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Crash Course for
Quantitative Methods
CFA
Level-I Exam

This files has expired at 30-Jun-13
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Neev Knowledge Management Pristine
Quantitative Methods

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Quantitative Analysis
Time Value of
Money
Descriptive
Statistics
Probability
Distributions
Technical
Analysis
Hypothesis
Testing
Probability Sampling
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Amount to which
investment grows after
one or more time period
FV = PV*(1+1/Y)
N
.
Current value of some
future cash flow
PV = FV /(1 + 1/Y)
N
.
Future value Present value
Q. If interest rate of
8%, what will be
the value of sum of
$1000 invested
today will grow in 5
years?
Ans. FV=PV*(1+r)
n
=1000*(1.08)
5
=
= $1469.3
Q. If interest rate of 10%,
What sum invested today
will grow to $1000 in 5
years?
Ans. PV = FV * (1/(1 + r)
N
)
= ($1000)*(1/(1.1)^5) = 621
Value of current
cash flow in Future -
Compounding
Present value of
future cash flow -
Discounting
We need to know the first three rows of TI BA-II
Plus/Professional calculator for CFA Exam
Time Value of
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Descriptive
Statistics
Probability
Distributions
Technical
Analysis
Hypothesis
Testing
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=

+
=
T
1 t
0 t
t
C
r) (1
C
NPV
Perpetuities: annuities
with an infinite life
PV
perpetuity
= PMT /
discount rate
Series of equal
cash flows
occurring at evenly
spaced interval
Ordinary annuity:
cash flow at end-
of-time period
Annuities
Annuity due: cash
flow at beginning-
of-time period
NPV
NPV is expressed in
monetary units ($), IRR
is the true interest yield
(%age). In general NPV
is a better measure
Q. What is the worth of perpetuity paying
$100 annually at an interest rate of 10%?
Ans. PV
Perpetuity
= A/r = $100/0.1 = $1000
Time Value of
Money
Descriptive
Statistics
Probability
Distributions
Technical
Analysis
Hypothesis
Testing
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Holding Period Return
Total return:
R
t
= [(P
t
+D
t
)/P
t-1
]-1

Q. A stock is bought today at $10. It
pays a dividend of $1 & you sell it at
$15 next year. What is the HPR?
Ans. HPR = (15+1-10)/10 = 60%
IRR
Discount rate that
makes NPV of all cash
flows equal to zero
Q. If I have to invest today $2000 for a project which
gives me $100 next year, $200 the next, and $250
after that till perpetuity, should I make this
investment? Cost of Capital = 10%.
Ans. Value of Perpetuity
(At Y2) = 250/0.1 = 2500

Year Cash PV
0 -2000 -2000
1 100 90.91
2 200+2500 2231.40
322.31 NPV
Time Value of
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Descriptive
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Probability
Distributions
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Means Variance &
Std. Deviation
Geometric mean: Calculating
investment returns over
multiple period or to measure
compound growth rates
RG = [(1+R
1
)*..*(I+R
N
)]
1/N
-1
Average of squared deviations from mean.
Population variance

Sample variance

Standard deviation:

( )
N
X X
N
i
i
=

=
1
2
2
o
1
1
2
2
|
.
|
\
|

=
n
X X
s
N
i
i
Arithmetic mean: =
Q. ABC was inc. on Jan 1, 2004. Its expected
annual default rate of 10%. Assume a constant
quarterly default rate. What is the probability
that ABC will not have defaulted by April 1,
2004?
Ans. P(No Default Year) = P(No def all
Quarters)
= (1-PDQ
1
)*(1-PDQ
2
)*(1-PDQ
3
) * (1-PDQ
4
)
PDQ
1
=PDQ
2
=PDQ
3
=PDQ
4
=PDQ
P(No Def Year) = (1-PDQ)
4
P(No Def Quarter) = (0.9)
4
= 97.4%
Harmonic mean =
=
|
|
.
|
\
|
N
i i
X
1
1
=
|
.
|
\
|
N
i
i
N
X
1
Variance = s or o
Calculate the standard deviation of
following data set:
Data Set A: 10,20,30,40,50
Data Set B: 10,20,70,120,130
Time Value of
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Descriptive
Statistics
Probability
Distributions
Technical
Analysis
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Expected
Return / Std.
Deviation
Correlation &
Covariance
Correlation = Corr(R
i
, R
j
) = Cov(R
i
, R
j
) / (R
i
)*(R
j
)
Expected return, Variance of 2-stock portfolio:
E(Rp) = w
A
E(R
A
) + w
B
E(R
B
)
VaR(R
p
) =w
A
2
2
(R
A
)+ w
B
2
2
(R
B
) +2w
A
w
B
(R
A
)
(R
B
)(R
A,
, R
B
)
Q. Amit has invested $300 in Security A, which has a mean return of 15% and
standard deviation of 0.4. He has also invested $700 in security B, which has a
mean return of 7% and variance of 9%. If the correlation between A and B is
0.4, What is his overall expectation and Standard deviation of portfolio?
Return = 9.4%, Std Deviation = 7.8%
Return = 9.4%, Std Deviation = 24%
Return = 9.4%, Std Deviation = 28%

