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B. 2.25%.
C. 3.35%.
D. 3.85%.
6.
The price of a stock has risen from $13 to $35 over the past five years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 20%.
B. 22%.
C. 24%.
D. 26%.
7.
The present value of $800 received in 12 month's time,, using a continuous discount rate of
20%, is CLOSEST to:
A. $621.
B. $638.
C. $655.
D. $667.
8.
The price of a stock has risen from $60 to $70 over the past 4 years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 2.18%.
B. 2.25%.
C. 3.35%.
D. 3.85%.
9.
The price of a stock has risen from $13 to $35 over the past five years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 20%.
B. 22%.
C. 24%.
D. 26%.
10.
The price of a stock has risen from $30 to $45 over the past 5 years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
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A. 7.2%.
B. 8.1%.
C. 8.3%.
D. 8.6%.
11.
The present value of $4,500 received in 6 month's time, using a continuous discount rate of
9%, is CLOSEST to:
A. $3,290
B. $4,302
C. $4,306
D. $4,310
12.
If a cash flow of $700 in 3 years' time has a PV of $400, the annual percentage rate, assuming
continuous compounding is CLOSEST to:
A. 8.52%.
B. 12.16%.
C. 18.65%.
D. 25.44%.
13.
The present value of $800 received in 12 month's time,, using a continuous discount rate of
20%, is CLOSEST to:
A. $621.
B. $638.
C. $655.
D. $667.
14.
The price of a stock has risen from $15 to $40 over the past 2 years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 9.15%
B. 14.94%
C. 29.24%
D. 49.04%
15.
If a cash flow of $800 in 6 years' time has a PV of $500, the annual percentage rate, assuming
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The covariance between the return from two securities is 4 and the correlation between them is
0.5. If the variance of the first return is 16, the variance of the second return will be CLOSEST
to:
A. 0.25.
B. 0.50.
C. 2.00.
D. 4.00.
21.
Which of the following are characteristics of a normal distribution?
I. Skewness equal to zero.
II. Mean less than median.
III. Kurtosis greater than zero.
IV. Continuous and unbounded.
A. I and IV.
B. II and III.
C. I, II and III.
D. I, III and IV.
22.
What is the quantile corresponding to the 95% confidence interval?
A. -3.715.
B. -2.326.
C. -1.645.
D. -1.282.
23.
Consider a portfolio whose expected return is normally distributed with a mean of 20 percent
and a standard deviation of 10 percent. The probability that the return will lie between 0
percent and 10 percent is CLOSEST to:
A. 2%.
B. 6%.
C. 14%.
D. 19%.
24.
Assume a variable with normal distribution. The mean is 100. The variance is 100. The
probability of observing an outcome of 77 and below is approximately:
A. 1.00%.
B. 10.35%.
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C. 12.35%.
D. 50.35%.
25.
An analyst determines that the S&P500 falls every 3 out of 8 days but without any serial
dependency, i.e. probability of a fall on a certain date is not affected by its movement on the
previous days. Given that there are 285 trading days in a year, the standard deviation in the
number of days that the S&P500 will fall is CLOSEST to:
A. 4
B. 6
C. 8
D. 14
26.
A portfolio has a mean value of $90 million and a daily standard deviation of $9 million.
Assuming that the portfolio values are normally distributed, the lowest value that the portfolio
will fall to over the next ten days and within 99.9% probability is:
A. $1.8 million.
B. $23.8 million.
C. $43.2 million.
D. $61.5 million.
27.
The covariance between the return from two securities is 4.2 and the correlation between them
is 0.6. If the variance of the first return is 5, the variance of the second return will be CLOSEST
to:
A. 1.40.
B. 1.96.
C. 3.13.
D. 9.80.
28.
What is the quantile corresponding to the 99% confidence interval?
A. -3.715.
B. -2.326.
C. -1.645.
D. -1.282.
29.
Which of the following are characteristic of a normal distribution?
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I. It is bell shaped.
II. It is a continuous distribution.
III. It is symmetrical about the mean.
IV. It peaks at the mean expected value.
A. I and II.
B. I and IV.
C. I, II and III.
D. I, II, III and IV.
30.
The mean age of the 80 employees in a company is 35 and the standard deviation is 15.
Assuming that the ages are normally distributed and using 95 percent confidence, we can say
that the employees within the firm fall between:
A. 20.0 and 50.0 years.
B. 31.7 and 38.3 years.
C. 33.8 and 36.2 years.
D. 34.6 and 35.4 years.
31.
Which of the following is the most appropriate for modeling stock prices?
A. Normal distribution.
B. Poisson distribution.
C. Random distribution.
D. Lognormal distribution.
32.
Which of the following are characteristics of a normal distribution?
I. Mean less than median.
II. Skewness equal to three.
III. Kurtosis greater than zero.
IV. Continuous and unbounded.
A. I and II.
B. III and IV.
C. I, III and IV.
D. II, III and IV.
33.
Given that a stock price rises on two days out of five and falls on three days out of five, what is
the probability that it will rise on exactly seven out of the next eight days?
A. 0.8%.
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B. 4.5%.
C. 9.0%.
D. 12.0%.
34.
The covariance between the return from two securities is 4 and the correlation between them is
0.5. If the variance of the first return is 16, the variance of the second return will be CLOSEST
to:
A. 0.25.
B. 0.50.
C. 2.00.
D. 4.00.
35.
The covariance between the return from two securities is 15 and the correlation between them
is 0.5. If the variance of the first return is 25, the variance of the second return will be
CLOSEST to:
A. 1.20.
B. 1.44.
C. 6
D. 36
36.
An analyst determines that in the current market environment the S&P500 goes up five out of
every seven days but without any serial dependency, i.e. probability of going up on a certain
date is not affected by its movement on the previous days. Given that 280 trading days in a
year the standard deviation in the number of days that the S&P500 will go up is CLOSEST to:
A. 7.56.
B. 11.95.
C. 57.18.
D. 142.74.
37.
A standard normal distribution has:
A. no tails.
B. fat tails.
C. infinite tails.
D. asymmetric tails.
38.
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A portfolio has a mean value of $140 million and a daily standard deviation of $1.5 million.
Assuming that the portfolio values are normally distributed, the lowest value that the portfolio
will fall to over the next 250 days and within 95% probability is:
A. $66.5 million.
B. $84.9 million.
C. $101 million.
D. $116.3 million.
39.
Which of the following is the most appropriate for modeling stock prices?
A. Normal distribution.
B. Poisson distribution.
C. Random distribution.
D. Lognormal distribution.
40.
A portfolio has a mean value of $100 million and a daily standard deviation of $19 million.
Assuming that the portfolio values are normally distributed, the lowest value that the portfolio
will fall to over the next five days and within 95% probability is:
A. -$31.7 million.
B. $1.2 million.
C. $30.1 million.
D. $57.5 million.
41.
The covariance between the return from two securities is 22 and the correlation between them
is 0.8. If the variance of the first return is 25, the variance of the second return will be
CLOSEST to:
A. 1.10.
B. 1.21.
C. 5.50.
D. 30.25.
42.
Pat Fineman is due to receive $6,000 one year from now, which he can invest at an interest
rate of 4 percent for a further four years. The value of this payment at the end of this period
will be CLOSEST to:
A. $6,960
B. $7,019
C. $7,200
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D. $7,300
43.
Assuming continuous compounding and an annual percentage rate of 8%, the present value of
$8,400 received in six months' time is CLOSEST to:
A. $6,203.
B. $8,071.
C. $8,077.
D. $8,083.
44.
If a cash flow of $21,000 in two years' time has a PV of $16,000, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 13.60%.
B. 13.80%.
C. 14.24%.
D. 14.56%.
45.
An investor is being promised an annuity of $4,000 starting in 8 years from now and continuing
for 10 years. Assuming a constant interest rate of 5.25 percent per annum, the value of this
annuity today is CLOSEST to:
A. $21,328.
B. $26,563.
C. $27,958.
D. $30,515.
46.
What is the standard deviation of the following set of numbers?
{2, 4, 6, 8, 10}.
A. 2.
B. 2.8.
C. 3.2.
D. 3.6.
47.
A bank is offering loans with monthly interest payments based on a stated annual interest rate
of 9 percent. The effective annual rate of these loans is CLOSEST to:
A. 9.20%.
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B. 9.31%.
C. 9.34%.
D. 9.38%.
48.
If a cash flow of $10,000 in five years' time has a PV of $7,500, the annual percentage rate,
assuming continuous compounding, is CLOSEST to:
A. 5.65%.
B. 5.75%.
C. 5.85%.
D. 5.92%.
49.
If all the cash flows in an investment are positive what is its IRR?
A. Positive.
B. Zero.
C. Negative.
D. Cannot be determined.
50.
Peter Roche is due to receive $4,000 one year from now, which he can invest at an interest rate
of 7 percent for a further ten years. The value of this payment at the end of this period will be
CLOSEST to:
A. $6,800.
B. $7,080.
C. $7,869.
D. $8,419.
51.
An investor is being promised an annuity of $900 starting in two years from now and continuing
for 25 years. Assuming a constant interest rate of 8 percent per annum, the value of this
annuity today is CLOSEST to:
A. $8,895.
B. $9,607.
C. $19,290.
D. $20,833.
52.
An investor is being promised an annuity of $1,500 starting in 15 years from now and
continuing for ten years. Assuming a constant interest rate of 8 percent per annum, the value
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57.
An investor is being promised an annuity of $2,000 starting in two years from now and
continuing for eight years. Assuming a constant interest rate of 4 percent per annum, the value
of this annuity today is CLOSEST to:
A. $12,947.
B. $13,465.
C. $14,793.
D. $15,385.
58.
A bank is offering loans with monthly interest payments based on a stated annual interest rate
of 7.79 percent. The effective annual rate of these loans is CLOSEST to:
A. 8.02%.
B. 8.05%.
C. 8.07%.
D. 8.09%.
59.
If a cash flow of $8,000 in four year's time has a PV of $7,000, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 3.24%.
B. 3.29%.
C. 3.34%.
D. 3.39%.
60.
Suppose that Gene owns a perpetuity, issued by an insurance company that pays $1,250 at the
end of each year. The insurance company now wishes to replace it with a decreasing perpetuity
of $1,500 decreasing at 1% p.a. without any change in the payment dates. At what rate of
interest (assuming a flat yield curve) would Gene be indifferent between the choices?
A. 4%.
B. 5%.
C. 6%.
D. 9%.
61.
Sam Walsh is due to receive $7,000 one year from now, which he can invest at an interest rate
of 6 percent for a further eight years. The value of this payment at the end of this period will be
CLOSEST to:
A. $10,360.
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B. $10,780.
C. $11,157.
D. $11,826.
62.
Pat Fineman is due to receive $6,000 one year from now, which he can invest at an interest
rate of 4 percent for a further four years. The value of this payment at the end of this period
will be CLOSEST to:
A. $6,960
B. $7,019
C. $7,200
D. $7,300
63.
The inflation rate in an economy where the prices are doubling ever eight years is CLOSEST to:
A. 6%.
B. 9%.
C. 13%.
D. 25%.
64.
What is the approximate price of a zero coupon bond whose par value is 100 and term is two
years if its yields is 5%?
A. 86.
B. 91.
C. 96.
D. 101.
65.
Consider two cash flows, the first of $10,000 receivable after one year and the second one of
$11,000 receivable after three years. At what rate of semi-annual interest would you be
indifferent between the two?
A. 3.8%.
B. 4.8%.
C. 5.8%.
D. 6.0%.
66.
The semi-annual yield in the market for one year is 5%. An options trader is pricing 1-year
options under Black Scholes. What is the rate of interest he should input in his model?
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A. 4.8500%.
B. 4.9385%.
C. 5.0000%.
D. 5.0625%.
67.
Which of the following statements are TRUE?
I. Correlation coefficient falls between -1 and +1.
II. Independent stochastic variables have a correlation coefficient of -1.
III. Correlation coefficient measures the non-linear relationship between two variables.
IV. Correlation coefficient can be calculated by scaling the covariance between two variables.
A. I and IV.
B. II and III.
C. I, II and III.
D. I, III and IV.
68.
A trader in your firm is convinced that the stock index in country X is perfectly negatively
correlated to the S&P 500. In order to profit from this analysis, he has taken a long position on
index X and shorted S&P 500 futures. Which of the following is TRUE?
A. This is a riskless trade because the stocks have negative correlation.
B. Apart from the currency risk and cash flow risks on margin calls, this is almost a riskless
strategy.
C. This trading strategy has the same risk as shorting the S&P 500. This is not a hedged
position.
D. There will be some small residual risk due to the currency conversion. Otherwise, it is a
virtually riskless strategy.
69.
The covariance between the return from two securities is 5 and the correlation between them is
0.5. If the variance of the first return is 8, the variance of the second return will be CLOSEST
to:
A. 1.25.
B. 1.56.
C. 3.54.
D. 12.50.
70.
What is the mean for the following probability data?
Probability Value
60% -2
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20% 10
20% 20
A. 1.60.
B. 2.80.
C. 3.60.
D. 4.80.
71.
Given the following data for a market variable what is the best estimate of its variance?
Probability Value
24% -12
40% 4
36% 14
A. 6
B. 10
C. 32
D. 97
72.
Which of the following statements about the correlation coefficient are FALSE?
I. Correlation coefficient ranges between 0 and +1.
II. If two random variables are independent they will have a correlation coefficient of zero.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. Correlation coefficient is a measure of the linear relationship between a dependent and an
independent variable.
A. I and II.
B. I and IV.
C. II and III.
D. III and IV.
73.
The covariance between the return from two securities is 5 and the correlation between them is
0.5. If the variance of the first return is 8, the variance of the second return will be CLOSEST
to:
A. 1.25.
B. 1.56.
C. 3.54.
D. 12.50.
74.
