 8 periods at 12%.

C) an ordinary annuity of 8 periods at 12%.




The following table summarizes the availability of trucks with air bags and bucket seats at a dealership.

What is the probability of randomly selecting a truck with air bags and bucket seats?

Your answer: A was incorrect. The correct answer was C) 0.34.

75 ÷ 220 = 0.34.



Consider the following set of stock returns: 12%, 23%, 27%, 10%, 7%, 20%,15%. The third quartile is:

Your answer: A was incorrect. The correct answer was C) 23%.

The third quartile is calculated as: Ly = (7 + 1) (75/100) = 6. When we order the observations in ascending order: 7%, 10%, 12%, 15%, 20%, 23%, 27%, “23%” is the sixth observation from the left.



The following information is available concerning expected return and standard deviation of Pluto and Neptune Corporations:

If the correlation between Pluto and Neptune is 0.25, determine the expected return and standard deviation of a portfolio that consists of 65% Pluto Corporation stock and 35% Neptune Corporation stock.

Bucket seats No Bucket Seats Total Air Bags 75 50 125 No Air Bags 35 60 95 Total 110 110 220

A) 0.28.B) 0.16.C) 0.34.

A) 21.5%.B) 20.0%.C) 23%.

Expected Return Standard DeviationPluto Corporation 11% 0.22Neptune Corporation 9% 0.13

A) 10.3% expected return and 2.58% standard deviation.



Your answer: A was incorrect. The correct answer was B) 10.3% expected return and 16.05% standard deviation.



The real risk-free rate can be thought of as:

Your answer: A was incorrect. The correct answer was B) approximately the nominal risk-free rate reduced by the expected inflation rate.

The approximate relationship between nominal rates, real rates and expected inflation rates can be written as:

Nominal risk-free rate = real risk-free rate + expected inflation rate.

Therefore we can rewrite this equation in terms of the real risk-free rate as:

Real risk-free rate = Nominal risk-free rate – expected inflation rate

The exact relation is: (1 + real)(1 + expected inflation) = (1 + nominal)



A company says that whether it increases its dividends depends on whether its earnings increase. From this we know:

Your answer: A was incorrect. The correct answer was C) P(earnings increase | dividend increase) is not equal to P(earnings increase).

B) 10.3% expected return and 16.05% standard deviation.C) 10.0% expected return and 16.05% standard deviation.

ERPort = (WPluto)(ERPluto) + (WNeptune)(ERNeptune)

= (0.65)(0.11) + (0.35)(0.09) = 10.3%

σp = [(w1)2(σ1)2 + (w2)2(σ2)2 + 2w1w2σ1σ2 r1,2]1/2

= [(0.65)2(22)2 + (0.35)2(13)2 + 2(0.65)(0.35)(22)(13)(0.25)]1/2

= [(0.4225)(484) + (0.1225)(169) + 2(0.65)(0.35)(22)(13)(0.25)]1/2

= (257.725)1/2 = 16.0538%

A) exactly the nominal risk-free rate reduced by the expected inflation rate.B) approximately the nominal risk-free rate reduced by the expected inflation rate.C) approximately the nominal risk-free rate plus the expected inflation rate.

A) P(both dividend increase and earnings increase) = P(dividend increase). B) P(dividend increase | earnings increase) is not equal to P(earnings increase). C) P(earnings increase | dividend increase) is not equal to P(earnings increase).



If two events A and B are dependent, then the conditional probabilities of P(A | B) and P(B | A) will not equal their respective unconditional probabilities (of P(A) and P(B), respectively). Both remaining choices may or may not occur, e.g., P(A | B) = P(B) is possible but not necessary.

This question tested from Session 2, Reading 8, LOS g.


Given investors require an annual return of 12.5%, a perpetual bond (i.e., a bond with no maturity/due date) that pays $87.50 a year in interest should be valued at:


87.50 ÷ 0.125 = $700.



Bill Jones is creating a charitable trust to provide six annual payments of $20,000 each, beginning next year. How much must Jones set aside now at 10% interest compounded annually to meet the required disbursements?

Your answer: A was incorrect. The correct answer was C) $87,105.21.

N = 6, PMT = -$20,000, I/Y = 10%, FV = 0, Compute PV → $87,105.21.



If the odds against an event occurring are twelve to one, what is the probability that it will occur?


If the probability against the event occurring is twelve to one, this means that in thirteen occurrences of the event, it is expected that it will occur once and not occur twelve times. The probability that the event will occur is then: 1/13 = 0.0769.

A) $70.B) $700.C) $1,093.

A) $154,312.20.B) $95,815.74.C) $87,105.21.

A) 0.0833.B) 0.9231.C) 0.0769.





Assume an investor makes the following investments:

� Today, she purchases a share of stock in Redwood Alternatives for $50.00. � After one year, she purchases an additional share for $75.00. � After one more year, she sells both shares for $100.00 each.

There are no transaction costs or taxes. The investor’s required return is 35.0%.

During year one, the stock paid a $5.00 per share dividend. In year two, the stock paid a $7.50 per share dividend.

The time-weighted return is:


To calculate the time-weighted return:

Step 1: Separate the time periods into holding periods and calculate the return over that period:

Holding period 1: P0 = $50.00

D1 = $5.00

P1 = $75.00 (from information on second stock purchase)

HPR1 = (75 − 50 + 5) / 50 = 0.60, or 60%

Holding period 2: P1 = $75.00

D2 = $7.50

P2 = $100.00

HPR2 = (100 − 75 + 7.50) / 75 = 0.433, or 43.3%.

Step 2: Use the geometric mean to calculate the return over both periods

Return = [(1 + HPR1) × (1 + HPR2)]1/2 − 1 = [(1.60) × (1.433)]1/2 − 1 = 0.5142, or 51.4%.



A) 23.2%.B) 51.7%.C) 51.4%.



Let A and B be two mutually exclusive events with P(A) = 0.40 and P(B) = 0.20. Therefore:


If the two evens are mutually exclusive, the probability of both ocurring is zero.