Ans.
The correct answer is Return = 9.4%, Std Deviation = 24%

Expected Return E(X)=P(x
1
)x
1
+P(x
2
)x
2
+.+P(x
n
)x
n

Probabilistic variance:
2
(x)=

=P(x
1
)[x
1
-E(X)]
2
+P(x
2
)[x
2
-E(X)]
2
+.+P(x
n
)[x
n
-E(X)]
2

2
)] ( )[ ( X E x x P
i i
B) Cov(A, w) - 2w(1 w) - (1 w
2
B
2 2
A
2
+ + o o
Calculate the correlation between the
following data set:
Data Set A: 10,20,30,40,50
Data Set B: 10,20,70,120,130
Time Value of
Money
Descriptive
Statistics
Probability
Distributions
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Analysis
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Dispersion relative to
mean of a distribution;
CV=/ ( is std dev.)
Coefficient of
Variation
Q. If the threshold return is higher
than the risk-free rate, what will
be the relationship b/w Roys
safety-first ratio (SF) and
Sharpes ratio?
Denominator (Sharpe) =
Denominator (SF)
R
target
> Rf
R Rf > R - R
target

Sharpe > SF
Ans. R Rf > R - R
target

Sharpe Ratio
Measures excess return per unit of
risk.
Sharpe ratio =

Roys safety- First ratio:

Sharpe Ratio uses risk free rate,
Roys Ratio uses Min. hurdle rate
For both ratios, larger is better.
o p
f p r r

o p
et t p r r arg
Nominal Scale: Observations classified with no order.

e.g. Participating Cars assigned numbers from 1 to 10 in the car
race
Ordinal Scale: Observations classified with a particular ranking
out of defined set of rankings.
e.g. Driver assigned a pole position according to their
performance in heats
Interval Scale: Observations classified with relative ranking. Its
an ordinal scale with the constant difference between the scale
values.
e.g. Average temperature of different circuits.
Ratio Scale: Its an interval scale with a constant ratio of the
scale values. True Zero point exists in the ratio scale.
e.g. Average speed of the cars during the competition.
Measurement
Scales
Which of the following type of scale is used when interest rates on
Treasury bill is mentioned for 60 years?
A. Ordinal scale
B. Interval scale
C. Ratio scale
Ans. Ratio Scale
Expect 2 questions form Measurement Scales
Time Value of
Money
Descriptive
Statistics
Probability
Distributions
Technical
Analysis
Hypothesis
Testing
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Sum Rule and Bayes Theorem Definition & Properties
P(A) = no. of fav. Events / Total
possible events
0 < P(A) <1, P(A
c
)=1-P(A)
P(AUB)=P(A)+P(B)-P(AB)
If A,B Mutually exclusive:
P(AUB)=P(A)+P(B)
P(AB)= P(AB)/P(B)
P(AB)=P(AB)P(B)
If A,B Independent:
P(AB)=P(A)P(B)
Empirical probability: derived from historical data
Priori probability: derived by formal reasoning
Subjective probability: derived by personal judgment
Time Value of
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P(B)= P(AB)+ P(A
c
B)
= P(BA)*P(A) + P(BA
c
)*P(A
c
)
P(A|B)=P(BA)*P(A) / [P(BA)*P(A)
+P(BA
c
)*P(A
c
)]
Q. The subsidiary will default if the
parent defaults, but the parent will not
necessarily default if the subsidiary
defaults. Calculate Prob. of a
subsidiary & parent both defaulting.
Parent has a PD = 0.5% subsidiary
has PD of .9%
Ans. P(PS) = P(S/P)*P(P)
= 1*0.5%
= 0.5%
Sum Rule and Bayes Theorem Definition & Properties
Time Value of
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Normal Distribution Binomial Distribution
Normal
Distribution
Described by mean & variance
Symmetric about its mean
Standard Normal Distribution
- Mean = 0; Variance =1
Z-Score
Skewness and
Kurtosis
No. of a given
observation is away
from population mean.
Z=(x-)/
Q. At a particular time, the market value
of assets of the firm is $100 Mn and the
market value of debt is $80 Mn. The
standard deviation of assets is $ 10 Mn.
What is the distance to default?
Ans. z = (A-K) /
A