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Consider a stock whose 5-day volatility has been estimated as 0.89%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 22 days will be CLOSEST
to:
A. 0.42%.
B. 1.87%.
C. 3.92%.
D. 4.17%.
75.
What is the mean for the following probability data?
Probability Value
50% -2
25% 8
25% 15
A. 1.58.
B. 2.25.
C. 4.75.
D. 5.38.
76.
What is the standard deviation of the following data?
Probability Value
60% -2
20% 10
20% 20
A. 5.14.
B. 8.91.
C. 26.45.
D. 79.36.
77.
What is the mean for the following probability data?
Probability Value
30% -10
40% 5
30% 25
A. 1.15.
B. 2.17.
C. 3.34.
D. 6.50.
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78.
Consider a stock whose 10-day volatility has been estimated as 1.4%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 23 days will be CLOSEST
to:
A. 0.92%.
B. 2.12%.
C. 3.22%.
D. 6.71%.
79.
Consider a stock whose 5-day volatility has been estimated as 1.2%. Assuming that the returns
from the stock are uncorrelated over time, the volatility over 22 days will be CLOSEST to:
A. 0.57%.
B. 2.52%.
C. 5.28%.
D. 5.63%.
80.
What is the standard deviation of the following data?
Probability Value
30% -15
40% 5
30% 25
A. 8.94.
B. 15.49.
C. 80.00.
D. 240.00.
81.
Asset 1 has correlation of 0.5 with asset 2. A portfolio with equal weights of these two assets
has a standard deviation of 13. The standard deviation of asset 2 is 19.50. What is the
approximate standard deviation of asset 1?
A. 5.
B. 10.
C. 20.
D. Insufficient Information.
82.
Asset 1 has correlation of 0.5 with asset 2. A portfolio with equal weights of these two assets
has a standard deviation of 13. The standard deviation of asset 2 is 19.50. What is the
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Consider a stock whose 5-day volatility has been estimated as 0.89%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 22 days will be CLOSEST
to:
A. 0.42%.
B. 1.87%.
C. 3.92%.
D. 4.17%.
87.
The covariance between the return from two securities is 5 and the correlation between them is
0.5. If the variance of the first return is 8, the variance of the second return will be CLOSEST
to:
A. 1.25.
B. 1.56.
C. 3.54.
D. 12.50.
88.
Which of the following statements are TRUE?
I. Correlation coefficient ranges between -1 and +1.
II. If two random variables are independent they will have a correlation coefficient of zero.
III. Correlation coefficient is a measure of the linear relationship between a dependent and an
independent variable.
IV. Covariance between two variables can be calculated from the variances of the variables and
their correlation coefficient.
A. I and II.
B. I and III.
C. II and IV.
D. I, II, III and IV.
89.
Consider a stock whose 5-day volatility has been estimated as 1.5%. Assuming that the returns
from the stock are uncorrelated over time, the volatility over 250 days will be CLOSEST to:
A. 0.21%.
B. 10.61%.
C. 23.72%.
D. 75.00%.
90.
What is the mean for the following probability data?
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Probability Value
20% -4
40% 6
40% 12
A. 2.13.
B. 6.40.
C. 12.22.
D. 16.17.
91.
What is the mean for the following probability data?
Probability Value
50% -2
25% 8
25% 15
A. 1.58.
B. 2.25.
C. 4.75.
D. 5.38.
92.
An analyst is studying a stock that is currently trading at $35. The analyst estimates that there
is 33 percent probability that the stock will trade at $50 after one year, a 20 percent probability
that the stock will trade at $42, and a 47 percent chance that the stock will trade at $20. What
is the implied volatility of this stock price?
A. 13%.
B. 24%.
C. 31%.
D. 39%.
93.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 15% and a variance of return of 0.008.
B. An investment with an expected return of 12% and a variance of return of 0.005.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 2%.
94.
An analyst regresses the returns of 60 stocks in a stock market and finds that the best fitting
line is:
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Return = 8% + 9% x Beta
If the standard error of the estimate is 6% and the standard error of the coefficient of Beta is
4%, the test statistic for the coefficient is CLOSEST to:
A. 1.33.
B. 1.43.
C. 1.50.
D. 2.25.
95.
Which of the following investment has the highest co-efficient of variation?
A. An investment with an expected return of 19% and a variance of return of 0.005.
B. An investment with an expected return of 15% and a variance of return of 0.002.
C. An investment with an expected return of 10% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 1%.
96.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 15% and a variance of of return of 0.008.
B. An investment with an expected return of 12% and a variance of of return of 0.005.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 2%.
97.
An analyst collects the data for interest rate expectations. The mean expected rate is 2.5
percent, the lowest expectation is 1 percent and the highest expectation is 5 percent. This
distribution is:
A. sparse.
B. normal.
C. skewed.
D. abnormal.
98.
Using the returns from 64 stocks, an analyst determines that the best fitting line for the capital
market relationship is:
Return = 2% + 12% x Beta
If the standard error of the estimate is 3% and the standard error of the coefficient of Beta is
4%, the test statistic for the coefficient is CLOSEST to:
A. 2
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B. 3
C. 4
D. 6
99.
An analyst regresses the returns of 60 stocks in a stock market and finds that the best fitting
line is:
Return = 8% + 9% x Beta
If the standard error of the estimate is 6% and the standard error of the coefficient of Beta is
4%, the test statistic for the coefficient is CLOSEST to:
A. 1.33.
B. 1.43.
C. 1.50.
D. 2.25.
100.
An analyst regresses the returns of 16 stocks in a stock market and finds that the best fitting
line is:
Return = 6.5% + 11.8% x Beta
If the standard error of the estimate is 4% and the standard error of the coefficient of Beta is
3%, the test statistic for the coefficient is CLOSEST to:
A. 1.63.
B. 2.95.
C. 2.80.
D. 3.93.
101.
If the mean P/E of 30 stocks in a certain industrial sector is 18 and the sample standard
deviation is 3.5, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.34.
C. 0.64.
D. 1.56.
102.
An analyst regresses the returns of 50 stocks in a stock market and finds that the best fitting
line is:
Return = 8% + 12.25% x Beta
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If the standard error of the estimate is 10% and the standard error of the coefficient of Beta is
8%, the test statistic for the coefficient is CLOSEST to:
A. 0.80.
B. 1.16.
C. 1.23.
D. 1.53.
103.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 15% and a variance of return of 0.008.
B. An investment with an expected return of 12% and a variance of return of 0.005.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 2%.
104.
Using the returns from 64 stocks, an analyst determines that the best fitting line for the capital
market relationship is:
Return = 2% + 12% x Beta
If the standard error of the estimate is 3% and the standard error of the coefficient of Beta is
4%, the test statistic for the coefficient is CLOSEST to:
A. 2
B. 3
C. 4
D. 6
105.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 12% and a variance of of return of 0.005.
B. An investment with an expected return of 10% and a variance of of return of 0.002.
C. An investment with an expected return of 15% and standard deviation of return of 3%.
D. An investment with an expected return of 6% and standard deviation of return of 5%.
106.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 10% and a variance of of return of 0.002.
B. An investment with an expected return of 15% and a variance of of return of 0.003.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 5% and standard deviation of return of 1%.
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107.
If the mean P/E of 40 stocks in a certain industrial sector is 12 and the sample standard
deviation is 4, standard error of the mean is CLOSEST to:
A. 0.10.
B. 0.32.
C. 0.63.
D. 1.58.
108.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 15% and a variance of of return of 0.008.
B. An investment with an expected return of 12% and a variance of of return of 0.005.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 2%.
109.
If the mean P/E of 90 stocks in a certain industrial sector is 12 and the sample standard
deviation is 6, standard error of the mean is CLOSEST to:
A. 0.07.
B. 0.26.
C. 0.63.
D. 1.58.
110.
If the mean P/E of 50 stocks in a certain industrial sector is ten and the sample standard
deviation is six, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.35.
C. 0.85.
D. 1.18.
111.
If the mean P/E of 60 stocks in a certain industrial sector is 18 and the sample standard
deviation is 7, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.34.
C. 0.90.
D. 1.11.
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112.
If the mean P/E of 90 stocks in a certain industrial sector is 12 and the sample standard
deviation is 6, standard error of the mean is CLOSEST to:
A. 0.07.
B. 0.26.
C. 0.63.
D. 1.58.
113.
An analyst regresses the returns of 50 stocks in a stock market and finds that the best fitting
line is:
Return = 8% + 9% x Beta
If the standard error of the estimate is 5.5% and the standard error of the coefficient of Beta is
3.25%, the test statistic for the coefficient is CLOSEST to:
A. 1.45.
B. 1.64.
C. 1.55.
D. 2.77.
114.
An analyst wants to test whether the variance of return from pharmaceutical stocks is different
from that of the overall market. For this purpose, he obtains the following data from a sample
of 21 pharmaceutical stocks and a sample of 41 stocks that are representative of the market.
Mean return from pharmaceutical stocks = 8% Standard deviation of return from
pharmaceutical stocks = 9.2% Mean return from market stocks = 12% Standard deviation of
return from market stocks = 13% Based on this information and a 0.05 significance level:
A. there is sufficient evidence for a difference between the variance of pharmaceutical stocks
and the variance of the market stocks.
B. there is insufficient evidence for a difference between the variance of pharmaceutical stocks
and the variance of the market stocks.
C. there is sufficient evidence that there is no difference between the variance of
pharmaceutical stocks and the variance of the market stocks.
D. there is insufficient evidence that there is no difference between the variance of
pharmaceutical stocks and the variance of the market stocks.
115.
An analyst wants to test whether the mean spending by tourists coming to a holiday resort is
equal to or less than $2,000 with a 1 percent level of significance. He finds that the average
spending by 16 tourists is $2,200 and the standard deviation of the population is $400. The
critical value of the Z statistic for this study is:
A. 1.65.
B. -1.96.
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C. 2.33.
D. 2.58.
116.
A t-test is used instead of a z-test when:
A. the sample size is small.
B. greater accuracy is required.
C. the variance of the population is known.
D. the standard deviation is larger than the mean.
117.
An analyst wants to test whether the standard deviation of return from pharmaceutical stocks is
lower than 0.2. For this purpose, he obtains the following data from a sample of 30
pharmaceutical stocks. Mean return from pharmaceutical stocks = 8%. Standard deviation of
return from pharmaceutical stocks = 12%. Mean return from the market = 12%. Standard
deviation of return from the market = 16%. What is the appropriate test statistic for this test?
A. t-statistic.
B. z-statistic.
C. F-statistic.
D. Chi-squared statistic.
118.
Using a sample size of 61 observations, an analyst determines that the standard deviation of
the returns from a stock is 21 percent. Using a 0.05 significance level, the analyst:
A. can conclude that the standard deviation of returns is higher than 14%.
B. cannot conclude that the standard deviation of returns is higher than 14%.
C. can conclude that the standard deviation of returns is not higher than 14%.
D. none of the above.
119.
An analyst wants to test whether the return from utility stocks are less volatile than that of the
overall market. For this purpose, he obtains the following data from a sample of 21 utility
stocks and a sample of 41 stocks that are representative of the market. Mean return from utility
stocks = 9%. Standard deviation of return from utility stocks = 11%. Mean return from the
market stocks = 12%. Standard deviation of return from the market stocks = 15%. Based on
this information and a 0.05 significance level:
A. there is sufficient evidence to say that the standard deviation of utility stocks lower than that
of the market.
B. there is sufficient evidence to say that the standard deviation of utility stocks higher than
that of the market.
C. there is insufficient evidence to say that the standard deviation of utility stocks lower than
that of the market.
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124.
An analyst wants to test whether the standard deviation of return from utility stocks is lower
than 0.14. For this purpose, he obtains the following data from a sample of 25 utility stocks.
Mean return from utility stocks = 8%. Standard deviation of return from utility stocks = 12%.
Mean return from the market = 10%. Standard deviation of return from the market = 15%.
What is the critical value of the statistic for this test at a 0.05 level of significance?
A. 13.85.
B. 23.77.
C. 36.42.
D. 39.36.
125.
An analyst wants to test whether the standard deviation of return from food and drinks stocks is
lower than 0.18. For this purpose, he obtains the following data from a sample of 15 food and
drinks stocks. Mean return from food and drinks stocks = 8%. Standard deviation of return
from food and drinks stocks = 13%. Mean return from the market = 12%. Standard deviation
of return from the market = 17% What is the value of the test statistic for this test?
A. 6.83.
B. 6.11.
C. 7.30.
D. 7.82.
126.
An analyst is given the task of determining whether a group of 16 active portfolio managers
have achieved a significantly higher performance (using a significance level of 0.05) than the
average for all portfolio managers over a certain period. Over the period of the study, the active
portfolio managers achieved a mean return of 15 percent. Over the same period the mean
return for all portfolio managers was 12 percent and their standard deviation was 8 percent.
The correct conclusion from this study is that:
A. the performance of active portfolio managers is significantly higher than the average for all
portfolio managers.
B. the performance of active portfolio managers is not significantly higher than the average for
all portfolio managers.
C. the performance of active portfolio managers is significantly lower than the average for all
portfolio managers.
D. the performance of active portfolio managers is the same as the average for all portfolio
managers.
127.
The z-statistic cannot be used to test the mean of a population when the population variance is:
A. known and the sample size is large.
B. known and the sample size is small.
C. unknown and the sample size is large.
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132.
Using a sample size of 20 observations, an analyst determines that the standard deviation of
the returns from a stock is 9 percent. Using a 0.05 significance level, the analyst:
A. can conclude that the standard deviation of returns is same as 16%.
B. can conclude that the standard deviation of returns is different from 16%.
C. cannot conclude that the standard deviation of returns is different from 16%.
D. none of the above.
133.