Banca Hakala purchases two front row concert tickets over the Internet for $90 per seat. One month later, the rock group announces that it is dissolving due to personality conflicts and the concert that Hakala has tickets for will be the “farewell” concert. Hakala sees a chance to raise some quick cash, so she puts the tickets up for sale on the same internet site. The auction closes at $250 per ticket. After paying a 10% commission to the site on the amount of the sale and paying $10 in shipping costs, Hakala’s one-month holding period return is approximately:


The holding period return is calculated as: (ending price – beginning price +/- any cash flows) / beginning price. Here, the beginning and ending prices are given. The other cash flows consist of the commission of 0.10 × $250 × 2 tickets = $50 and the shipping cost of $10 (total for both tickets).

Thus, her one-month holding period return is: [(2 × $250) – (2 × $90) – $50 − $10] / (2 × $90) = 1.44, or approximately 144%.



If $2,500 were put into an account at the end of each of the next 10 years earning 15% annual interest, how much would be in the account at the end of ten years?


N = 10; I = 15; PMT = 2,500; CPT → FV = $50,759.


A) P(A and B) = 0.B) P(B|A) = 0.20.C) P(A and B) = 0.08.

A) 144%.B) 44%.C) 139%.

A) $50,759.B) $41,965.C) $27,461.




Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe ratio measures:


The Sharpe ratio measures excess return per unit of risk. Remember that the numerator of the Sharpe ratio is (portfolio return − risk free rate), hence the importance of excess return. Note that peakedness of a return distribution is measured by kurtosis.



Use the results from the following survey of 500 firms to answer the question.

The number of classes in this frequency table is:


300 - 400 = 1, 400 - 500 = 2, 500 - 600 = 3, 600 - 700 = 4, 700 - 800 = 5, 800 - 900 = 6, Total = 6



Helen Pedersen has all her money invested in either of two mutual funds (A and B). She knows that there is a 40% probability that fund A will rise in price and a 60% chance that fund B will rise in price if fund A rises in price. What is the probability that both fund A and fund B will rise in price?


A) excess return per unit of risk.B) peakedness of a return distrubtion.C) total return per unit of risk.

Number of Employees Frequency 300 up to 400 40 400 up to 500 62 500 up to 600 78 600 up to 700 101 700 up to 800 131 800 up to 900 88

A) 6.B) 600.C) 5.

A) 1.00.B) 0.40.C) 0.24.



P(A) = 0.40, P(B|A) = 0.60. Therefore, P(AÇB) = P(A)P(B|A) = 0.40(0.60) = 0.24.



If two events are mutually exclusive, the probability that they both will occur at the same time is:

Your answer: A was incorrect. The correct answer was B) 0.00.

If two events are mutually exclusive, it is not possible to occur at the same time. Therefore, the P(A∩B) = 0.

This question tested from Session 2, Reading 8, LOS a.


Which of the following statements concerning kurtosis is least accurate?

Your answer: A was incorrect. The correct answer was C) A leptokurtic distribution has excess kurtosis less than zero.

A leptokurtic distribution is more peaked than normal and has fatter tails. However, the excess kurtosis is greater than zero.



Avery Scott, financial planner, recently obtained his CFA Charter and is considering multiple job offers. Scott devised the following four criteria to help him decide which offers to pursue most aggressively.

If Scott has 20 job offers and the probabilities of meeting each criterion are independent, how many are expected to meet all of his criteria? (Round to nearest whole number).

A) 0.50. B) 0.00. C) Cannot be determined from the information given.

A) A distribution that is more peaked than a normal distribution is leptokurtic.B) A leptokurtic distribution has fatter tails than a normal distribution.C) A leptokurtic distribution has excess kurtosis less than zero.

Criterion % Expected to Meet the Criteria

1. Within 75 miles of San Francisco 0.85

2. Employee size less than 50 0.50

3. Compensation package exceeding $100,000 0.30

4. Three weeks of vacation 0.15

A) 0.




We will use the multiplication rule to calculate this probability.

P(1, 2, 3, 4) = P(1) × P(2) × P(3) × P(4)

= 0.85 × 0.50 × 0.30 × 0.15 = 0.019125

Number of offers expected to meet the criteria = 0.019125 × 20 = 0.3825, or 0.



Consider the following graph of a distribution for the prices of various bottles of champagne.

Which of the following statements regarding the distribution is least accurate?

Your answer: A was incorrect. The correct answer was C) Point A represents the mode.

The graph represents a negatively skewed distribution, and thus Point A represents the mean. By definition, mean < median < mode describes a negatively skewed distribution.

Both remaining statements are true. Chebyshev’s Inequality states that for any set of observations (normally distributed or skewed), the proportion of observations that lie within k standard deviations of the mean is at least 1 – 1 / k2. Here, 1 – (1 / 1.32) = 1 − 0.59172 = 0.40828, or 40%.



The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000.

B) 3.C) 1.

A) The distribution is negatively skewed.B) The mean value will be less than the mode.C) Point A represents the mode.



Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the respective internal rate of return (IRR) and net present value (NPV) on this project?

Your answer: A was incorrect. The correct answer was C) 7.01%; −$53,765.

IRR Keystrokes: CF0 = -$550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1.

NPV Keystrokes: CF0 = -$550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1.

Compute NPV, I = 9.

Note: Although the rate of return is positive, the IRR is less than the required rate of 9%. Hence, the NPV is negative.



Claude Bellow, CFA, is an analyst with a real estate focused investment firm. He asks his assistant to gather annual return information on a large office building and on a REIT (real estate investment trust) with diverse holdings. The following tables summarize the information.

* Calculated using the arithmetic mean.

Part 1) Determine which of the following statements about the coefficient of variation of the two assets is least accurate.

Your answer: A was incorrect. The correct answer was C) There is more dispersion relative to the mean in the distribution of the REIT returns when compared to the distribution of the returns for the office building.

A) 13.99%; $166,177.B) 6.66%; −$64,170.C) 7.01%; −$53,765.