= (100-80)/10
= 2
If Z is a standard normal R.V. An event X is defined to happen if either -1< Z < 1 or
Z > 1.5. What is the prob. of event X happening if N (1) =0.8413, N (0.5) = 0.6915
and N (-1.5) = 0.0668, where N is the CDF of a standard normal variable?
Ans. P(X)= P(-1< Z < 1) + P(Z > 1.5)
= N(1)-(1-N(1)) + N(-1.5)
= 2*0.8413-1 + 0.0668
= 0.7494
-1 +1 1.5
-4 -3 -2 -1 0 1 2 3 4
68% of Data
95% of Data
99.7% of Data
Q. Which of the following is likely to be a probability distribution
function?
For X=[1,2,3,4,5], Prob[X
i
]= 49/(75-X
i
2
)
For X=[0,5,10,15], Prob[X
i
]= X
i
/30
For X=[1,4,9,16,25], Prob[X
i
]= [(X
i
)
1/2
1]/5

Ans. The correct answer is For X=[0,5,10,15], Prob[X
i
]= X
i
/30
For all values of X, probability lies within [0,1] and sum of all the
probabilities is equal to 1.
Time Value of
Money
Descriptive
Statistics
Probability
Distributions
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Analysis
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Skewness Kurtosis
Positively :
Mean > median > mode
Negatively :
Mean < median < mode
Skewness of Normal = 0
Mean = median = mode
Leptokurtic: More peaked than
normal (fat tails); excess kurtosis>0
Platykurtic: Flatter than a normal;
excess kurtosis<0
Kurtosis of Normal = 3
Q. If distributions of returns from financial
instruments are leptokurtotic. How does it compare
with a normal distribution of the same mean and
variance?
Ans. Leptokurtic refers to a distribution with fatter
tails than the normal, which implies greater kurtosis.
Normal
Distribution
Z-Score
Skewness and
Kurtosis
Time Value of
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Tracking Error
Tracking Error
= Total return on a portfolio
(gross of fees) - the total
return on the benchmark

In an Index Fund, the tracking
error should be minimal
Example: If a portfolio of U.S.
stocks has a return of 5% in a
period when a comparable
U.S. stock index increases by
6%(both on a total return
basis), the portfolios tracking
error for that period is -1%
Time Value of
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Descriptive
Statistics
Probability
Distributions
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Analysis
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Testing
Sampling Probability
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Discrete Distribution:
Variables can take 2 values
(success / failure)
Variance is constant
Can describe changes in the
value of an asset or portfolio
The probability distribution for
a Binomial Random Variable is
given by:

Mean = np, variance = np(1-p)
Q.The Prob. of a stock moving up is 0.8 and
moving down is 0.2 in a particular day. What is
the probability that it would move up at least
twice in the 5 working days of the week?
Ans. P=0.8, q=0.2, n=5
P(X>=2) = 1-P(X=0) P(X=1)
=1-
n
C
r
(5,0)*(0.8)
0
*(0.2)
5