You want to test at the 0.05 level of significance that the mean price of luxury cars is greater
than $80,000. A random sample of 50 cars has a mean price of $88,000. The population
standard deviation is $15,000. What is the alternative hypothesis?
A. The population mean is greater than or equal to $80,000.
B. The population mean is less than $80,000.
C. The population mean is not equal to $80,000.
D. The population mean is greater than is $80,000.
134.
An analyst is studying the impact of the dot-com bust on the beta of business services sector
stocks. From price data for 10 stocks in this sector, she has obtained the following results:
Mean beta of the stocks before dot-com bust = 1.3 Mean beta of the stocks after dot-com bust
= 1.4 Standard deviation before and after dot-com bust = 0.25. Mean difference in betas before
and after dot-com bust = 0.18 The standard deviation of differences in betas before and after
dot-com bust = 0.2. Based on these results and using a 0.05 significance level, the analyst:
A. can conclude that the dot-com bust has affected the beta of these stocks.
B. cannot conclude that the dot-com bust has affected the beta of these stocks.
C. can conclude that the dot-com bust has not affected the beta of these stocks.
D. none of the above.
135.
An analyst wants to test whether the variance of return from telecom stocks is higher than
0.04. For this purpose, he obtains the following data from a sample of 31 telecom stocks. Mean
return from telecom stocks = 15% Standard deviation of return from telecom stocks = 24%
Mean return from market = 12% Standard deviation of return from market = 13% What is the
critical value of the statistic for this test at a 0.05 level of significance?
A. 16.79.
B. 18.49.
C. 43.73.
D. 46.98.
136.
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An analyst wants to test whether the variance of return from oil and gas stocks is higher than
0.045. For this purpose, he obtains the following data from a sample of 60 oil and gas stocks.
Mean return from oil and gas stocks = 16%. Standard deviation of return from oil and gas
stocks = 22% Mean return from the market = 12%. Standard deviation of return from the
market = 14% What is the value of the test statistic for this test?
A. 61.19.
B. 63.46.
C. 64.53.
D. 93.33.
137.
An analyst is studying the impact of the 1990 deregulation on the beta of financial services
sector stocks. From price data for 12 stocks in this sector she has obtained the following
results: Mean beta of the stocks before 1990 deregulation = 1.2 Mean beta of the stocks after
1990 deregulation = 1.4 The standard deviation before and after 1990 deregulation = 0.5.
Mean difference in betas before and after 1990 deregulation = 0.25 Standard deviation of
differences in betas before and after 1990 deregulation = 0.3. Based on these results and using
a 0.01 significance level, the analyst:
A. can conclude that the 1990 deregulation has affected the beta of these stocks.
B. cannot conclude that the 1990 deregulation has affected the beta of these stocks.
C. can conclude that the 1990 deregulation has not affected the beta of these stocks.
D. none of the above.
138.
Which of the following statements are NOT true? I. Type I error occurs when the null hypothesis
is not rejected when it is actually false. II. Type II error occurs when the null hypothesis is
rejected when it is actually true. III. Type I error occurs when the alternate hypothesis is
wrongly accepted. IV. Minimizing the probability of Type II error maximizes the power of the
test.
A. I and II.
B. I and III.
C. II and IV.
D. I, II and IV.
139.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of coefficient of determination for this
regression is CLOSEST to:
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A. 0.043.
B. 0.084.
C. 0.916.
D. 0.957.
140.
An analyst has constructed the following t-test for a portfolio of financial securities whose
returns are normally distributed:
Number of securities = 40.
H0: Mean return >= 18 percent.
Significance level = 0.1
What is the rejection point for this test?
A. 1.304.
B. 1.684.
C. 2.021.
D. 2.023.
141.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
correlation between the price and volume is
CLOSEST to:
A. 0.120.
B.
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0.062.
C. 0.880.
D. 0.938.
142.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of the intercept for this regression is
CLOSEST to:
A. -2.97.
B. -1.09.
C. 3.07.
D. 5.62.
143.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
value of the intercept for this regression is
CLOSEST to:
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A. -51.85.
B. 0.
C. 20.51.
D. 38.22.
144.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The correlation between the price and volume
is CLOSEST to:
A. 0.038.
B. 0.074.
C. 0.926.
D. 0.962.
145.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The standard error of the
estimate from this regression is CLOSEST to:
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A. 53.
B. 59.
C. 2,852.
D. 3,423.
146.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
value of the intercept for this regression is
CLOSEST to:
A. -51.85.
B. 0.
C. 20.51.
D. 38.22.
147.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The correlation between the price and volume is
CLOSEST to:
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A. 0.043.
B. 0.084.
C. 0.916.
D. 0.957.
148.
If the correlation coefficient of a linear regression is 0.6, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 36%.
B. 40%.
C. 60%.
D. 64%.
149.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
correlation between the price and volume is
CLOSEST to:
A. 0.120.
B. 0.062.
C. 0.880.
D. 0.938.
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150.
If the correlation coefficient of a linear regression is 0.75, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 25%.
B. 44%.
C. 56%.
D. 75%.
151.
If the correlation coefficient of a linear regression is 0.85, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 15%.
B. 28%.
C. 72%.
D. 85%.
152.
If the correlation coefficient of a linear regression is 0.25, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 6%.
B. 25%.
C. 75%.
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D. 94%.
153.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of the intercept for this regression is
CLOSEST to:
A. -2.97.
B. -1.09.
C. 3.07.
D. 5.62.
154.
If the correlation coefficient of a linear regression is 0.75, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 25%.
B. 44%.
C. 56%.
D. 75%.
155.
Which of the following test statistics is most appropriate for conducting the hypothesis test
given below?
H0: variance A = variance B; where the test is based on two random independent samples from
two normally distributed populations.
A. t-statistic.
B. z-statistic.
C. F-statistic.
D. chi-square.
156.
An analyst is using a statistical package to perform a
linear regression between price of a new semi-
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A. 0.038.
B. 0.074.
C. 0.926.
D. 0.962.
157.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The standard error of the estimate from this
regression is CLOSEST to:
A. 0.225.
B. 0.247.
C. 0.051.
D. 0.061.
158.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The standard error of the estimate from this
regression is CLOSEST to:
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A. 55.
B. 60.
C. 3,009.
D. 3,611.
159.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of the slope coefficient for this
regression is CLOSEST to:
A. 0.37.
B. 1.24.
C. 2.09.
D. 7.11.
160.
If the correlation coefficient of a linear regression is 0.25, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 6%.
B. 25%.
C. 75%.
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D. 94%.
161.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The value of the slope
coefficient for this regression is CLOSEST to:
A. 7.0.
B. 3.6.
C. 58.6.
D. 113.9.
162.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The correlation between the price and volume
is CLOSEST to:
A. 0.038.
B. 0.074.
C. 0.926.
D. 0.962.
163.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The correlation between the
price and volume is CLOSEST to:
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A. 0.079.
B. 0.151.
C. 0.849.
D. 0.921.
164.
A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent
and 7 percent. The proportion of these two securities that would lead to the lowest risk are:
A. 58% and 42%.
B. 42% and 58%.
C. 34% and 66%.
D. 66% and 34%.
165.
If Security A and Security B are positively correlated, and the price of Security A increases, the
price of Security B:
A. will increase.
B. will decrease.
C. is most likely to increase than to decrease.
D. may decrease or remain unchanged, but will not increase.
166.
A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent
and 7 percent. The proportion of these two securities that would lead to the lowest risk are:
A. 34% and 66%.
B. 66% and 34%.
C. 58% and 42%.
D. 42% and 58%.
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167.
A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent
and 7 percent. The proportion of these two securities that would lead to the lowest risk are:
A. 34% and 66%.
B. 66% and 34%.
C. 58% and 42%.
D. 42% and 58%.
168.
A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent
and 7 percent. The proportion of these two securities that would lead to the lowest risk are:
A. 58% and 42%.
B. 42% and 58%.
C. 34% and 66%.
D. 66% and 34%.
169.
If Security A and Security B are positively correlated, and the price of Security A increases, the
price of Security B:
A. will increase.
B. will decrease.
C. may increase or decrease, but is most likely to increase.
D. may decrease or remain unchanged, but will not increase.
170.
The lowest level of risk, measured by volatility, of a portfolio containing two perfectly negatively
correlated investments with volatilities of 3 percent and 10 percent respectively is:
A. 0%
B. 3%
C. 10%
D. 13%
171.
The lowest level of risk, measured by volatility, of a portfolio containing two perfectly negatively
correlated investments with volatilities of 5 percent and 7 percent is:
A. 0%.
B. 5%.
C. 7%.
D. 12%.
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172.
If Security A and Security B are positively correlated, and the price of Security A increases, the
price of Security B:
A. will increase.
B. will decrease.
C. may increase or decrease, but is most likely to increase.
D. may decrease or remain unchanged, but will not increase.
173.
The variance of the returns from stock A is 0.018 and that of the market is 0.025. If the
covariance between the stock and the index is -0.002, their correlation coefficient is CLOSEST
to:
A. -0.23.
B. -0.11.
C. -0.09.
D. -0.08.
174.
A positive covariance means that:
A. there is no relationship between asset returns.
B. the correlation coefficient is zero.
C. asset returns move in the opposite direction.
D. asset returns move in the same direction.
175.
Which of the following model incorporates both mean reversion and no-arbitrage?
A. Vasicek.
B. Black Scholes.
C. Cox, Ingersoll and Ross.
D. Heath, Jarrow and Morton.
176.
Given two variables X and Y that follow geometric Brownian motion, which of the following
variable will also follow geometric Brownian motion?
A. X * Y.
B. X + Y.
C. log(X) + log(Y).
D. exp(X) + exp(Y).
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177.
The standard deviation of a Wiener process over a short period of time would be proportional
to:
A. the time period.
B. square of the time period.
C. square-root of the time period.
D. none of the above.
178.
For which of the following process can the mean change be not equal to zero?
I. Ito process.
II. Wiener process.
III. Generalized Wiener process.
A. I and II.
B. I and III.
C. II and III.
D. I, II and III.
179.
Which of the following model incorporates both mean reversion and no-arbitrage?
A. Vasicek.
B. Ho and Lee.
C. Black Scholes.
D. Hull and White.
180.
The standard deviation of a Wiener process over a short period of time would be proportional
to:
A. the time period.
B. square of the time period.
C. square-root of the time period.
D. none of the above.
181.
Given two variables X and Y that are lognormally distributed, what is the distribution of X * Y?
A. Normal.
B. Lognormal.
C. Exponential.
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of a cash amount of $8,500 that we will receive after 5 years is CLOSEST to:
A. $6,372.
B. $6,141.
C. $8,022.
D. $8,030.
187.
Assuming continuous compounding and an annual percentage rate of 9%, the present value of
a cash amount of $600 that we will receive after 8 years is CLOSEST to:
A. $292.
B. $301.
C. $323.
D. $349.
188.
Assuming continuous compounding and an annual percentage rate of 9%, the present value of
a cash amount of $1,500 that we will receive after 4 years is CLOSEST to:
A. $1,047.
B. $1,063.
C. $1,103.
D. $1,141.
189.
If a cash flow of $700 in 3 years' time has a PV of $400, the annual percentage rate, assuming
continuous compounding is CLOSEST to:
A. 8.52%.
B. 12.16%.
C. 18.65%.
D. 25.44%.
190.
The price of a stock has risen from $15 to $40 over the past 2 years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 9.15%
B. 14.94%
C. 29.24%
D. 49.04%
191.
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The present value of $4,500 received in 6 month's time, using a continuous discount rate of
9%, is CLOSEST to:
A. $3,290
B. $4,302
C. $4,306
D. $4,310
192.
The price of a stock has risen from $15 to $40 over the past 2 years. If the stock did not pay
any dividends during this period, its continuously compounded return is CLOSEST to:
A. 9.15%
B. 14.94%
C. 29.24%
D. 49.04%
193.
The present value of $500 received in 9 month's time, using a continuous discount rate of 9%,
is CLOSEST to:
A. $467.
B. $468.
C. $469.
D. $470.
194.
If a cash flow of $10,000 in two years' time has a PV of $8,455, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 8.13%.
B. 8.39%.
C. 8.75%.
D. 8.95%.
195.
If a cash flow of $10,000 in two years' time has a PV of $8,455, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 8.13%.
B. 8.39%.
C. 8.75%.
D. 8.95%.
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196.
The present value of $4,500 received in 6 month's time, using a continuous discount rate of
9%, is CLOSEST to:
A. $3,290
B. $4,302
C. $4,306
D. $4,310
197.
If a cash flow of $100 in 2 years' time has a PV of $75, the annual percentage rate, assuming
continuous compounding is CLOSEST to:
A. 11.1%.
B. 12.2%.
C. 13.5%.
D. 14.4%.
198.
If a cash flow of $800 in 6 years' time has a PV of $500, the annual percentage rate, assuming
continuous compounding is CLOSEST to:
A. 4.48%.
B. 5.23%.
C. 7.83%.
D. 9.12%.
199.
Assuming continuous compounding and an annual percentage rate of 9%, the present value of
a cash amount of $400 that we will receive after 8 years is CLOSEST to:
A. $195.
B. $201.
C. $233.
D. $252.
200.
Assuming continuous compounding and an annual percentage rate of 6.5%, the present value
of a cash amount of $8,500 that we will receive after 5 years is CLOSEST to:
A. $6,372.
B. $6,141.
C. $8,022.
D. $8,030.
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201.
Assuming continuous compounding and an annual percentage rate of 6.5%, the present value
of a cash amount of $8,500 that we will receive after 5 years is CLOSEST to:
A. $6,372.
B. $6,141.
C. $8,022.
D. $8,030.
202.
Given that a stock price rises on six days out of ten and falls on four days out of ten, what is
the probability that it will rise on exactly eight out of the next twelve days?
A. 4.2%.
B. 5.8%.
C. 20.2%.
D. 21.3%.
203.