Table 1: Annual returns (in %)

Asset Year 1 Year 2 Year 3 Year 4 Year 5

REIT 25.0 20.0 5.0 -5.0 13.0

Office Building 15.0 5.0 -5.0 -2.0 13.0

Table 2: Mean and Dispersion Information

Asset Mean Return* Variance

REIT 11.6% 114.24

Office Building 5.2% 62.56

A) The coefficient of variation of the office building returns is approximately 1.52.

B) The mean of the squared deviations from the arithmetic mean of the office building is less than that of the REIT.

C) There is more dispersion relative to the mean in the distribution of the REIT returns when compared to the distribution of the returns for the office building.



There is less dispersion relative to the mean in the distribution of the REIT returns (CV = s / mean = 114.241/2 / 11.6 = 0.92) when compared to the distribution of the monthly returns for the Office building (CV = 62.561/2 / 5.2 = 1.52). The coefficient of variation measures how much dispersion exists relative to the mean of a distribution and allows for direct comparison of dispersion across different data sets. Note: Ignore Table 1! All the information you need is in Table 2.

Both remaining statements are true. The mean of the squared deviations from the arithmetic mean is the definition of the variance, and the variance of the Office Building returns is less than for those of the REIT. Thus, the same relationship holds for the standard deviation.


Claude Bellow, CFA, is an analyst with a real estate focused investment firm. He asks his assistant to gather annual return information on a large office building and on a REIT (real estate investment trust) with diverse holdings. The following tables summarize the information.

* Calculated using the arithmetic mean.

Part 2) A partner in the firm asks Bellow to calculate the Sharpe ratio for the REIT. If the risk-free rate is 5.0%, the Sharpe ratio is closest to:


The Sharpe ratio measures the excess return per unit of risk. The formula is:

Sharpe Ratio = ( rp − rf ) / σp where: rp = portfolio return; rf = risk free return; σ = standard deviation

Sharpe RatioREIT = (11.6% − 5.00%) / 114.241/2 = 0.62



An indicator calculated as the ratio of the average yield of 10 top-grade corporate bonds to the average yield on Dow Jones 40 bond is known as:

Table 1: Annual returns (in %)

Asset Year 1 Year 2 Year 3 Year 4 Year 5

REIT 25.0 20.0 5.0 -5.0 13.0

Office Building 15.0 5.0 -5.0 -2.0 13.0

Table 2: Mean and Dispersion Information

Asset Mean Return* Variance

REIT 11.6% 114.24

Office Building 5.2% 62.56

A) 1.62.B) 0.62.C) 0.06.

A) confidence index.




This is the definition of the confidence index. In periods of confidence, investors sell quality bonds and buy lower quality bonds looking for yield. Quality bond prices will fall and their yields rise. Lower grade bond prices will rise and their yields fall. Thus, the CI ratio will increase during periods of confidence (e.g., from 0.07/0.10 = 0.7 to 0.08/0.09 = 0.89). Note that the CI moves in the opposite direction of yield spreads. In periods of confidence, yield spreads narrow and the CI gets bigger. In periods of pessimism, spreads widen and the CI falls.



An analyst conducts a two-tailed z-test to determine if small cap returns are significantly different from 10%. The sample size was 200. The computed z-statistic is 2.3. Using a 5% level of significance, which statement is most accurate?

Your answer: A was incorrect. The correct answer was B) Reject the null hypothesis and conclude that small cap returns are significantly different from 10%.

At the 5% level of significance the critical z-statistic for a two-tailed test is 1.96 (assuming a large sample size). The null hypothesis is H0: x = 10%. The alternative hypothesis is HA: x ≠ 10%. Because the computed z-statistic is greater than the critical z-statistic (2.33 > 1.96), we reject the null hypothesis and we conclude that small cap returns are significantly different than 10%.



An analyst has reviewed market data for returns from 1980–1990 extensively, searching for patterns in the returns. She has found that when the end of the month falls on a Saturday, there are usually positive returns on the following Thursday. She has engaged in:


Data mining refers to the extensive review of the same database searching for patterns.



B) relative strength index.C) breadth index.

A) You cannot determine what to do with the information given.B) Reject the null hypothesis and conclude that small cap returns are significantly different from 10%.

C) Fail to reject the null hypothesis and conclude that small cap returns are close enough to 10% that we cannot say they are significantly different from 10%.

A) data mining. B) data snooping.C) biased selection.



Which of the following statements about contrary-opinion and smart money technicians is most accurate?

Your answer: A was incorrect. The correct answer was C) When investor credit balances are falling, contrary-opinion technicians are bearish.

When investor credit balances are falling, investors are bullish, so contrary-opinion technicians are bearish.

The other statements are incorrect. Contrarians are bullish when OTC-to-NYSE volume is decreasing. When 70% or more of futures traders are bullish on stock index futures, contrary-opinion technicians become bearish and sell.

Summary of the indicators for contrary-opinion and smart money technicians:

Contrary-opinion technicians (trade the opposite of the mass of general investors):

� Mutual Fund Ratio (mutual fund cash/total mutual funds) � Investor credit balances in brokerage accounts � Investment Advisory Opinions (bearish opinions/total opinions) � OTC (speculative) versus New York Stock Exchange (less speculative) volume � CBOE Put/Call ratio � Futures traders bullish on stock index futures

Smart-money technicians (follow the professional investors):

� Confidence index (yield on high-quality bond/yield on average-quality bonds). Note: AMIR® has been known to use wording about yield spreads (which move in the opposite direction of the confidence index) to test your understanding of this indicator.

� T-bill – Eurodollar yield spreads � Debit (margin) balances in brokerage accounts



Which of the following statements least describes the procedure for testing a hypothesis?


Depending upon the author there can be as many as seven steps in hypothesis testing which are:

1. Stating the hypotheses. 2. Identifying the test statistic and its probability distribution. 3. Specifying the significance level.

A) A smart-money technician buys when most futures traders are bullish on stock index futures.

B) A contrary-opinion technician is bearish when the ratio of over-the-counter to NYSE volume is decreasing.