n
C
r
(5,1)*(0.8)
1
*(0.2)
4

= 1- (0.2)
5
5*(0.8)
1
*(0.2)
4

= 0.99328
Tracking Error
x n x
x
n
p p C x X P

= = ) 1 ( ) (
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As Sample Size increases, Sampling Distribution Becomes
Almost Normal regardless of shape of population
Probability distribution of all possible
sample statistics computed from a
set of equal-size samples randomly
drawn from the same population
Sampling Distribution
Q. 25 observation are taken from a sample of unknown variance.
Sample mean of 70 and = 60. You wish to conduct a 2-tailed test of
null hypothesis that the mean is equal to 50. What is most appropriate
test statistic?
Ans. Standard Error of mean (
x
) = / (n) = 60/sqrt(25) = 12
Degrees of freedom = 24
Use t-statistic = (x )/
x
= (70 50)/12 = 1.67
Standard Error (SE)
SE (
x
) of the sample mean is
of the dist. of sample means
Known pop. Var.
x
= / (n)
Unknown pop. var s
x
= s/ (n)
Central limit theorem
Expect 1 question on the calculation of standard error!!!
Time Value of
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Inference
Based on
Sample
Data
Real State of Affairs

H
0
is True H
0
is False
H
0
is True
Correct decision
Confidence level = 1- o
Type II error
P (Type II error) = |
H
0
is False
Type I error

Significance level = o*
Correct decision
Power = 1-|
*Term o represents the maximum probability of committing a
Type I error, Type II error cannot be computed easily

Null
Hypothesis:H
0
Alternative
Hypothesis: H
a
One tailed
Test
Two Tailed test
Hypothesis that
the researcher
wants to reject
Concluded if there is
significant evidence
to reject H
0
Type I error: rejection of H
0
when it
is actually true
Type II error :Fail to reject H
0
when
it is actually false
Q. Co. ABC would give bonus to employees, if they get a
rating higher than 7/10 from customers. A random sample
of 30 customers is conducted with rating of 7.1/10.
Formulate Hypothesis?
Null Hypothesis: H
0
: Mean<=7
Alternate Hypothesis : H
1
: Mean>7
Statistic to be measured: t-statistic, with 29 DoF
Range of values within which
H
0
Cannot be rejected (say
90% or 95%).
Known variance, 2 Tailed test,
CI is: X z
/2
(/t)
Confidence Intervals
(CI)
Hypothesis Tests
for Variances
Power of a test : probability of
correctly rejecting the null
hypothesis when it is false
Time Value of
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Null
HYPOTHESIS:H
0
Alternative
Hypothesis: H
a
One tailed
Test
Two Tailed test
Confidence Intervals
(CI)
Hypothesis Tests
for Variances
H
0
:
2
= c
H
A
:
2
c

Do not reject H
0
Reject H
0
o
_
2
o
_
2
H
0
:
2

0
2
H
A
:
2
>
0
2
Upper tail test:
2
2
2
1)s (n
= _
F
o/2
F
o/2
Reject H
0
Do not
reject H
0
H
0
:
1
2

2
2
= 0
H
A
:
1
2

2
2
0
Tests for a Single
Population Variances
Tests for a two
Population Variances
F test Chi-Square test
H
0
:
1
2

2
2
= 0
H
A
:
1
2

2
2
0

2
2
2
1
s
s
F =
Test if the value is greater
than or less than K
H
0
; <=K vs. H
a
: >K
Test if the value is
different from K
H
0
; =0 vs. H
a
: 0
Q. If standard deviation of a
normal population is known to be
10 & the mean is hypothesized
to be 8. Suppose a sample size
of 100 is considered. What is the
range of sample means in which
hypothesis can be accepted at
significance level of 0.05?
Ans: SE = = 10/100 =1

z = (x-)/ SE

= (x-8)/1
At 95% -1.96<z<1.96
Therefore 6.04<x<9.96
n
o
0
0.05
0.1
0.15
0.2
0.25
-10 -5 0 5 10 Z=0 Z=2.5
Do not Reject H0
Reject H0
= 0.05
Z=0
Do not Reject H0
Reject H0
= 0.025
0
0.05
0.1
0.15
0.2
0.25
-10 -5 10
= 0.025
Reject H0
Time Value of
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Supply-Demand dictate prices
Driven by rational & irrational behavior
Prices move in trends that persist for long periods
Observe the actual shifts in supply / demand in market
prices
Fibonacci Sequence
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55
Fibonacci ratios:
=0.5, 2/3=0.67, 3/5=0.6, 5/8=0.625
etc
2/1=2, 3/2=1.5, 5/3=1.67, 8/5=1.60,
13/8=1.625
The second series of numbers
converge to around 1.618, called the
Golden Ratio
In a Bull Market
An impulse wave consists
1 = up
2=down
3=up
4=down
5=up
A Corrective Wave
a=down
b=up
c=down
In a Bear Market, the
impulse waves are named
A-E and the corrective
waves are numbered 1-3.
It is based on the observation that market
participants tend to act in herds and that
trends tend to stay in place for some time.
In an uptrend, the securitys prices goes to
higher highs and higher lows
A downward trend makes lower lows and
lower highs