A sports firm produces two different sets of golf clubs and five types of high-tech golf balls. If
the firm bundles each set of golf club with three different balls, how may unique packages can it
make?
A. 20.
B. 40.
C. 120.
D. 250.
204.
An analyst determines that in the current market environment the S&P500 goes up 7 out of
every 15 days but without any serial dependency, i.e. probability of going up on a certain date
is not affected by its movement on the previous days. Given that 275 trading days in a year the
standard deviation in the number of days that the S&P500 will go up is CLOSEST to:
A. 7.74.
B. 8.27.
C. 59.97.
D. 68.45.
205.
Which of the following is the most appropriate for modeling stock prices?
A. Normal distribution.
B. Random distribution.
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C. Bernoulli distribution.
D. Lognormal distribution.
206.
The lognormal distribution is:
A. not skewed.
B. positively skewed.
C. negatively skewed.
D. skewed, but the degree of skew is dependent on the a relative mean of the distribution.
207.
The lognormal distribution is:
A. not skewed.
B. positively skewed.
C. negatively skewed.
D. skewed, but the degree of skew is dependent on the a relative mean of the distribution.
208.
The mean age of the 200 employees in a company is 32 and the standard deviation is 12.
Assuming that the ages are normally distributed and using 95 percent confidence we can say
that the employees within the firm fall between:
A. 8.5 and 55.5 years.
B. 29.7 and 34.3 years.
C. 30.3 and 33.7 years.
D. 31.9 and 32.1 years.
209.
A portfolio has a mean value of $60 million and a daily standard deviation of $8 million.
Assuming that the portfolio values are normally distributed, the lowest value that the portfolio
will fall to over the next five days and within 99% probability is:
A. $4.5 million.
B. $18.4 million.
C. $30.6 million.
D. $42.1 million.
210.
Which of the following are characteristic of a normal distribution?
I. It is bell shaped.
II. It is a continuous distribution.
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215.
What is the quantile corresponding to the 99.99% confidence interval?
A. -3.715.
B. -2.326.
C. -1.645.
D. -1.282.
216.
Which of the following are characteristic of a normal distribution?
I. Its kurtosis is equal to zero.
II. Its skewness is less than zero.
III. It is symmetrical about the mean.
IV. It has the same mean, median and mode.
A. I and III.
B. III and IV.
C. I, III and IV.
D. I, II, III and IV.
217.
Consider a portfolio whose expected return is normally distributed with a mean of 20 percent
and a standard deviation of 10 percent. The probability that the return will lie between 0
percent and 10 percent is CLOSEST to:
A. 2%.
B. 6%.
C. 14%.
D. 19%.
218.
A portfolio has a mean value of $70 million and a daily standard deviation of $9.62 million.
Assuming that the portfolio values are normally distributed, the probability of the portfolio value
falling below $20 million within the next five days is CLOSEST to:
A. 0.10%.
B. 1.00%.
C. 5.00%.
D. 15.87%.
219.
The covariance between the return from two securities is 5 and the correlation between them is
0.5. If the variance of the first return is 8, the variance of the second return will be CLOSEST
to:
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A. 1.25.
B. 1.56.
C. 3.54.
D. 12.50.
220.
Which of the following is FALSE in relation to the distribution of prices of an asset that is found
to be lognormal?
A. The skewness of the returns distribution will be zero.
B. The mean and median of the price distribution will not be equal.
C. The mean, median and mode of the returns distribution will be equal.
D. If volatility increases but the mean stays constant, the median of price distribution will shift
to the right.
221.
The covariance between the return from two securities is 4.2 and the correlation between them
is 0.6. If the variance of the first return is 5, the variance of the second return will be CLOSEST
to:
A. 1.40.
B. 1.96.
C. 3.13.
D. 9.80.
222.
A portfolio has a mean value of $100 million and a daily standard deviation of $2.5 million.
Assuming that the portfolio values are normally distributed, the lowest value that the portfolio
will fall to over the next 14 days and within 95% probability is:
A. $18.6 million.
B. $42.4 million.
C. $78.3 million.
D. $84.6 million.
223.
A sports firm produces two different sets of golf clubs and five types of high-tech golf balls. If
the firm bundles each set of golf club with three different balls, how may unique packages can it
make?
A. 20.
B. 40.
C. 120.
D. 250.
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224.
A sports firm produces three different sets of golf clubs and three types of high-tech golf balls.
If the firm bundles each set of golf club with two different balls, how may unique packages can
it make?
A. 9.
B. 18.
C. 27.
D. 81.
225.
An analyst observes that the closing price of a stock during a week as $33, $43, $45, $48, $46.
On the corresponding days the S&P 500 closed at 1150, 1125, 1140, 1160, 1170. Based on this
data the covariance of the stock with the market is CLOSEST to:
A. 15.8
B. 18.0
C. 37.4
D. 54.4
226.
A sports firm produces two different sets of golf clubs and five types of high-tech golf balls. If
the firm bundles each set of golf club with three different balls, how may unique packages can it
make?
A. 20.
B. 40.
C. 120.
D. 250.
227.
If a loan is being offered at a rate of interest of 14.49 percent compounded monthly, the
borrower will pay:
I. a nominal rate of 13.61%.
II. a periodic rate of 14.49%.
III. a stated rate of 14.49%.
IV. an effective rate of 15.49%.
A. I and II.
B. II and III.
C. III and IV.
D. I, III and IV.
228.
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233.
Assuming continuous compounding and an annual percentage rate of 8%, the present value of
$7,000 received in eight months' time is CLOSEST to:
A. $6,636.
B. $6,646.
C. $6,650.
D. $6,665.
234.
An investor is being promised an annuity of $2,000 starting in two years from now and
continuing for eight years. Assuming a constant interest rate of 4 percent per annum, the value
of this annuity today is CLOSEST to:
A. $12,947.
B. $13,465.
C. $14,793.
D. $15,385.
235.
The inflation rate in an economy where the prices are doubling ever 15 years is CLOSEST to:
A. 3%.
B. 5%.
C. 7%.
D. 13%.
236.
If all the cash flows in an investment are positive what is its IRR?
A. Positive.
B. Zero.
C. Negative.
D. Cannot be determined.
237.
An investor is being promised an annuity of $6,000 starting in five years from now and
continuing for 15 years. Assuming a constant interest rate of 6 percent per annum, the value of
this annuity today is CLOSEST to:
A. $46,158.
B. $58,273.
C. $67,253.
D. $71,288.
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238.
If a cash flow of $15,000 in two years' time has a PV of $12,000, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 11.16%.
B. 11.44%.
C. 11.69%.
D. 11.80%.
239.
Suppose that you need to borrow $1 million for 24 months. Two large US-based international
banks with equal credit ratings offer deposit rates of 2%. To choose between the two banks,
you would need all of the following except:
A. day count basis.
B. compounding basis.
C. currency of deposit.
D. balance sheets of the banks.
240.
An investor is being promised an annuity of $1,500 starting in 15 years from now and
continuing for ten years. Assuming a constant interest rate of 8 percent per annum, the value
of this annuity today is CLOSEST to:
A. $3,427.
B. $4,729.
C. $5,107.
D. $10,065.
241.
Suppose that you need to borrow $1 million for 24 months. Two large US-based international
banks with equal credit ratings offer deposit rates of 2%. To choose between the two banks,
you would need all of the following except:
A. day count basis.
B. compounding basis.
C. currency of deposit.
D. balance sheets of the banks.
242.
A bank is offering loans with monthly interest payments based on a stated annual interest rate
of 7.75 percent. The effective annual rate of these loans is CLOSEST to:
A. 7.90%.
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B. 7.98%.
C. 8.00%.
D. 8.03%.
243.
If a cash flow of $10,000 in five years' time has a PV of $7,500, the annual percentage rate,
assuming continuous compounding, is CLOSEST to:
A. 5.65%.
B. 5.75%.
C. 5.85%.
D. 5.92%.
244.
Consider a 4.25 percent semi-annual coupon bond with a par value of $100 and three
remaining coupons, which is trading at a yield of 3.975 percent. There are 45 days remaining in
the current period that has a total of 180 days. The clean price of this bond is CLOSEST to:
A. 99.70.
B. 100.30.
C. 101.89.
D. 102.32.
245.
As the discount rate rises, the NPV of a set of cash flows:
A. increases.
B. decreases.
C. stays constant.
D. cannot be determined without further information.
246.
Assuming continuous compounding and an annual percentage rate of 8%, the present value of
$8,400 received in six months' time is CLOSEST to:
A. $6,203.
B. $8,071.
C. $8,077.
D. $8,083.
247.
A bank is offering loans with monthly interest payments based on a stated annual interest rate
of 7.75 percent. The effective annual rate of these loans is CLOSEST to:
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A. 7.90%.
B. 7.98%.
C. 8.00%.
D. 8.03%.
248.
Peter Roche is due to receive $4,000 one year from now, which he can invest at an interest rate
of 7 percent for a further ten years. The value of this payment at the end of this period will be
CLOSEST to:
A. $6,800.
B. $7,080.
C. $7,869.
D. $8,419.
249.
A bank is offering loans with monthly interest payments based on a stated annual interest rate
of 9 percent. The effective annual rate of these loans is CLOSEST to:
A. 9.20%.
B. 9.31%.
C. 9.34%.
D. 9.38%.
250.
If a cash flow of $15,000 in two years' time has a PV of $12,000, the annual percentage rate,
assuming continuous compounding is CLOSEST to:
A. 11.16%.
B. 11.44%.
C. 11.69%.
D. 11.80%.
251.
The inflation rate in an economy where the prices are doubling ever eight years is CLOSEST to:
A. 6%.
B. 9%.
C. 13%.
D. 25%.
252.
What is the standard deviation of the following data?
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Probability Value
40% -4
25% 8
35% 15
A. 4.80.
B. 8.32.
C. 23.08.
D. 69.23.
253.
Consider a stock whose 10-day volatility has been estimated as 1.8%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 250 days will be CLOSEST
to:
A. 0.36%.
B. 9.00%.
C. 28.46%.
D. 45.00%.
254.
Assets A and B have a correlation of +1. The volatility of asset A is 15%. The volatility of asset
B is 25%. The daily return on asset A is observed at 1.50%. What is the most likely return on
asset B?
A. -1.50%.
B. 1.50%.
C. 2.50%.
D. Cannot the predicted.
255.
Which of the following statements about the correlation coefficient are FALSE?
I. Correlation coefficient ranges between -1 and +1.
II. Correlation coefficient is a measure of non-linear relationship between two random variables.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. If the correlation coefficient between two random variables is zero they will be independent.
A. I and II.
B. I and III.
C. II and IV.
D. I, III and IV.
256.
What is the standard deviation of the following data?
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Probability Value
15% -6
40% 6
45% 12
A. 3.51.
B. 6.08.
C. 12.33.
D. 36.98.
257.
What is the mean for the following probability data?
Probability Value
30% -10
40% 5
30% 25
A. 1.15.
B. 2.17.
C. 3.34.
D. 6.50.
258.
Which of the following statements are TRUE?
I. Correlation coefficient ranges between 0 and +1.
II. Correlation coefficient is a measure of non-linear relationship between two random variables.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. If two random variables are independent they will have a correlation coefficient of zero.
A. I and II.
B. I and IV.
C. II and III.
D. III and IV.
259.
What is the mean for the following probability data?
Probability Value
25% -8
40% 12
35% 24
A. 3.73.
B. 5.73.
C. 11.20.
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D. 20.10.
260.
The covariance between the return from two securities is 5 and the correlation between them is
0.5. If the variance of the first return is 8, the variance of the second return will be CLOSEST
to:
A. 1.25.
B. 1.56.
C. 3.54.
D. 12.50.
261.
What is the standard deviation of the following data?
Probability Value
25% -8
40% 12
35% 24
A. 7.07.
B. 12.24.
C. 49.92.
D. 149.76.
262.
Which of the following statements about the correlation coefficient are FALSE?
I. Correlation coefficient ranges between -1 and +1.
II. Correlation coefficient can be calculated by scaling the covariance between two variables.
III. If the correlation coefficient between two random variables is zero they will be independent.
IV. Correlation coefficient is a measure of the non-linear relationship between a dependent and
an independent variable.
A. I and II.
B. I and IV.
C. II and III.
D. III and IV.
263.
What is the standard deviation of the following data?
Probability Value
45% -4
40% 8
15% 25
A. 5.77.
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B. 10.00.
C. 33.34.
D. 100.03.
264.
Which of the following statements are TRUE?
I. Correlation coefficient ranges between -1 and +1.
II. Correlation coefficient is a measure of linear relationship between two random variables.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. If the correlation coefficient between two random variables is zero they will be independent.
A. I and II.
B. III and IV.
C. I, II and III.
D. I, II, III and IV.
265.
What is the mean for the following probability data?
Probability Value
25% -8
40% 12
35% 24
A. 3.73.
B. 5.73.
C. 11.20.
D. 20.10.
266.
What is the standard deviation of the following data?
Probability Value
15% -6
40% 6
45% 12
A. 3.51.
B. 6.08.
C. 12.33.
D. 36.98.
267.
Which of the following statements about the correlation coefficient are FALSE?
I. Correlation coefficient ranges between 0 and +1.
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II. If two random variables have a correlation coefficient of zero they are independent.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. Correlation coefficient is a measure of the linear relationship between a dependent and an
independent variable.
A. I and II.
B. I and IV.
C. II and III.
D. III and IV.
268.
Consider a stock whose 10-day volatility has been estimated as 1.4%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 23 days will be CLOSEST
to:
A. 0.92%.
B. 2.12%.
C. 3.22%.
D. 6.71%.
269.
Which of the following statements about the correlation coefficient are FALSE?