C) When investor credit balances are falling, contrary-opinion technicians are bearish.

A) Compute the sample value of the test statistic, set up a rejection (critical) region, and make a decision.B) Develop a hypothesis, compute the test statistic, and make a decision.C) Select the level of significance, formulate the decision rule, and make a decision.



4. Stating the decision rule. 5. Collecting the data and performing the calculations. 6. Making the statistical decision. 7. Making the economic or investment decision.



Jo Su believes that there should be a negative relation between returns and systematic risk. She intends to collect data on returns and systematic risk to test this theory. What is the appropriate alternative hypothesis?

Your answer: A was incorrect. The correct answer was B)

Ha: ρ < 0.

The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that she wishes to reject (in favor of the alternative). The theory in this case is that the correlation is negative.



The average annual rainfall amount in Yucutat, Alaska, is normally distributed with a mean of 150 inches and a standard deviation of 20 inches. The 90% confidence interval for the annual rainfall in Yucutat is closest to:

Your answer: A was incorrect. The correct answer was B) 117 to 183 inches.

The 90% confidence interval is µ ± 1.65 standard deviations. 150 − 1.65(20) = 117 and 150 + 1.65(20) = 183.

This question tested from Session 3, Reading 9, LOS k, (Part 1).


Studies of performance of a sample of mutual fund managers most likely suffer from:

A) Ha: ρ > 0.

B) Ha: ρ < 0.

C) Ha: ρ ≠ 0.

A) 110 to 190 inches.B) 117 to 183 inches.C) 137 to 163 inches.

A) sample-selection bias.B) survivorship bias.C) look-ahead bias.



Your answer: A was incorrect. The correct answer was B) survivorship bias.

Studies of the performance of mutual fund managers often suffer from survivorship bias as poorly performing funds are closed down and are not included in the sample.



The fact that it is not heavily dependent on the analysis of accounting information is an advantage of:

Your answer: A was incorrect. The correct answer was B) technical analysis.

One advantage of technical analysis is that it does not involve messing with financial accounting information and adjusting for management choice of accounting methods.

This question tested from Session 3, Reading 12, LOS b, (Part 1).


Joseph Lu calculated the average return on equity for a sample of 64 companies. The sample average is 0.14 and the sample standard deviation is 0.16. The standard error of the mean is closest to:


0.0200.

The standard error of the mean = σ/√n = 0.16/√64 = 0.02.



In a two-tailed test of a hypothesis concerning whether a population mean is zero, Jack Olson computes a t-statistic of 2.7 based on a sample of 20 observations where the distribution is normal. If a 5% significance level is chosen, Olson should:


A) fundamental analysis. B) technical analysis. C) efficient market analysis.

A) 0.1600. B) 0.0200. C) 0.0025.

A) reject the null hypothesis and conclude that the population mean is significantly different from zero.B) reject the null hypothesis and conclude that the population mean is not significantly different from zero.C) fail to reject the null hypothesis that the population mean is not significantly different from zero.



At a 5% significance level, the critical t-statistic using the Student’s t-distribution table for a two-tailed test and 19 degrees of freedom (sample size of 20 less 1) is ± 2.093 (with a large sample size the critical z-statistic of 1.960 may be used). Because the critical t-statistic of 2.093 is to the left of the calculated t-statistic of 2.7, meaning that the calculated t-statistic is in the rejection range, we reject the null hypothesis and we conclude that the population mean is significantly different from zero.



Brian Ci believes that the average return on equity in the airline industry, µ, is less than 5%. What are the appropriate null (H0) and alternative (Ha) hypotheses to test this belief?


H0: µ ≥ 0.05 versus Ha: µ < 0.05.

The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that he wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the "less than" belief.



Analysts who look for patterns and trends in security prices for buy and sell signals are called:


Technical analysts look for patterns and trends in securities prices to determine when to buy or sell. The approach taken by technicians varies greatly from that of fundamentalists, who try to forecast value changes by analyzing expected risk and return data. Efficient market analysts feel all available information is immediately impounded in the current security price. Thus, any new information will cause instantaneous price adjustments.



Which of the following portfolios provides the best “safety first” ratio if the minimum acceptable return is 6%?

A) H0: µ < 0.05 versus Ha: µ ≥ 0.05.

B) H0: µ ≥ 0.05 versus Ha: µ < 0.05.

C) H0: µ < 0.05 versus Ha: µ > 0.05.

A) technical analysts. B) efficient market analysts. C) fundamental analysts.

Portfolio Expected Return (%) Standard Deviation (%)




Roy’s safety-first criterion requires the maximization of the SF Ratio: SF Ratio = (expected return – threshold return) / standard deviation

Portfolio #2 has the highest safety-first ratio at 1.67.



Which of the following statements regarding confidence intervals is most accurate?

Your answer: A was incorrect. The correct answer was C) The lower the alpha level, the wider the confidence interval.

A higher degree of confidence requires a wider confidence interval. The degree of confidence is equal to one minus the alpha level, and so the wider the confidence interval, the higher the degree of confidence and the lower the alpha level. Note that the lower alpha level requires a higher reliability factor which results in the wider confidence interval.

This question tested from Session 3, Reading 10, LOS h.


An article in a trade journal suggests that a strategy of buying the seven stocks in the S&P 500 with the highest earnings-to-price ratio at the end of the calendar year and holding them until March 20 of the following year produces significant trading profits. Upon reading further, you discover that the study is based on data from 1993 to 1997, and the earnings-to-price ratio is calculated using the stock price on December 31 of each year and the annual reported earnings per share for that year. Which of the following biases is least likely to influence the reported results?

1 13 5

2 11 3

3 9 2

A) 2.B) 1.C) 3.

Portfolio Expected Return (%) Standard Deviation (%) SF Ratio 1 13 5 1.40 2 11 3 1.67 3 9 2 1.50

A) The lower the degree of confidence, the wider the confidence interval.B) The higher the alpha level, the wider the confidence interval.C) The lower the alpha level, the wider the confidence interval.