Support
A low price range in which buying activity is
sufficient to stop the decline in price

Resistance
A high price range in which selling is sufficient to
stop the rise in price

Change in polarity principle
Once a support level is breached, it becomes a
resistance level and once a resistance level is
breached, it becomes a support level.
Trend Analysis
Elliot Wave Theory
Time Value of
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Question 1
An investor invests $1000 in a mutual fund every month for 3 months. The NAV for the
1
st
, 2
nd
and 3
rd
months are $300, $312 and $290 respectively. What is the average
NAV per unit acquired over the 3 months period for the investor?
A. $ 300.398
B. $ 300.667
C. $ 300.546

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Answer 1
A.

Harmonic Mean = 3000/9.9867 = 300.3984064

Year Amount Invested NAV UNITS Purchased
1 1000 300 3.3333
2 1000 312 3.2051
3 1000 290 3.4483
Total 3000 9.9867
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Question 2
Which of the above portfolios has the highest risk?

A. Portfolio A
B. Portfolio B
C. Portfolio C
The following data regarding 3 portfolios is observed

Skewness Excess Kurtosis
Portfolio A -0.083 1.4
Portfolio B 0.008 0
Portfolio C 0.034 -0.32
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Answer 2
A.
Negative skewness indicates that the portfolio returns distribution has a lot of data
points towards the left side of the mean at the same time a positive kurtosis indicates
greater probability of finding large concentration of data points either around the mean
or away from the mean. Therefore a negatively skewed and excess positive kurtosis is
a very risky portfolio
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Question 3
An investor purchases 1000 shares of a company for $32. The price of the shares
increases to $42 one year later when he sells 300 shares. The next year the price is at
$40. What is the investors money weighted return?
A. 15.28%
B. -24.10%
C. 24.10%

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Answer 3
A.
Cash flow year 0 : -32000 ; cash flow year 1 : 12600 ; cash flow year 2 : 28000
IRR = 15.28%

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Question 4
For the given returns on a stock find the value that lies below the 75
th
percentile.
18%, 21%,12%,17%,16%,28%,26%,23%,29%,18.5%
A. 26%
B. 29%
C. 16%

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Answer 4
A.
The 75
th
percentile is given by:
(n+1)*P
(10+1)*.75 = 8.25
th
data point.
The 8
th
data point is 26.
The question asks for the value that lies below the 75
th
percentile.
Hence, 26% is the answer.

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Question 5
Risk free rate is 5%

A. Portfolio A
B. Portfolio B
C. Portfolio C
For the given three portfolios with the following information, which one is most lucrative
to an investor?

Standard deviation Expected returns
Portfolio A 3.4% 13%
Portfolio B 2.3% 12%
Portfolio C 5.4% 22%
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Answer 5
C.
Portfolio C has the highest sharpe ratio given by (Rp- Rf)/p
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Question 6
John borrows $62000 to buy a truck. The loan requires a monthly payment of $1500
over each of the next 4 years. What is the Effective annual rate on this loan?
A. 7.53%
B. 5.63%
C. 7.80%

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Answer 6
C.
PMT = 1500
PV = -62000
N = 48
I/Y = .62761

Interest rate = (1 + I/Y)^12 -1 = 7.8%

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Question 7
Mr Y invests $3100 today for 5 years with monthly compounding. If he receives $5600
at the end of 5 years. Find his effective annual interest rate.
A. 12.56%
B. 11.8%
C. 10.93%
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Answer 7
A.
The rate at which the PV of 3100 becomes $5600 is .0.99%. EAR is (1+rate)^12-1 =
12.56%
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Question 8
Which of the following test statistics is used to test the whether the two population
variances are equal?
A. t- statistics
B. F- statistics
C. z- statistics
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Answer 8
B. F-test tests for two Population Variances.