I. Correlation coefficient ranges between 0 and +1.
II. If two random variables have a correlation coefficient of zero they are independent.
III. Correlation coefficient can be calculated by scaling the covariance between two variables.
IV. Correlation coefficient is a measure of the linear relationship between a dependent and an
independent variable.
A. I and II.
B. I and IV.
C. II and III.
D. III and IV.
270.
Assets A and B have a correlation of +1. The volatility of asset A is 15%. The volatility of asset
B is 25%. The daily return on asset A is observed at 1.50%. What is the most likely return on
asset B?
A. -1.50%.
B. 1.50%.
C. 2.50%.
D. Cannot the predicted.
271.
Consider a stock whose 7-day volatility has been estimated as 1.05%. Assuming that the
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returns from the stock are uncorrelated over time, the volatility over 30 days will be CLOSEST
to:
A. 0.51%.
B. 2.17%.
C. 4.50%.
D. 5.75%.
272.
What is the mean for the following probability data?
Probability Value
60% -2
20% 10
20% 20
A. 1.60.
B. 2.80.
C. 3.60.
D. 4.80.
273.
What is the standard deviation of the following data?
Probability Value
40% -4
25% 8
35% 15
A. 4.80.
B. 8.32.
C. 23.08.
D. 69.23.
274.
What is the standard deviation of the following data?
Probability Value
60% -2
20% 10
20% 20
A. 5.14.
B. 8.91.
C. 26.45.
D. 79.36.
275.
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Consider a stock whose 7-day volatility has been estimated as 1.05%. Assuming that the
returns from the stock are uncorrelated over time, the volatility over 30 days will be CLOSEST
to:
A. 0.51%.
B. 2.17%.
C. 4.50%.
D. 5.75%.
276.
What is the standard deviation of the following data?
Probability Value
30% -15
40% 5
30% 25
A. 8.94.
B. 15.49.
C. 80.00.
D. 240.00.
277.
Which of the following investments has the highest co-efficient of variation?
A. Expected return = 18%; variance of return = 0.004.
B. Expected return = 25%; variance of return = 0.005.
C. Expected return = 12%; standard deviation of return = 4%.
D. Expected return = 8%; standard deviation of return = 2.5%.
278.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 12% and a variance of of return of 0.005.
B. An investment with an expected return of 10% and a variance of of return of 0.002.
C. An investment with an expected return of 15% and standard deviation of return of 3%.
D. An investment with an expected return of 6% and standard deviation of return of 5%.
279.
An analyst regresses the returns of 18 stocks in a stock market and finds that the best fitting
line is:
Return = 3.75% + 6% x Beta
If the standard error of the estimate is 4% and the standard error of the coefficient of Beta is
3%, the test statistic for the coefficient is CLOSEST to:
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A. 0.94.
B. 1.43.
C. 1.50.
D. 2.00.
280.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 24% and a variance of of return of 0.005.
B. An investment with an expected return of 18% and a variance of of return of 0.002.
C. An investment with an expected return of 15% and standard deviation of return of 5%.
D. An investment with an expected return of 25% and standard deviation of return of 8%.
281.
If the mean P/E of 40 stocks in a certain industrial sector is 12 and the sample standard
deviation is 4, standard error of the mean is CLOSEST to:
A. 0.10.
B. 0.32.
C. 0.63.
D. 1.58.
282.
An analyst regresses the returns of 15 stocks in a stock market and finds that the best fitting
line is:
Return = 13% + 15% x Beta
If the standard error of the estimate is 6% and the standard error of the coefficient of Beta is
9%, the test statistic for the coefficient is CLOSEST to:
A. 1.67.
B. 2.17.
C. 2.38.
D. 2.50.
283.
Which of the following investments has the highest co-efficient of variation?
A. Expected return = 18%; variance of return = 0.004.
B. Expected return = 25%; variance of return = 0.005.
C. Expected return = 12%; standard deviation of return = 4%.
D. Expected return = 8%; standard deviation of return = 2.5%.
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284.
An analyst regresses the returns of 50 stocks in a stock market and finds that the best fitting
line is:
Return = 8% + 12.25% x Beta
If the standard error of the estimate is 10% and the standard error of the coefficient of Beta is
8%, the test statistic for the coefficient is CLOSEST to:
A. 0.80.
B. 1.16.
C. 1.23.
D. 1.53.
285.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 24% and a variance of of return of 0.005.
B. An investment with an expected return of 18% and a variance of of return of 0.002.
C. An investment with an expected return of 15% and standard deviation of return of 5%.
D. An investment with an expected return of 25% and standard deviation of return of 8%.
286.
If the mean P/E of 30 stocks in a certain industrial sector is 18 and the sample standard
deviation is 3.5, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.34.
C. 0.64.
D. 1.56.
287.
An analyst regresses the returns of 15 stocks in a stock market and finds that the best fitting
line is:
Return = 13% + 15% x Beta
If the standard error of the estimate is 6% and the standard error of the coefficient of Beta is
9%, the test statistic for the coefficient is CLOSEST to:
A. 1.67.
B. 2.17.
C. 2.38.
D. 2.50.
288.
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An analyst regresses the returns of 50 stocks in a stock market and finds that the best fitting
line is:
Return = 8% + 9% x Beta
If the standard error of the estimate is 5.5% and the standard error of the coefficient of Beta is
3.25%, the test statistic for the coefficient is CLOSEST to:
A. 1.45.
B. 1.64.
C. 1.55.
D. 2.77.
289.
An analyst collects the data for interest rate expectations. The mean expected rate is 2.5
percent, the lowest expectation is 1 percent and the highest expectation is 5 percent. This
distribution is:
A. sparse.
B. normal.
C. skewed.
D. abnormal.
290.
An analyst is studying a stock that is currently trading at $35. The analyst estimates that there
is 33 percent probability that the stock will trade at $50 after one year, a 20 percent probability
that the stock will trade at $42, and a 47 percent chance that the stock will trade at $20. What
is the implied volatility of this stock price?
A. 13%.
B. 24%.
C. 31%.
D. 39%.
291.
An analyst regresses the returns of 16 stocks in a stock market and finds that the best fitting
line is:
Return = 6.5% + 11.8% x Beta
If the standard error of the estimate is 4% and the standard error of the coefficient of Beta is
3%, the test statistic for the coefficient is CLOSEST to:
A. 1.63.
B. 2.95.
C. 2.80.
D. 3.93.
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292.
If the mean P/E of 60 stocks in a certain industrial sector is 18 and the sample standard
deviation is 7, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.34.
C. 0.90.
D. 1.11.
293.
If the mean P/E of 50 stocks in a certain industrial sector is ten and the sample standard
deviation is six, standard error of the mean is CLOSEST to:
A. 0.12.
B. 0.35.
C. 0.85.
D. 1.18.
294.
An analyst regresses the returns of 18 stocks in a stock market and finds that the best fitting
line is:
Return = 3.75% + 6% x Beta
If the standard error of the estimate is 4% and the standard error of the coefficient of Beta is
3%, the test statistic for the coefficient is CLOSEST to:
A. 0.94.
B. 1.43.
C. 1.50.
D. 2.00.
295.
Which of the following investment has the highest co-efficient of variation?
A. An investment with an expected return of 19% and a variance of return of 0.005.
B. An investment with an expected return of 15% and a variance of return of 0.002.
C. An investment with an expected return of 10% and standard deviation of return of 3%.
D. An investment with an expected return of 3% and standard deviation of return of 1%.
296.
An analyst regresses the returns of 40 stocks in a stock market and finds that the best fitting
line is:
Return = 6% + 13.6% x beta
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If the standard error of the estimate is 3% and the standard error of the coefficient of beta is
5%, the test statistic for the coefficient is CLOSEST to:
A. 2.00.
B. 2.72.
C. 4.31.
D. 4.53.
297.
Which of the following investments has the highest co-efficient of variation?
A. An investment with an expected return of 10% and a variance of of return of 0.002.
B. An investment with an expected return of 15% and a variance of of return of 0.003.
C. An investment with an expected return of 8% and standard deviation of return of 3%.
D. An investment with an expected return of 5% and standard deviation of return of 1%.
298.
An analyst regresses the returns of 40 stocks in a stock market and finds that the best fitting
line is:
Return = 6% + 13.6% x beta
If the standard error of the estimate is 3% and the standard error of the coefficient of beta is
5%, the test statistic for the coefficient is CLOSEST to:
A. 2.00.
B. 2.72.
C. 4.31.
D. 4.53.
299.
Which of the following statements are TRUE? I. Lowering the level of significance reduces the
probability of Type I error. II. Lowering the level of significance increases the probability of
Type I error. III. Minimizing the probability of Type II error minimizes the power of the test. IV.
Minimizing the probability of Type II error maximizes the power of the test.
A. I and III.
B. I and IV.
C. II and III.
D. II and IV.
300.
Which of the following statements is TRUE?
A. Statistical significance does not suggest economic significance.
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B. 1.50.
C. 1.69.
D. 2.25.
305.
An analyst wants to test whether the variance of return from telecom stocks is higher than
0.04. For this purpose, he obtains the following data from a sample of 51 telecom stocks. Mean
return from telecom stocks = 15% Standard deviation of return from telecom stocks = 24%
Mean return from market = 12% Standard deviation of return from market = 13% Based on
this information and a 0.05 significance level:
A. we can say that the variance of telecom firms is lower than 0.04.
B. we can say that the variance of telecom firms is higher than 0.04.
C. we cannot say that the variance of telecom firms is lower than 0.04.
D. none of the above.
306.
Which of the following is NOT a step in the hypothesis testing process?
A. State a hypothesis.
B. Identify the population mean and probability distribution.
C. Specify the significance level.
D. Make the investment/economic decision based on the results of the test.
307.
An analyst wants to test whether the standard deviation of return from pharmaceutical stocks is
lower than 0.2. For this purpose, he obtains the following data from a sample of 30
pharmaceutical stocks. Mean return from pharmaceutical stocks = 8%. Standard deviation of
return from pharmaceutical stocks = 12%. Mean return from the market = 12%. Standard
deviation of return from the market = 16%. What is the critical value of the statistic for this
test at a 0.05 level of significance?
A. 17.71.
B. 28.81.
C. 42.56.
D. 45.72.
308.
An analyst wants to test whether the return from transportation sector stocks is different from
that of the utility stocks. For this purpose, he obtains the following data from a sample of 21
transportation stocks and a sample of 41 utility stocks. Mean return from transportation stocks
= 15%. Standard deviation of return from transportation stocks = 12%. Mean return from
utility stocks = 12%. Standard deviation of return from utility stocks = 13%. Based on this
information and using a 0.05 significance level:
A. there is no evidence for a difference between the means.
B. there is sufficient evidence for a difference between the means.
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B. 1.99.
C. 2.07.
D. 2.29.
313.
Which of the following statements are NOT true? I. Type I error occurs when the alternate
hypothesis is wrongly accepted. II. Minimizing the probability of Type II error maximizes the
power of the test. III. Type II error occurs when the null hypothesis is rejected when it is
actually true. IV. Type I error occurs when the null hypothesis is not rejected when it is actually
false.
A. I and II.
B. I and III.
C. III and IV.
D. I, II and IV.
314.
An analyst collects a sample of 50 P/E ratios of stocks that are representative of the market.
The mean P/E of these stocks is 20 and the standard deviation is 8.5. What is the 95 percent
confidence interval for the mean P/E of stocks in this market?
A. 17.21 to 22.79.
B. 17.64 to 22.36.
C. 18.02 to 21.98.
D. 18.31 to 21.69.
315.
An analyst has calculated that the variance of returns of stock A based on 20 observations is
0.005 and the variance of returns of stock B based on 15 observations is 0.012. Using a 0.05
level of significance, the analyst:
A. can conclude that the variance of Stock A is the same as that of Stock B.
B. can conclude that the variance of Stock A is different from that of Stock B.
C. cannot conclude that the variance of Stock A is different from that of Stock B.
D. none of the above.
316.
Which of the following statements are NOT true? I. Type I error occurs when the null hypothesis
is not rejected when it is actually false. II. Type II error occurs when the null hypothesis is
rejected when it is actually true. III. Type I error occurs when the alternate hypothesis is
wrongly accepted. IV. Minimizing the probability of Type II error maximizes the power of the
test.
A. I and II.
B. I and III.
C. II and IV.
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D. I, II and IV.
317.
Using a sample size of 101 observations, an analyst determines that the standard deviation of
the returns from a stock is 10 percent. Using a 0.05 significance level, the analyst:
A. can conclude that the standard deviation of returns is lower than 18%.
B. cannot conclude that the standard deviation of returns is lower than 18%.
C. can conclude that the standard deviation of returns is not lower than 18%.
D. none of the above.
318.
An analyst believes that hedge funds have significantly (using a significance level of 0.05)
outperformed the S&P 500 over the past five years. So she picks a random group of 15 hedge
funds and finds that their mean return over this period is 85 percent and their standard
deviation is 45 percent. During the same period the S&P 500 has risen by 75 percent. The
critical value of the t-statistic for this study is:
A. 1.21.
B. 1.65.
C. 1.76.
D. 1.96.
319.
An analyst believes that a group of 16 active portfolio managers have achieved a significantly
higher performance (using a significance level of 0.05) than the average for all portfolio
managers over a certain period. Over the period of the study, the active portfolio managers
achieved a mean return of 15 percent. Over the same period the mean return for all portfolio
managers was 12 percent and their standard deviation was 8 percent. What is the null
hypothesis in this study?
A. The performance of active portfolio managers is higher than or equal to the average for all
portfolio managers.
B. The performance of active portfolio managers is higher than the average for all portfolio
managers.
C. The performance of active portfolio managers is lower than or equal to the average for all
portfolio managers.
D. The performance of active portfolio managers is lower than the average for all portfolio
managers.
320.
An analyst collects a sample of 40 P/E ratios of stocks that are representative of the market.