A) Look-ahead bias.



Your answer: A was incorrect. The correct answer was B) Survivorship bias.

Survivorship bias is not likely to significantly influence the results of this study because the authors looked at the stocks in the S&P 500 at the beginning of the year and measured performance over the following three months. Look-ahead bias could be a problem because earnings-price ratios are calculated and the trading strategy implemented at a time before earnings are actually reported. Finally, the study is conducted over a relatively short time period during the long bull market of the 1990s. This suggests the results may be time-specific and the result of time-period bias.



Jay Crewson, equity analyst at a large investment bank, formerly worked with a group of contrary-opinion technician traders who traded exclusively using contrary indicators. He was recently transferred to support a group of smart-money technicians. Since he is still adjusting to the “new” rules, he asks Richard Ruscoe, another analyst in the group, to review his work. Ruscoe reviews Crewson’s latest recommendation list and points out that one of the statements is incorrect. Which of the following is the least accurate statement? A smart-money technical analyst recommends buying when:

Your answer: A was incorrect. The correct answer was B) investor credit balances in brokerage accounts increase.

Increased investor credit balances in brokerage accounts (indicating a bearish trend) are a bullish sign to contrary-opinion technicians. The other statements are true and are indicators used by smart-money technicians.



In a two-tailed hypothesis test, Jack Olson observes a t-statistic of -1.38 based on a sample of 20 observations where the population mean is zero. If you choose a 5% significance level, you should:

Your answer: A was incorrect. The correct answer was B) fail to reject the null hypothesis that the population mean is not significantly different from zero.

At a 5% significance level, the critical t-statistic using the Student’s t distribution table for a two-tailed test and 19 degrees of freedom (sample size of 20 less 1) is ± 2.093 (with a large sample size the critical z-statistic of 1.960 may be used). Because the critical t-statistic of -2.093 is to the left of the calculated t-statistic of -1.38, meaning that the calculated t-statistic is not in the rejection range, we fail to reject the null hypothesis that the population mean is not significantly different from zero.

B) Survivorship bias.C) Time-period bias.

A) debit balances in brokerage accounts increase.B) investor credit balances in brokerage accounts increase.C) the Barron's confidence index is increasing.

A) reject the null hypothesis and conclude that the population mean is significantly different from zero.B) fail to reject the null hypothesis that the population mean is not significantly different from zero.C) reject the null hypothesis and conclude that the population mean is not significantly different from zero.





The average salary for a sample of 61 CFA charterholders with 10 years experience is $200,000, and the sample standard deviation is $80,000. Assume the population is normally distributed. Which of the following is a 99% confidence interval for the population mean salary of CFA charterholders with 10 years of experience?

Your answer: A was incorrect. The correct answer was B) $172,754 to $227,246.

If the distribution of the population is normal, but we don’t know the population variance, we can use the Student’s t-distribution to construct a confidence interval. Because there are 61 observations, the degrees of freedom are 60. From the student’s t table, we can determine that the reliability factor for tα/2, or t0.005, is 2.660. Then the 99% confidence interval is $200,000 ± 2.660($80,000 / √61) or $200,000 ± 2.660 × $10,243, or $200,000 ± $27,246.



A study reports that from 2002 to 2004 the average return on growth stocks was twice as large as that of value stocks. These results most likely reflect:


Time-period bias can result if the time period over which the data is gathered is either too short because the results may reflect phenomenon specific to that time period, or if a change occurred during the time frame that would result in two different return distributions. In this case the time period sampled is probably not large enough to draw any conclusions about the long-term relative performance of value and growth stocks, even if the sample size within that time period is large. Look-ahead bias occurs when the analyst uses historical data that was not publicly available at the time being studied. Survivorship bias is a form of sample selection bias in which the observations in the sample are biased because the elements of the sample that survived until the sample was taken are different than the elements that dropped out of the population.



The use of the F-distributed test statistic, F = s12 / s2

2, to compare the variances of two populations does NOT require which of the following?

A) $172,514 to $227,486.B) $172,754 to $227,246.C) $160,000 to $240,000.

A) time-period bias.B) look-ahead bias.C) survivorship bias.

A) two samples are of the same size.




The F-statistic can be computed using samples of different sizes. That is, n1 need not be equal to n2.



A resistance level signifies the price at which a stock's supply would be expected to:

Your answer: A was incorrect. The correct answer was C) increase substantially.

Most stock prices remain relatively stable and fluctuate up and down from their true value. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling. This will result in increased supply. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. This will result in decreased supply.



A sample of 25 junior financial analysts gives a mean salary (in thousands) of 60. Assume the population variance is known to be 100. A 90% confidence interval for the mean starting salary of junior financial analysts is most accurately constructed as:

Your answer: A was incorrect. The correct answer was C) 60 + 1.645(2).

Because we can compute the population standard deviation, we use the z-statistic. A 90% confidence level is constructed by taking the population mean and adding and subtracting the product of the z-statistic reliability (zá/2) factor times the known standard deviation of the population divided by the square root of the sample size (note that the population variance is given and its positive square root is the standard deviation of the population): x ± zá/2 * ( σ / n1/2) = 60 +/- 1.645 × (1001/2 / 251/2) = 60 +/- 1.645 × (10 / 5) = 60 +/- 1.645 × 2.



James Ambercrombie believes that the average return on equity in the utility industry, µ, is greater than 10%. What is null (H0) and alternative (Ha) hypothesis for his study?

B) populations are normally distributed.C) samples are independent of one another.

A) decrease to match the demand for the stock.B) decrease substantially.C) increase substantially.

A) 60 + 1.645(10).B) 60 + 1.645(4).C) 60 + 1.645(2).



Your answer: A was incorrect. The correct answer was C) H0: µ ≤ 0.10 versus Ha: µ > 0.10.

This is a one-sided alternative because of the “greater than” belief. We expect to reject the null.



Melissa Cyprus, CFA, is conducting an analysis of inventory management practices in the retail industry. She assumes the population cross-sectional standard deviation of inventory turnover ratios is 20. How large a random sample should she gather in order to ensure a standard error of the sample mean of 4?