The mean P/E of these stocks is 18 and the standard error of this estimate 7.25. What is the 95
percent confidence interval for the mean P/E of stocks in this market?
A. 3.79 to 32.21.
B. 6.04 to 29.96.
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C. 1.18 to 34.82.
D. 7.78 to 28.22.
321.
An analyst wants to test whether the mean spending by tourists coming to a holiday resort is
greater than $2,000 with a 1 percent level of significance. He finds that the average spending
by 16 tourists is $2,200 and the standard deviation of the population is $400. This study is a:
A. one-tailed test.
B. two-tailed test.
C. four-tailed test.
D. alternate test.
322.
An analyst wants to test whether the return from transportation sector stocks is different from
that of the utility stocks. For this purpose, he obtains the following data from a sample of 21
transportation stocks and a sample of 41 utility stocks. Mean return from transportation stocks
= 9%. Standard deviation of return from transportation stocks = 13%. Mean return from utility
stocks = 12%. Standard deviation of return from utility stocks = 15%. Based on this
information and using a 0.05 significance level:
A. there is no evidence for a difference between the means.
B. there is sufficient evidence for a difference between the means.
C. there is insufficient evidence for a difference between the means.
D. none of the above.
323.
An analyst believes that a group of 16 active portfolio managers have achieved a significantly
higher performance (using a significance level of 0.05) than the average for all portfolio
managers over a certain period. Over the period of the study, the active portfolio managers
achieved a mean return of 15 percent. Over the same period the mean return for all portfolio
managers was 12 percent and their standard deviation was 8 percent. What is the null
hypothesis in this study?
A. The performance of active portfolio managers is higher than or equal to the average for all
portfolio managers.
B. The performance of active portfolio managers is higher than the average for all portfolio
managers.
C. The performance of active portfolio managers is lower than or equal to the average for all
portfolio managers.
D. The performance of active portfolio managers is lower than the average for all portfolio
managers.
324.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
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A. 0.062.
B. 0.120.
C. 0.880.
D. 0.938.
325.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The standard error of the
estimate from this regression is CLOSEST to:
A. 53.
B. 59.
C. 2,852.
D. 3,423.
326.
If the correlation coefficient of a linear regression is 0.6, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 36%.
B. 40%.
C. 60%.
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D. 64%.
327.
If the correlation coefficient of a linear regression is 0.85, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 15%.
B. 28%.
C. 72%.
D. 85%.
328.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The value of the slope coefficient for this
regression is CLOSEST to:
A. -24.81.
B. -14.59.
C. 24.83.
D. 42.21.
329.
If the correlation coefficient of a linear regression is 0.33, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 11%.
B. 33%.
C. 67%.
D. 89%.
330.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
value of the slope coefficient for this regression is
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CLOSEST to:
A. -8.51.
B. -2.47.
C. 3.68.
D. 5.71.
331.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The correlation between the
price and volume is CLOSEST to:
A. 0.079.
B. 0.151.
C. 0.849.
D. 0.921.
332.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
value of coefficient of determination for this
regression is CLOSEST to:
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A. 0.062.
B. 0.120.
C. 0.880.
D. 0.938.
333.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The value of coefficient of
determination for this regression is CLOSEST to:
A. 0.079.
B. 0.151.
C. 0.849.
D. 0.921.
334.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
standard error of the estimate from this regression
is CLOSEST to:
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A. 4.
B. 17.
C. 21.
D. 26.
335.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
standard error of the estimate from this regression
is CLOSEST to:
A. 4.
B. 17.
C. 21.
D. 26.
336.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The correlation between the price and volume is
CLOSEST to:
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A. 0.043.
B. 0.084.
C. 0.916.
D. 0.957.
337.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The value of the intercept for this regression is
CLOSEST to:
A. 0.
B. 258.51.
C. 843.96.
D. 995.77.
338.
If the average return of 60 stocks in a certain industrial sector is 25 percent and the sample
standard deviation is 15 percent, standard error of the mean is CLOSEST to:
A. 1.76.
B. 1.82.
C. 1.88.
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D. 1.94.
339.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of coefficient of determination for this
regression is CLOSEST to:
A. 0.043.
B. 0.084.
C. 0.916.
D. 0.957.
340.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The standard error of the estimate from this
regression is CLOSEST to:
A. 55.
B. 60.
C. 3,009.
D. 3,611.
341.
If the average return of 60 stocks in a certain industrial sector is 25 percent and the sample
standard deviation is 15 percent, standard error of the mean is CLOSEST to:
A. 1.76.
B. 1.82.
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C. 1.88.
D. 1.94.
342.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The standard error of the estimate from this
regression is CLOSEST to:
A. 0.225.
B. 0.247.
C. 0.051.
D. 0.061.
343.
If the correlation coefficient of a linear regression is 0.33, the percentage of variation of the
dependent variable that is not explained by the independent variable is CLOSEST to:
A. 11%.
B. 33%.
C. 67%.
D. 89%.
344.
An analyst is using a statistical package to perform a
linear regression between the risk and return from
securities in an emerging market country. The original
data and intermediate statistics are shown on the
right. The value of the slope coefficient for this
regression is CLOSEST to:
A. 0.37.
B. 1.24.
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C. 2.09.
D. 7.11.
345.
An analyst is using a statistical package to perform a
linear regression between price of a new semiconductor cleaning product and its price. The original
data and intermediate statistics are shown on the
right. The value of the intercept for this regression is
CLOSEST to:
A. 0.
B. 258.51.
C. 843.96.
D. 995.77.
346.
A fund manager is using a statistical package to
perform a linear regression between the number of
securities that she uses to replicate an index and
the 95 percent shortfall risk. The original data and
intermediate statistics are shown on the right. The
value of the slope coefficient for this regression is
CLOSEST to:
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A. -8.51.
B. -2.47.
C. 3.68.
D. 5.71.
347.
An analyst is using a statistical package to perform
a linear regression between the features offered in
a product and its sales volume at a constant price.
The original data and intermediate statistics are
shown on the right. The value of the intercept for
this regression is CLOSEST to:
A. 0.
B. 221.
C. 441.
D. 690.
348.
Which of the following test statistics is most appropriate for conducting the hypothesis test
given below?
H0: variance A = variance B; where the test is based on two random independent samples from
two normally distributed populations.
A. t-statistic.
B. z-statistic.
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C. F-statistic.
D. chi-square.
349.
Stock A has a standard deviation of 0.30 and Stock B has a standard deviation of 0.45. If the
covariance is 0.1013 what is the correlation coefficient?
A. 0.01.
B. 0.23.
C. 0.34.
D. 0.75.
350.
The variance of the returns from stock A is 0.018 and that of the market is 0.025. If the
covariance between the stock and the index is -0.002, their correlation coefficient is CLOSEST
to:
A. -0.23.
B. -0.11.
C. -0.09.
D. -0.08.
351.
Stock A has a standard deviation of 0.30 and Stock B has a standard deviation of 0.45. If their
correlation coefficient is 0.75 what is their covariance?
A. 0.1013.
B. 0.1350.
C. 0.2250.
D. 0.3375.
352.
A portfolio contains two perfectly negatively correlated investments with volatilities of 3 percent
and 10 percent. The proportion of these two securities that would lead to the lowest risk are:
A. 8% and 92%.
B. 92% and 8%.
C. 23% and 77%.
D. 77% and 23%.
353.
A portfolio contains two perfectly negatively correlated investments with volatilities of 3 percent
and 10 percent. The proportion of these two securities that would lead to the lowest risk are:
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A. 8% and 92%.
B. 92% and 8%.
C. 23% and 77%.
D. 77% and 23%.
354.
Stock A has a standard deviation of 0.30 and Stock B has a standard deviation of 0.45. If their
correlation coefficient is 0.75 what is their covariance?
A. 0.1013.
B. 0.1350.
C. 0.2250.
D. 0.3375.
355.
The lowest level of risk, measured by volatility, of a portfolio containing two perfectly negatively
correlated investments with volatilities of 5 percent and 7 percent is:
A. 0%.
B. 5%.
C. 7%.
D. 12%.
356.
If Security A and Security B are positively correlated, and the price of Security A increases, the
price of Security B:
A. will increase.
B. will decrease.
C. is most likely to increase than to decrease.
D. may decrease or remain unchanged, but will not increase.
357.
The lowest level of risk, measured by volatility, of a portfolio containing two perfectly negatively
correlated investments with volatilities of 3 percent and 10 percent respectively is:
A. 0%
B. 3%
C. 10%
D. 13%
358.
Stock A has a standard deviation of 0.30 and Stock B has a standard deviation of 0.45. If the
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B. X + Y.
C. log(X) + log(Y).
D. exp(X) + exp(Y).
363.
Which of the following model incorporates both mean reversion and no-arbitrage?
A. Vasicek.
B. Black Scholes.
C. Cox, Ingersoll and Ross.
D. Heath, Jarrow and Morton.
364.
Given two variables X and Y that follow geometric Brownian motion, which of the following
variable will also follow geometric Brownian motion?
A. X * Y.
B. X + Y.
C. log(X) + log(Y).
D. exp(X) + exp(Y).
365.
Which of the following are no-arbitrage models for fixed income valuation?
I. Ho and Lee.
II. Hull and White.
III. Cox, Ingersoll and Ross.
IV. Heath, Jarrow and Morton.
A. I and II.
B. III and IV.
C. I, II and IV.
D. II, III and IV.
366.
Vasicek proposed the following model for interest rates:
dr = a * (b - r) * dt + s * dz
What is the long term mean of interest rates in this model?
A. a
B. b
C. r
D. s
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367.
Which of the following models for interest rates would allow for mean reversion?
A. dr = a * dt + s * dz
B. dr = a * dt - b * dt + s * dz
C. dr = a * (b - r) * dt + s * dz
D. dr = a * (r - b) * dt + s * dz
368.
Which of the following model incorporates both mean reversion and no-arbitrage?
A. Vasicek.
B. Ho and Lee.
C. Black Scholes.
D. Hull and White.
369.
For which of the following process can the mean change be not equal to zero?
I. Ito process.
II. Wiener process.
III. Generalized Wiener process.
A. I and II.
B. I and III.
C. II and III.
D. I, II and III.
370.
Given two variables X and Y that are lognormally distributed, what is the distribution of X * Y?
A. Normal.
B. Lognormal.
C. Exponential.
D. None of the above.
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The tail ends of a normal distribution stretch to infinity, although the area under these tails
becomes insignificant past 3 standard deviation from mean.
Study Session: 1 - RA: 2
38. Correct answer: C
Given that the daily standard deviation is $1.5 million, the standard deviation over 250 days =
$1.5 million x (250/1)^0.5 = $23.72 million.
Given that the returns are normally distributed, we know that 95% of the outcomes will be
above 1.645 standard deviations below the mean, i.e. above $101 million.
Study Session: 1 - RA: 2
39. Correct answer: D
Lognormal distribution is most appropriate for stock prices, since it does not allow for negative
values and implies that the returns are normally distributed.
Study Session: 1 - RA: 2
40. Correct answer: C
Given that the daily standard deviation is $19 million, the standard deviation over 5 days = $19
million x (5/1)^0.5 = $42.49 million.
Given that the returns are normally distributed, we know that 95% of the outcomes will be
above 1.645 standard deviations below the mean, i.e. above $30.1 million.
Study Session: 1 - RA: 2
41. Correct answer: D
Covariance = Correlation x Standard Deviation_A x Standard Deviation_B. Therefore Standard
Deviation_B
= Covariance / Correlation / Standard Deviation_A
= 22 / 0.8 / 25^0.5 = 5.5.
Therefore Variance_B = 5.5^2 = 30.25.
Study Session: 1 - RA: 2
42. Correct answer: B
FV of this payment = $6,000 x (1 + 4%)^4 = $7,019.
Study Session: 1 - RA: 3
43. Correct answer: B
Using continuous compounding, PV = FV x exp(-Rate x Time period) = $8,400 x exp (- 8% x
6/12) = $8,071.
Study Session: 1 - RA: 3
44. Correct answer: A
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Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
68. Correct answer: C
The long position on negatively correlated index X does not hedge the short S&P 500, but
rather the two add to it each other. In order to profit from the negative correlation, one needs
to go long on both assets.
Study Session: 1 - RA: 4
69. Correct answer: D
Covariance = Correlation x Standard Deviation_A x Standard Deviation_B. Therefore Standard
Deviation_B
= Covariance / Correlation / Standard Deviation_A
= 5 / 0.5 / 8^0.5 = 3.5355.
Therefore Variance_B = 3.5355^2 = 12.5.
Study Session: 1 - RA: 4
70. Correct answer: D
Mean = -2 x 60% + 10 x 20% + 20 x 20% = 4.8.
Study Session: 1 - RA: 4
71. Correct answer: D
First we calculate the Mean = -12 x 24% + 4 x 40% + 14 x 36% = 3.76
Then, Variance = (3.76 - -12)^2 x 24% + (3.76 - 4)^2 x 40% + (3.76 - 14)^2 x 36% = 97.38
Study Session: 1 - RA: 4
72. Correct answer: B
Correlation coefficient is a measure of the linear relationship between two random variables. It
can be calculated by scaling the covariance between them and varies between -1 (perfect
negative correlation) to +1 (perfect positive correlation). If the variables are independent, they
will have a correlation coefficient of zero, but the reverse does not always hold true (i.e. a
correlation coefficient of zero does not necessarily mean that they are independent).
Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
73. Correct answer: D
Covariance = Correlation x Standard Deviation_A x Standard Deviation_B. Therefore Standard
Deviation_B
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Volatility scales as the square root of time. Therefore, the 22-day volatility = 5-day volatility x
(22 / 5)^0.5 = 0.89% x 2.0976 = 1.87%.
Study Session: 1 - RA: 4
87. Correct answer: D
Covariance = Correlation x Standard Deviation_A x Standard Deviation_B. Therefore Standard
Deviation_B
= Covariance / Correlation / Standard Deviation_A
= 5 / 0.5 / 8^0.5 = 3.5355.
Therefore, Variance_B = 3.5355^2 = 12.5.
Study Session: 1 - RA: 4
88. Correct answer: D
Correlation coefficient is a measure of the linear relationship between two random variables. It
can be calculated by scaling the covariance between them and varies between -1 (perfect
negative correlation) to +1 (perfect positive correlation). If the variables are independent they
will have a correlation coefficient of zero, but the reverse does not always hold true (i.e. a
correlation coefficient of zero does not necessarily mean that they are independent).
Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
89. Correct answer: B
Volatility scales as the square root of time. Therefore the 250-day volatility = 5-day volatility x
(250 / 5)^0.5 = 1.5% x 7.0711 = 10.61%.
Study Session: 1 - RA: 4
90. Correct answer: B
Mean = -4 x 20% + 6 x 40% + 12 x 40% = 6.4.
Study Session: 1 - RA: 4
91. Correct answer: C
Mean = -2 x 50% + 8 x 25% + 15 x 25% = 4.75.
Study Session: 1 - RA: 4
92. Correct answer: D
Step 1. The returns for the three scenarios given are: 42.857% [= (50 - 35)/35], 20% [= (42 35) / 35], and -42.857% [= (20 - 35) / 35]
Step 2. Calculate expected price = 33% x 42.857% + 20% x 20% + 47% x -42.857% = -2%.
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Step 3. Calculate Variance = 33% x (-2% - 42.857%)^2 + 20% x (-2% - 20%)^2 + 47% x (2% + 42.857%)^2 = 0.154538
Step 4. Calculate volatility/standard deviation = 0.154538^0.5 = 39.31%.
Study Session: 1 - RA: 5
93. Correct answer: D
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.008^0.5 / 0.15 = 0.596.
CV(B) = 0.005^0.5 / 0.12 = 0.589.
CV(C) = 0.03 / 0.08 = 0.375.
CV(D) = 0.02 / 0.03 = 0.667.
Study Session: 1 - RA: 5
94. Correct answer: D
The null hypothesis for this test is that the coefficient is equal to zero. Therefore the test
statistic = (Observed value - 0) / Standard error = (9% - 0) / 4% = 2.25.
Study Session: 1 - RA: 5
95. Correct answer: A
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.005^0.5 / 0.19 = 0.372.
CV(B) = 0.002^0.5 / 0.15 = 0.298.
CV(C) = 0.03 / 0.1 = 0.3.
CV(D) = 0.01 / 0.03 = 0.333.
Study Session: 1 - RA: 5
96. Correct answer: D
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.008^0.5 / 0.15 = 0.596.
CV(B) = 0.005^0.5 / 0.12 = 0.589.
CV(C) = 0.03 / 0.08 = 0.375.
CV(D) = 0.02 / 0.03 = 0.667.
Study Session: 1 - RA: 5
97. Correct answer: C
In this distribution, the lowest element is 1.5 percent below the mean whereas the highest
element is 2.5 percent above the mean. Thus the distribution is skewed towards the right.
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Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.005^0.5 / 0.12 = 0.589.
CV(B) = 0.002^0.5 / 0.1 = 0.447.
CV(C) = 0.03 / 0.15 = 0.2.
CV(D) = 0.05 / 0.06 = 0.833.
Study Session: 1 - RA: 5
106. Correct answer: A
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.002^0.5 / 0.1 = 0.447.
CV(B) = 0.003^0.5 / 0.15 = 0.365.
CV(C) = 0.03 / 0.08 = 0.375.
CV(D) = 0.01 / 0.05% = 0.2.
Study Session: 1 - RA: 5
107. Correct answer: C
Standard error of the mean = s /vn = 4/v40 = 0.63.
Study Session: 1 - RA: 5
108. Correct answer: D
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.008^0.5 / 0.15 = 0.596.
CV(B) = 0.005^0.5 / 0.12 = 0.589.
CV(C) = 0.03 / 0.08 = 0.375.
CV(D) = 0.02 / 0.03 = 0.667.
Study Session: 1 - RA: 5
109. Correct answer: C
Standard error of the mean = s /n^0.5 = 6/90^0.5 = 0.63.
Study Session: 1 - RA: 5
110. Correct answer: C
Standard error of the mean = s /n^0.5 = 6/50^0.5 = 0.85.
Study Session: 1 - RA: 5
111. Correct answer: C
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hypothesis and the null hypothesis will be that the standard deviation is higher than or equal to
14%. Thus, using a probability in the right tail of 95% and degrees of freedom of 24, the critical
value from the chi-squared table is 13.85.
Study Session: 1 - RA: 6
125. Correct answer: C
Tests of the variance of a population require the chi-squared test. For this data chi-squared =
(n - 1) x Sample variance / Hypothesized variance = 14 x 0.13^2 / 0.18^2 = 7.3.
Study Session: 1 - RA: 6
126. Correct answer: B
The null hypothesis in this study is that the performance of active portfolio managers <=
average for all portfolio managers. The value of test statistic for this, Z = (0.15 - 0.12)/(0.08 /
16^0.5) = 0.03 / (0.08 / 4) = 1.5. Since the analyst is using a 0.05 significance level the
critical value of Z is 1.65 (the rejection region is above 1.65). As the test statistic is lower than
the critical value the null hypothesis cannot be rejected, i.e. the performance of active portfolio
managers is not significantly higher than the average for all portfolio managers.
Study Session: 1 - RA: 6
127. Correct answer: D
Theoretically, the z-statistic can be used when the population variance is known, but it can also
be used for populations with unknown variances if the sample size is large. However, if the
population variance is unknown and the sample size is small then it is necessary to use tstatistic.
Study Session: 1 - RA: 6
128. Correct answer: C
The significance level does not depend on the data. Rather it is chosen separately based on how
much evidence is required before a null hypothesis will be rejected. The steps in the hypothesis
testing process are: 1) State a hypothesis. 2) Identify the test statistic and its probability
distribution. 3) Specify the significance level. 4) State the decision rule. 5) Collect data and
perform the calculations. 6) Make the statistical decision. 7) Make the investment/economic
decision based on the above.
Study Session: 1 - RA: 6
129. Correct answer: A
This problem requires a hypothesis test in which the null hypothesis, H0, is that Peter's
performance is not significantly higher than average. The z statistic for this test = (Peter's
performance - Average performance) / Standard deviation = (1,000,000 - 800,000) / 100,000
= 2. The critical value of the z statistic for a significance level of 0.05 is 1.645. Since the test
statistic is larger than this critical value, we reject the null hypothesis and accept the alternate
hypothesis that Peter's performance is significantly higher than average.
Study Session: 1 - RA: 6
130. Correct answer: B
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Tests of differences between variances (or standard deviation) of two populations require the Ftest. Looking up the F-table for 0.05 significance level, with 40 degrees of freedom in the
numerator and 20 in the denominator (note the population with the higher variance goes in the
numerator), the critical value of F is 1.99.
Study Session: 1 - RA: 6
131. Correct answer: D
Tests of the variance of a population require the chi-squared test. For this data chi-squared =
(n - 1) x Sample variance / Hypothesized variance = 59 x 0.22^2 / 0.045 = 63.46. Since the
analyst wants to show that the variance is more than 0.045, this will be chosen as the
alternative hypothesis and the null hypothesis will be that the variance is lower than or equal to
0.045. The critical value of the chi-squared statistic (for df = 59 and p= 5%) is 77.93. Since the
test statistic is lower than the critical statistic, we cannot reject the null hypothesis that the
variance is equal to or lower than 0.045.
Study Session: 1 - RA: 6
132. Correct answer: B
The required test for testing the variance is the chi-squared test. The test statistic = (n - 1) x
Sample variance / Hypothesized variance = 19 x 0.09^2 / 0.16^2 = 6.01. To test whether the
standard deviation is different (Ho: standard deviation is equal to 16%), the critical values of
chi-squared will be 8.91 and 32.85(using df = 19, p-lower = 0.975 and p-higher = 0.025).
Since the test statistic falls outside the critical range, the analyst can reject the null hypothesis
and conclude that the standard deviation of returns is different from 16%.
Study Session: 1 - RA: 6
133. Correct answer: D
The alternate hypothesis is the statement which will be accepted if the null hypothesis is proven
wrong. Therefore, we make whatever we are trying to test as the alternate hypothesis - in this
case that the mean price of luxury cars is greater than $80,000, and the null hypothesis as the
opposite (the mean price of luxury cars is less than or equal to $80,000). This problem is a
common example of how statisticians establish hypotheses by proving that the opposite (i.e.
the null hypothesis) is false.
Study Session: 1 - RA: 6
134. Correct answer: A
This is a paired comparison test because the two samples are not independent. The null
hypothesis: Ho: mean difference in betas before and after the dot-com bust = 0. The test
statistic = (Mean of differences - 0) / Standard error = (0.18 - 0) / (0.2 / 10^0.5) = 2.85. The
critical value of t-statistic for 9 degrees of freedom and p = 0.025 (this is a two sided test) is
2.26. Since the test statistic is higher than the critical value of t-statistic, the analyst can reject
the null hypothesis.
Study Session: 1 - RA: 6
135. Correct answer: C
Tests of the variance of a population require the chi-squared test. Since the analyst wants to
show that the variance is more than 0.04, this will be chosen as the alternative hypothesis and
the null hypothesis will be that the variance is lower than or equal to 0.04. Thus using a
probability in the right tail of 5% and degrees of freedom of 30, the critical value from the chi-
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A positive covariance means that the asset returns move in the same direction, while a negative
covariance means that asset returns move in the opposite direction.
A zero covariance means that there is no relationship between asset returns.
Study Session: 1 - RA: 8
175. Correct answer: D
Of the models given here, only Heath, Jarrow and Morton is a no-arbitrage model that
incorporates mean reversion. Cox, Ingersoll and Ross model and Vasicek model incorporate
mean reversion but are not a no-arbitrage model. Black-Scholes does not meet either criteria.
Study Session: 1 - RA: 10
176. Correct answer: A
Since X and Y follow geometric Brownian motion, it follows that log(X) and log(Y) are normally
distributed, which means that log(X) + log(Y) is also normally distributed. log(X) + log(Y) is
equal to log(X * Y), so X * Y must follow geometric Brownian motion.
Study Session: 1 - RA: 10
177. Correct answer: C
Wiener process has a mean change of zero and variance proportional to the time interval.
Study Session: 1 - RA: 10
178. Correct answer: B
Wiener process has a mean change of zero and variance proportional to the time interval.
Generalized Wiener process and Ito process incorporate a trend variable a * dt.
Study Session: 1 - RA: 10
179. Correct answer: D
Only Hull and White is a no-arbitrage model that incorporates mean reversion. Ho and Lee is a
no-arbitrage model that does not incorporate mean reversion. Vasicek model incorporates mean
reversion but is not a no-arbitrage model. Black-Scholes does not meet either criteria.
Study Session: 1 - RA: 10
180. Correct answer: C
Wiener process has a mean change of zero and variance proportional to the time interval.
Study Session: 1 - RA: 10
181. Correct answer: B
If X and Y are lognormally distributed, log(X) and log(Y) will be normally distributed, which
means that log(X) + log(Y) = log(X * Y) is also normally distributed, implying that X * Y must
be lognormally distributed.
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A lognormal distribution cuts off at zero on the left-hand side and extends to infinity on the
right-hand side.
Study Session: 1 - RA: 2
207. Correct answer: B
A lognormal distribution cuts off at zero on the left-hand side and extends to infinity on the
right-hand side.
Study Session: 1 - RA: 2
208. Correct answer: A
The range of the 95 percent confidence interval = mean ? 1.96 x standard deviation /
Number of employees^0.5 = 32 ? 1.96 x 12 = 32 ? 23.5 = between 8.5 and 55.5
Study Session: 1 - RA: 2
209. Correct answer: B
Given that the daily standard deviation is $8 million, the standard deviation over five days = $8
million x (5/1)^0.5 = $17.89 million.
Given that the returns are normally distributed, we know that 99% of the outcomes will be
above 2.325 standard deviations below the mean, i.e. above $18.4 million.
Study Session: 1 - RA: 2
210. Correct answer: D
The characteristics of a normal distribution are:
It is a continuous distribution.
It is bell shaped.
It is symmetrical about the mean.
It peaks at the mean expected value.
It extends theoretically from negative infinity to positive infinity (the probability asymptotically
approaches zero at plus and minus infinity).
It has a skewness of zero (i.e. it is symmetric).
It has a kurtosis (the level of peakedness) of three. Below three the distribution is platykurtic
(too flat) and above three it is leptokurtic (too tall).
Study Session: 1 - RA: 2
211. Correct answer: C
Confidence interval = 1 - CND
(Quantile) = Area under the normal
distribution to the right of the given
Quantile point. Some of these points
are rather important due to their use
in VAR calculations.
Confidence Level 90% 95% 99%
Quantile (alpha) -1.282 -1.645 -2.326
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Correlation coefficient is a measure of linear relationship between two random variables. It can
be calculated by scaling the covariance between them and varies between -1 (perfect negative
correlation) to +1 (perfect positive correlation). If the variables are independent they will have
a correlation coefficient of zero, but the reverse does not always hold true (i.e. a correlation
coefficient of zero does not necessarily mean that they are independent).
Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
265. Correct answer: C
Mean = -8 x 25% + 12 x 40% + 24 x 35% = 11.2.
Study Session: 1 - RA: 4
266. Correct answer: B
Firstly, we calculate the Mean = -6 x 15% + 6 x 40% + 12 x 45% = 6.9.
Then, Variance = (6.9 - -6)^2 x 15% + (6.9 - 6)^2 x 40% + (6.9 - 12)^2 x 45% = 36.98
Finally, Standard deviation = 36.98^0.5 = 6.08.