25.

Given the population standard deviation and the standard error of the sample mean, you can solve for the sample size. Because the standard error of the sample mean equals the standard deviation of the population divided by the square root of the sample size, 4 = 20 / n1/2, so n1/2 = 5, so n = 25.



George Appleton believes that the average return on equity in the amusement industry, µ, is greater than 10%. What is the null (H0) and alternative (Ha) hypothesis for his study?


H0: ≤ 0.10 versus Ha: > 0.10.

The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that he wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the "greater than" belief.


A) H0: µ = 0.10 versus Ha: µ ≠ 0.10.

B) H0: µ ≥ 0.10 versus Ha: µ < 0.10.

C) H0: µ ≤ 0.10 versus Ha: µ > 0.10.

A) 20. B) 25. C) 80.

A) H0: > 0.10 versus Ha: ≤ 0.10.

B) H0: ≤ 0.10 versus Ha: > 0.10.

C) H0: > 0.10 versus Ha: < 0.10.




The central limit theorem concerns the sampling distribution of the:


sample mean.

The central limit theorem tells us that for a population with a mean m and a finite variance σ2, the sampling distribution of the sample means of all possible samples of size n will approach a normal distribution with a mean equal to m and a variance equal to σ2 / n as n gets large.



A Type II error:

Your answer: A was incorrect. The correct answer was B) fails to reject a false null hypothesis.

A Type II error is defined as accepting the null hypothesis when it is actually false. The chance of making a Type II error is called beta risk.



The variance of 100 daily stock returns for Stock A is 0.0078. The variance of 90 daily stock returns for Stock B is 0.0083. Using a 5% level of significance, the critical value for this test is 1.61. The most appropriate conclusion regarding whether the variance of Stock A is different from the variance of Stock B is that the:

Your answer: A was incorrect. The correct answer was B) variances are equal.

A test of the equality of variances requires an F-statistic. The calculated F-statistic is 0.0083/0.0078 = 1.064. Since the calculated F value of 1.064 is less than the critical F value of 1.61, we cannot reject the null hypothesis that the variances of the 2 stocks are equal.


A) sample standard deviation. B) population mean. C) sample mean.

A) fails to reject a true null hypothesis.B) fails to reject a false null hypothesis.C) rejects a true null hypothesis.

A) variance of Stock B is significantly greater than the variance of Stock A.B) variances are equal.C) variances are not equal.




Susan Bellows is comparing the return on equity for two industries. She is convinced that the return on equity for the discount retail industry (DR) is greater than that of the luxury retail (LR) industry. What are the hypotheses for a test of her comparison of return on equity?

Your answer: A was incorrect. The correct answer was B) H0: µDR ≤ µLR versus Ha: µDR > µLR.

The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that she wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the “greater than” belief.



Thomas Merton, a car industry analyst, wants to investigate a relationship between the types of ads used in advertising campaigns and sales to customers in certain age groups. In order to make sure he includes manufacturers of all sizes, Merton divides the industry into four size groups and draws random samples from each group. What sampling method is Merton using?

Your answer: A was incorrect. The correct answer was B) Stratified random sampling.

In stratified random sampling, we first divide the population into subgroups based on some relevant characteristic(s) and then make random draws from each group.



The central limit theorem states that, for any distribution, as n gets larger, the sampling distribution:


As n gets larger, the variance of the distribution of sample means is reduced, and the distribution of sample means approximates a normal distribution.

A) H0: µDR = µLR versus Ha: µDR ≠ µLR.

B) H0: µDR ≤ µLR versus Ha: µDR > µLR.

C) H0: µDR = µLR versus Ha: µDR < µLR.

A) Cross-sectional sampling.B) Stratified random sampling. C) Simple random sampling.

A) approaches a normal distribution.B) becomes larger.C) approaches the mean.





The difference between a Monte Carlo simulation and a historical simulation is that a historical simulation uses randomly selected variables from past distributions, while a Monte Carlo simulation:

Your answer: A was incorrect. The correct answer was C) uses a computer to generate random variables.

A Monte Carlo simulation uses a computer to generate random variables from specified distributions.

This question tested from Session 3, Reading 9, LOS o.


Which of the following statements about test statistics is least accurate?

Your answer: A was incorrect. The correct answer was B) In a test of the population mean, if the population variance is unknown and the sample is small, we should use a z-distributed test statistic.

If the population sampled has a known variance, the z-test is the correct test to use. In general, a t-test is used to test the mean of a population when the population is unknown. Note that in special cases when the sample is extremely large, the z-test may be used in place of the t-test, but the t-test is considered to be the test of choice when the population variance is unknown. A t-test is also used to test the difference between two population means while an F-test is used to compare differences between the variances of two populations.



A researcher is testing the hypothesis that a population mean is equal to zero. From a sample with 64 observations, the researcher calculates a sample mean of -2.5 and a sample standard deviation of 8.0. At which levels of significance should the researcher reject the hypothesis?

A) projects variables based on a priori principles.B) uses randomly selected variables from future distributions.C) uses a computer to generate random variables.

A) In the case of a test of the difference in means of two independent samples, we use a t-distributed test statistic.

B) In a test of the population mean, if the population variance is unknown and the sample is small, we should use a z-distributed test statistic.

C) In a test of the population mean, if the population variance is unknown, we should use a t-distributed test statistic.

1% significance 5% significance 10% significance

A) Fail to reject Fail to reject Reject

B) Reject Fail to reject Fail to reject




This is a two-tailed test. With a sample size greater than 30, using a z-test is acceptable. The test statistic =

= −2.5. For a two-tailed z-test, the critical values are ±1.645 for a 10% significance level, ±1.96 for a 5%

significance level, and ±2.58 for a 1% significance level. The researcher should reject the hypothesis at the 10% and 5% significance levels, but fail to reject the hypothesis at the 1% significance level.