Study Session: 1 - RA: 4
267. Correct answer: A
Correlation coefficient is a measure of the linear relationship between two random variables. It
can be calculated by scaling the covariance between them and varies between -1 (perfect
negative correlation) to +1 (perfect positive correlation). If the variables are independent they
will have a correlation coefficient of zero, but the reverse does not always hold true (i.e. a
correlation coefficient of zero does not necessarily mean that they are independent).
Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
268. Correct answer: B
Volatility scales as the square root of time. Therefore, the 23-day volatility = 10-day volatility x
(23 / 10)^0.5 = 1.4% x 1.5166 = 2.12%.
Study Session: 1 - RA: 4
269. Correct answer: A
Correlation coefficient is a measure of the linear relationship between two random variables. It
can be calculated by scaling the covariance between them and varies between -1 (perfect
negative correlation) to +1 (perfect positive correlation). If the variables are independent they
will have a correlation coefficient of zero, but the reverse does not always hold true (i.e. a
correlation coefficient of zero does not necessarily mean that they are independent).
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Covariance between the variables = Correlation coefficient x Standard deviation of the first
variable x Standard deviation of the second variable. This calculation does not require the use
of mean at all.
Study Session: 1 - RA: 4
270. Correct answer: C
Since the correlation is 1, the return on Asset B should be the same proportion as the ratio of
volatility of B to A, i.e. Return on Asset B = (Volatility B / Volatility A) x Return on Asset =
(25% /15%) x 1.50% = 2.50%.
Study Session: 1 - RA: 4
271. Correct answer: B
Volatility scales as the square root of time. Therefore, the 30-day volatility = 7-day volatility x
(30 / 7)^0.5 = 1.05% x 2.0702 = 2.17%.
Study Session: 1 - RA: 4
272. Correct answer: D
Mean = -2 x 60% + 10 x 20% + 20 x 20% = 4.8.
Study Session: 1 - RA: 4
273. Correct answer: B
Firstly, we calculate the Mean = -4 x 40% + 8 x 25% + 15 x 35% = 5.65
Then, Variance = (5.65 - -4)^2 x 40% + (5.65 - 8)^2 x 25% + (5.65 - 15)^2 x 35% = 69.23
Finally, Standard deviation = 69.23^0.5 = 8.32.
Study Session: 1 - RA: 4
274. Correct answer: B
Firstly, we calculate the Mean = -2 x 60% + 10 x 20% + 20 x 20% = 4.8
Then, Variance = (4.8 - -2)^2 x 60% + (4.8 - 10)^2 x 20% + (4.8 - 20)^2 x 20% = 79.36
Finally, Standard deviation = 79.36^0.5 = 8.91.
Study Session: 1 - RA: 4
275. Correct answer: B
Volatility scales as the square root of time. Therefore, the 30-day volatility = 7-day volatility x
(30 / 7)^0.5 = 1.05% x 2.0702 = 2.17%.
Study Session: 1 - RA: 4
276. Correct answer: B
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The null hypothesis for this test is that the coefficient is equal to zero. Therefore the test
statistic = (Observed value - 0) / Standard error = (9% - 0) / 3.25% = 2.77.
Study Session: 1 - RA: 5
289. Correct answer: C
In this distribution, the lowest element is 1.5 percent below the mean whereas the highest
element is 2.5 percent above the mean. Thus the distribution is skewed towards the right.
Study Session: 1 - RA: 5
290. Correct answer: D
Step 1. The returns for the three scenarios given are: 42.857% [= (50 - 35)/35], 20% [= (42 35) / 35], and -42.857% [= (20 - 35) / 35]
Step 2. Calculate expected price = 33% x 42.857% + 20% x 20% + 47% x -42.857% = -2%.
Step 3. Calculate Variance = 33% x (-2% - 42.857%)^2 + 20% x (-2% - 20%)^2 + 47% x (2% + 42.857%)^2 = 0.154538
Step 4. Calculate volatility/standard deviation = 0.154538^0.5 = 39.31%.
Study Session: 1 - RA: 5
291. Correct answer: D
The null hypothesis for this test is that the coefficient is equal to zero. Therefore the test
statistic = (Observed value - 0) / Standard error = (11.8% - 0) / 3% = 3.93.
Study Session: 1 - RA: 5
292. Correct answer: C
Standard error of the mean = s /n^0.5 = 7/60^0.5 = 0.9.
Study Session: 1 - RA: 5
293. Correct answer: C
Standard error of the mean = s /n^0.5 = 6/50^0.5 = 0.85.
Study Session: 1 - RA: 5
294. Correct answer: D
The null hypothesis for this test is that the coefficient is equal to zero. Therefore, the test
statistic = (Observed value - 0) / Standard error = (6% - 0) / 3% = 2.
Study Session: 1 - RA: 5
295. Correct answer: A
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
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shown below:
CV(A) = 0.005^0.5 / 0.19 = 0.372.
CV(B) = 0.002^0.5 / 0.15 = 0.298.
CV(C) = 0.03 / 0.1 = 0.3.
CV(D) = 0.01 / 0.03 = 0.333.
Study Session: 1 - RA: 5
296. Correct answer: B
The null hypothesis for this test is that the coefficient is equal to zero. Therefore the test
statistic = (Observed value - 0) / Standard error = (13.6% - 0) / 5% = 2.72.
Study Session: 1 - RA: 5
297. Correct answer: A
Coefficient of variation (CV) is a measure of relative risk and is calculated as: CV = (standard
deviation of returns) / (expected rate of return). The calculations for each investment are
shown below:
CV(A) = 0.002^0.5 / 0.1 = 0.447.
CV(B) = 0.003^0.5 / 0.15 = 0.365.
CV(C) = 0.03 / 0.08 = 0.375.
CV(D) = 0.01 / 0.05% = 0.2.
Study Session: 1 - RA: 5
298. Correct answer: B
The null hypothesis for this test is that the coefficient is equal to zero. Therefore the test
statistic = (Observed value - 0) / Standard error = (13.6% - 0) / 5% = 2.72.
Study Session: 1 - RA: 5
299. Correct answer: B
In hypothesis testing, Type I error is rejecting the null hypothesis when it is actually true. The
probability of Type I error is called the "level of significance", so choosing a lower level of
significance lowers the probability of Type I error. Type II error happens if the null hypothesis is
not rejected when it is actually false. The power of the test is the probability of correctly
rejecting the null hypothesis (when it is false), so minimizing Type II errors would maximize the
power of the test.
Study Session: 1 - RA: 6
300. Correct answer: C
Economic significance and statistical significance are not the same. Economic significance takes
into account statistical significance but also a number of other issues (externalities such as
transaction costs, regulations etc.) Note: the wording of the choices is a bit tricky. Choice A is
right in some cases, but in many situations statistical significance can suggest economic
significance, although it cannot confirm significance./p>
Study Session: 1 - RA: 6
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with 40 degrees of freedom in the numerator and 20 in the denominator (note the population
with the higher variance goes in the numerator and that this is a two-sided test so p = 0.025),
the critical value of F is 2.29.
Study Session: 1 - RA: 6
313. Correct answer: C
In hypothesis testing, we accept the alternate hypothesis if the null hypothesis has been
rejected. Type I error happens if the null hypothesis is rejected when it is actually true. Type II
error happens if the null hypothesis is not rejected when it is actually false. The power of the
test is the probability of correctly rejecting the null hypothesis (when it is false), so minimizing
Type II errors would maximize the power of the test.
Study Session: 1 - RA: 6
314. Correct answer: B
The 95% confidence interval = Mean 1.96 x Standard error = Mean 1.96 x Standard
deviation / Sample size^0.5 = 20 1.96 x 8.5 / 50^0.5 = 17.64 to 22.36.
Study Session: 1 - RA: 6
315. Correct answer: C
This problem requires an F-test in which the null hypothesis Ho: variance of stock A = variance
of stock B. The test statistic = higher variance / lower variance = 0.012 / 0.005 = 2.4. The
critical F with 14 and 19 degrees of freedom and p=0.025 is 2.65. Since the test statistic is
lower, the analyst cannot reject the null hypothesis.
Study Session: 1 - RA: 6
316. Correct answer: A
In hypothesis testing we accept the alternate hypothesis if the null hypothesis has been
rejected. Type I error happens if the null hypothesis is rejected when it is actually true. Type II
error happens if the null hypothesis is accepted when it is actually false. The power of the test
is the probability of correctly rejecting the null hypothesis (when it is false), so minimizing Type
II errors would maximize the power of the test.
Study Session: 1 - RA: 6
317. Correct answer: A
The required test for testing the variance is the chi-squared test. The test statistic = (n - 1) x
Sample variance / Hypothesized variance = 100 x 0.1^2 / 0.18^2 = 30.86. To test whether the
standard deviation is lower (Ho: standard deviation is higher than or equal to 18%), the critical
value of chi-squared will be 77.93 (using df = 100 and p= 0.95). Since the test statistic is lower
than the critical value, the analyst can reject the null hypothesis and conclude that the standard
deviation of returns is lower than 18%.
Study Session: 1 - RA: 6
318. Correct answer: C
Since this is a one-tailed test with a 0.05 significance level and 14 degrees of freedom, the
critical value from the t-table is 1.76.
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The standard error = USS / (N-2) = (TSS - ESS) / (N-2) = (865.333 - 761.562) / (6-2) =
25.94.
Study Session: 1 - RA: 7
335. Correct answer: D
The standard error = USS / (N-2) = (TSS - ESS) / (N-2) = (865.333 - 761.562) / (6-2) =
25.94.
Study Session: 1 - RA: 7
336. Correct answer: D
Correlation = (Coefficient of determination)^0.5 = (ESS / TSS)^0.5 = (3.312 / 3.617)^0.5 =
0.957.
Study Session: 1 - RA: 7
337. Correct answer: D
First we calculate the slope coefficient = Sum_XY / Sum_X^2 = -9,152.23 / 368.857 = 24.812.
Then we calculate the intercept = Avg_Y - Slope x Avg X = 627.143 - -24.812 x 14.857 =
995.77.
Study Session: 1 - RA: 7
338. Correct answer: D
Standard error of the mean = Standard deviation / (Number of observations)^0.5 = 15 /
60^0.5 = 1.94.
Study Session: 1 - RA: 7
339. Correct answer: C
Coefficient of determination = ESS / TSS = 3.312 / 3.617 = 0.916.
Study Session: 1 - RA: 7
340. Correct answer: D
The standard error = USS / (N-2) = (TSS - ESS) / (N-2) = (245,142.857 - 227,088.816) / (72) = 3,610.8082.
Study Session: 1 - RA: 7
341. Correct answer: D
Standard error of the mean = Standard deviation / (Number of observations)^0.5 = 15 /
60^0.5 = 1.94.
Study Session: 1 - RA: 7
342. Correct answer: D
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The standard error = USS / (N-2) = (TSS - ESS) / (N-2) = (3.617 - 3.312) / (7-2) = 0.061.
Study Session: 1 - RA: 7
343. Correct answer: D
The percentage of explained variation = Correlation coefficient ^ 2 = 0.33 ^ 2 = 0.1089 or
10.89%. Therefore, the unexplained variation is 89.11%.
Study Session: 1 - RA: 7
344. Correct answer: A
The slope coefficient = Sum_XY / Sum_X^2 = 9.08 / 24.9 = 0.365.
Study Session: 1 - RA: 7
345. Correct answer: D
First we calculate the slope coefficient = Sum_XY / Sum_X^2 = -9,152.23 / 368.857 = 24.812.
Then we calculate the intercept = Avg_Y - Slope x Avg X = 627.143 - -24.812 x 14.857 =
995.77.
Study Session: 1 - RA: 7
346. Correct answer: D
The slope coefficient = Sum_XY / Sum_X^2 = 133.302 / 23.333 = 5.713.
Study Session: 1 - RA: 7
347. Correct answer: B
Firstly, we calculate the slope coefficient = Sum_XY / Sum_X^2 = 1,640 / 28 = 58.571.
Then, we calculate the intercept = Avg_Y - Slope x Avg X = 455.714 - 58.571 x 4 = 221.43.
Study Session: 1 - RA: 7
348. Correct answer: C
The test to compare variances of two normally distributed populations is F-statistic.
Study Session: 1 - RA: 7
349. Correct answer: D
Correlation coefficient = Covariance / (Standard deviation of stock A x Standard deviation of
stock B) = 0.1013 / (0.30 x 0.45) = 0.75.
Study Session: 1 - RA: 8
350. Correct answer: C
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The Hull and White, the Ho and Lee, and the Heath, Jarrow and Morton are no-arbitrage
models.
Study Session: 1 - RA: 10
366. Correct answer: B
In the model: dr = a * (b - r) * dt + s * dz, the interest rate r will mean revert to a level b.
Study Session: 1 - RA: 10
367. Correct answer: C
dr = a * (b - r) * dt + s * dz, is the only model given above that allows for the interest rate r to
mean revert to a level b.
Study Session: 1 - RA: 10
368. Correct answer: D
Only Hull and White is a no-arbitrage model that incorporates mean reversion. Ho and Lee is a
no-arbitrage model that does not incorporate mean reversion. Vasicek model incorporates mean
reversion but is not a no-arbitrage model. Black-Scholes does not meet either criteria.
Study Session: 1 - RA: 10
369. Correct answer: B
Wiener process has a mean change of zero and variance proportional to the time interval.
Generalized Wiener process and Ito process incorporate a trend variable a * dt.
Study Session: 1 - RA: 10
370. Correct answer: B
If X and Y are lognormally distributed, log(X) and log(Y) will be normally distributed, which
means that log(X) + log(Y) = log(X * Y) is also normally distributed, implying that X * Y must
be lognormally distributed.
Study Session: 1 - RA: 10
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