Using Student's t-distribution, the critical values for 60 degrees of freedom (the closest available in a typical table) are ±1.671 for a 10% significance level, ±2.00 for a 5% significance level, and ±2.66 for a 1% significance level. The researcher should reject the hypothesis at the 10% and 5% significance levels, but fail to reject the hypothesis at the 1% significance level.



Point and figure charting is most concerned with which of the following?


A point-and-figure chart includes only significant price changes, regardless of their timing or volume. The technician determines what price interval to record as signficiant and when to note price reversals.



In addition to the usual parameters that describe a normal distribution, to completely describe 10 random variables, a multivariate normal distribution requires knowing the:


45 correlations.

The number of correlations in a multivariate normal distribution of n variables is computed by the formula ((n) × (n-1)) / 2, in this case (10 × 9) / 2 = 45.


C) Fail to reject Reject Reject

Fail to reject Reject Reject

A) Price "jumps".B) Time.C) Volume.

A) overall correlation. B) 45 correlations. C) 10 correlations.




From a population of 5,000 observations, a sample of n = 100 is selected. Calculate the standard error of the sample mean if the population standard deviation is 50.


The standard error of the sample mean equals the standard deviation of the population divided by the square root of the sample size: 50 / 1001/2 = 5.



Which of the following statements about probability distributions is least accurate?


The binomial probability distribution is an example of a discrete probability distribution. There are only two possible outcomes of each trial and the outcomes are mutually exclusive. For example, in a coin toss the outcome is either heads or tails.

The other responses are both correct definitions.



Which of the following statements about contrary-opinion and smart money indicators is least accurate?

Your answer: A was incorrect. The correct answer was C) When margin balances in brokerages accounts increase, contrary-opinion technicians are bullish.

Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, this would be a bullish sign to smart-money technicians.

The other statements are correct. When the investment advisory ratio (bearish opinions/total opinions) is equal to

A) 5.00.B) 50.00.C) 4.48.

A) A binomial probability distribution is an example of a continuous probability distribution.

B) A discrete random variable is a variable that can assume only certain clearly separated values resulting from a count of some set of items.

C) The skewness of a normal distribution is zero.

A) If OTC volume is decreasing as a percentage of the NYSE volume, investors are bearish.B) The investment advisory ratio is at 0.65. Contrary-opinion technicians are bullish.C) When margin balances in brokerages accounts increase, contrary-opinion technicians are bullish.



or greater than 0.60, it means that investors are bearish, and contrary-opinion technicians are bullish. Investors are considered bearish if the OTC volume is decreasing relative to NYSE volume.


Question 100 - #93989

A range of estimated values within which the actual value of a population parameter will lie with a given probability of 1 − α is a(n):

Your answer: A was incorrect. The correct answer was B) (1 − α) percent confidence interval.

A 95% confidence interval for the population mean (α = 5%), for example, is a range of estimates within which the actual value of the population mean will lie with a probability of 95%. Point estimates, on the other hand, are single (sample) values used to estimate population parameters. There is no such thing as a α percent point estimate or a (1 − α) percent cross-sectional point estimate.


Question 101 - #94328

If random variable Y follows a lognormal distribution then the natural log of Y must be:

Your answer: A was incorrect. The correct answer was B) normally distributed.

For any random variable that is lognormally distributed its natural logarithm (ln) will be normally distributed.

This question tested from Session 3, Reading 9, LOS m.

Question 102 - #94397

For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one bond defaults is independent of whether another bond defaults. For a portfolio of five of these junk bonds, what is the probability that zero or one bond of the five defaults in the year ahead?


0.7373.

A) α percent confidence interval.B) (1 − α) percent confidence interval.C) α percent point estimate.

A) denoted as ex.B) normally distributed.C) lognormally distributed.

A) 0.0819. B) 0.4096. C) 0.7373.



The outcome follows a binomial distribution where n = 5 and p = 0.2. In this case p(0) = 0.85 = 0.3277 and p(1) = 5 × 0.84 × 0.2 = 0.4096, so P(X=0 or X=1) = 0.3277 + 0.4096.


Question 103 - #94029

If the null hypothesis is H0: ρ ≤ 0, what is the appropriate alternative hypothesis?


Ha: ρ > 0.

The alternative hypothesis must include the possible outcomes the null does not.


Question 104 - #94113

Which of the following is a discrete random variable?


Since the DJIA consists of only 30 stocks, the answer associated with it would be a discrete random variable. Random variables measuring time, rates of return and weight will be continuous.


Question 105 - #94243

Which of the following is least likely an underlying assumption of technical analysis?

Your answer: A was incorrect. The correct answer was B) Markets are efficient and all known information is reflected in prices.

For technical analysis to succeed, markets must have some inefficiency in order for trends to develop.

A) Ha: ρ ≠ 0.

B) Ha: ρ > 0.

C) Ha: ρ < 0.

A) The number of advancing stocks in the DJIA in a day. B) The realized return on a corporate bond. C) The amount of time between two successive stock trades.

A) Prices are determined by supply and demand B) Markets are efficient and all known information is reflected in prices. C) Supply and demand for a stock is driven by rational and irrational behavior.




Question 106 - #94090

Which of the following statements about probability distributions is least accurate?

Your answer: A was incorrect. The correct answer was C) A probability distribution is, by definition, normally distributed.

Probabilities must be zero or positive, but a probability distribution is not necessarily normally distributed. Binomial distributions are either successes or failures.


Question 107 - #94234

Robert Patterson, an options trader, believes that the return on options trading is higher on Mondays than on other days. In order to test his theory, he formulates a null hypothesis. Which of the following would be an appropriate null hypothesis? Returns on Mondays are:

Your answer: A was incorrect. The correct answer was C) not greater than returns on other days.

An appropriate null hypothesis is one that the researcher wants to reject. If Patterson believes that the returns on Mondays are greater than on other days, he would like to reject the hypothesis that the opposite is true–that returns on Mondays are not greater than returns on other days.


Question 108 - #93873

If a smooth curve is to represent a probability density function, what two requirements must be satisfied? The area under the curve must be:

Your answer: A was incorrect. The correct answer was B) one and the curve must not fall below the horizontal axis.

If a smooth curve is to represent a probability density function, the total area under the curve must be one (probability of all outcomes equals 1) and the curve must not fall below the horizontal axis (no outcome can have

A) In a binomial distribution each observation has only two possible outcomes that are mutually exclusive.B) A probability distribution includes a listing of all the possible outcomes of an experiment.C) A probability distribution is, by definition, normally distributed.

A) greater than returns on other days.B) less than returns on other days.C) not greater than returns on other days.

A) one and the curve must not rise above the horizontal axis.B) one and the curve must not fall below the horizontal axis.C) zero and the curve must not fall below the horizontal axis.



a negative chance of occurring).


Question 109 - #94315

The continuously compounded rate of return that will generate a one-year holding period return of -6.5% is closest to:


Continuously compounded rate of return = ln(1 − 0.065) = -6.72%.

This question tested from Session 3, Reading 9, LOS n, (Part 2).

Question 110 - #94051

If the probability of a Type I error decreases, then the probability of:

Your answer: A was incorrect. The correct answer was C) a Type II error increases.

If P(Type I error) decreases, then P(Type II error) increases. A null hypothesis is never accepted. We can only fail to reject the null.


Question 111 - #93956

A group of investors wants to be sure to always earn at least a 5% rate of return on their investments. They are looking at an investment that has a normally distributed probability distribution with an expected rate of return of 10% and a standard deviation of 5%. The probability of meeting or exceeding the investors' desired return in any given year is closest to:

Your answer: A was incorrect. The correct answer was B) 84%.

The mean is 10% and the standard deviation is 5%. You want to know the probability of a return 5% or better. 10% - 5% = 5% , so 5% is one standard deviation less than the mean. Thirty-four percent of the observations are between the mean and one standard deviation on the down side. Fifty percent of the observations are greater

A) -6.7%.B) -6.3%.C) -5.7%.

A) incorrectly accepting the null decreases.B) incorrectly rejecting the null increases.C) a Type II error increases.

A) 34%.B) 84%.C) 98%.



than the mean. So the probability of a return 5% or higher is 34% + 50% = 84%.


Question 112 - #93871

A random sample of 25 Indiana farms had a mean number of cattle per farm of 27 with a sample standard deviation of five. Assuming the population is normally distributed, what would be the 95% confidence interval for the number of cattle per farm?


The standard error of the sample mean = 5 / √25 = 1 Degrees of freedom = 25 − 1 = 24 From the student’s T table, t5/2 = 2.064 The confidence interval is: 27 ± 2.064(1) = 24.94 to 29.06 or 25 to 29.


Question 113 - #94141

For a t-distributed test statistic with 30 degrees of freedom, a one-tailed test specifying the parameter greater than some value and a 95% confidence level, the critical value is:


This is the critical value for a one-tailed probability of 5% and 30 degrees of freedom.


Question 114 - #93926

Books Fast, Inc., prides itself on shipping customer orders quickly. Downs Shipping Service has promised that mean delivery time will be less than 72 hours. Books Fast sampled 27 of its customers and found a mean delivery time of 76 hours, with a sample standard deviation of 6 hours. Based on this sample and assuming a normal distribution of delivery times, what is the confidence interval at 5% significance?

Your answer: A was incorrect. The correct answer was B) 73.63 to 78.37 hours.

A) 25 to 29.B) 23 to 31.C) 22 to 32.

A) 1.640.B) 1.697.C) 2.042.

A) 68.50 to 83.50 hours.B) 73.63 to 78.37 hours. C) 65.75 to 86.25 hours.



The confidence interval is equal to 76 + or − (2.056)(6 / √27) = 73.63 to 78.37 hours. Because the sample size is small, we use the t-distribution with (27 − 1) degrees of freedom.


Question 115 - #94045

If a two-tailed hypothesis test has a 5% probability of rejecting the null hypothesis when the null is true, it is most likely that the:


Rejecting the null hypothesis when it is true is a Type I error. The probability of a Type I error is the significance level of the test. The power of a test is one minus the probability of a Type II error, which cannot be calculated from the information given.


Question 116 - #94049

Which of the following statements regarding hypothesis testing is least accurate?

Your answer: A was incorrect. The correct answer was B) A type I error is acceptance of a hypothesis that is actually false.

A type I error is the rejection of a hypothesis that is actually true.


Question 117 - #94086

If the null hypothesis is innocence, then the statement “It is better that the guilty go free, than the innocent are punished” is an example of preferring a:

Your answer: A was incorrect. The correct answer was B) type II error over a type I error.

The statement shows a preference for accepting the null hypothesis when it is false (a type II error), over rejecting it when it is true (a type I error).

A) significance level of the test is 5%.B) probability of a Type I error is 2.5%.C) power of the test is 95%.

A) The significance level is the risk of making a type I error.B) A type I error is acceptance of a hypothesis that is actually false.C) A type II error is the acceptance of a hypothesis that is actually false.

A) higher level of significance.B) type II error over a type I error. C) type I error over a type II error.




Question 118 - #94129

The test of the equality of the variances of two normally distributed populations requires the use of a test statistic that is:


F-distributed.

The F-distributed test statistic, F = s12 / s2

2, is used to compare the variances of two populations.


Question 119 - #93925

If the number of offspring for females of a certain mammalian species has a mean of 16.4 and a standard deviation of 3.2, what will be the standard error of the sample mean for a survey of 25 females of the species?


The standard error of the sample mean when the standard deviation of the population is known is equal to the standard deviation of the population divided by the square root of the sample size. In this case, 3.2 / √25 = 0.64.


©2009 Kaplan Schweser. All Rights Reserved.

A) z-distributed. B) Chi-squared distributed. C) F-distributed.

A) 1.28.B) 0.64.C) 3.20.

Back to Test Review Hide Questions Print this Page



Schweser Printable Answers - QM 1 - Webs

Documents

Transcript of Schweser Printable Answers - QM 1 - Webs