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Question 9
The probability of an investment earning an average return of 15% is 33% out of a
given portfolio of investment options. The probability distribution of such investments
options would follow which of the following distributions?
A. Binomial distribution
B. Poisson distribution
C. Normal distribution
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Answer 9
A.
The probability distribution is a discrete distribution with the probability defined as
whether the investment would give a return of 15% or not. Therefore it qualifies as a
binomial distribution.
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Question 10
In the period from 2000-2010, the interest rates of the economy was forecasted to
decline 14 out of 34 actual movements in the interest rates. The actual rise in interest
rates has been 16 out of 34 actual movements in the rates. Assuming the researcher
has an accuracy of prediction of 40%, find the probability of the interest rates
forecasted to rise and in reality has actually risen.
A. 16.4%
B. 23.5%
C. 50%

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Answer 10
B.
14 out of 34 instances are of interest rates predicted to decline the remaining 20
predictions are for rise in the rates. Out of 20, 40% of the prediction is supposed to be
true. Therefore 40% of 20 i.e. 8 times the interest rates actually rose when predicted to
rise. Therefore the probability of the interest rates forecasted to rise and in reality has
actually risen is 8/34 = 23.5%
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Question 11
An analyst is testing a hypothesis about stock returns. He would like to minimize the
chances of rejecting the null hypothesis when it is true. Which of the following is most
likely to be the level of significance?
A. 0.01
B. 0.05
C. 0.95

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Answer 11
A.
Having a lower value of alpha makes it more hard to reject the null hypothesis
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Question 12
Which of the following statements of the central limit theorem is least likely true?
A. For large n if the population distribution is uniform, the sample distribution is
always normal
B. The standard deviation of the sample is always less than the population standard
deviation
C. The interval within which the sample mean is expected to fall is z.

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Answer 12
C.
The interval within which the sample mean is expected to fall is z. /n

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Question 13
A $ 100 million loan to company Y for 1 year has a 0.2 probability of default after one
year, a 0.7 probability of repayment as per schedule and a 0.1 probability of 50%
recovery after one year. What is the average amount that can be recovered if the
interest rate is 10%?
A. $82.5 million
B. $67.25 million
C. $82 million

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Answer 13
A.
The possible outcomes after 1 year are the person repays the entire loan with interest,
$110 million or repays only 50%, $55 million or does not repay at all. The
corresponding probability for each event is given. Therefore expected value of the loan
is 0.2*0+0.7*110+0.1*55 = $ 82.5 million
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Question 14
A portfolio manager manages two different sector specific portfolios with the following
annual returns:
Portfolio A : 6%, 4%, 10%
Portfolio B : 14%, 20%, 23%
The best measure for the comparative performance of the two portfolios can be
obtained from which of the following measures of dispersion:
A. Standard deviation
B. Compounded annual rate of return
C. Coefficient of variation

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Answer 14
C.
CoV is the measure for comparison of two different portfolio with a huge gap in the
mean
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Question 15
Which of the following values/deductions is least likely for an equally weighted portfolio
of two stocks A
and B, given their annual returns and standard deviation?
Annual Returns of stock A: 9%, 6%, 5%, 4.5%
Standard deviation of Stock A: 2.03%
Annual returns of stock B: 18%, 12%, 10%, 9%
Standard deviation of Stock B: 4.03%
A. The portfolio is very well diversified
B. The coefficient of correlation of the portfolio is 0.9931
C. The standard deviation of the portfolio is most likely to be equal to the weighted
average of the individual standard deviations.

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Answer 15
B.

Correlation coefficient is covariance(A,B)/a*b
Std dev A 2.02
Std dev B 4.03
Portfolio return 9.1875
Covariance 8.125
Correlation coeff 0.9931
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Question 16
A distribution of S&P 500 annual returns for a period of 10 years has a third quartile
which is the 8.25
th
element arranged in the ascending order, that corresponds to a
return of 12.62%. Which of the following is least likely true about the data?
A. About 25% of the returns lie below 12.62%
B. The probability of finding a return less than 12.62% in the dataset is 0.825
C. The eight data point is lower than 12.62% by 40% of the value of the ninth data
point

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Answer 16
C.
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Question 17
The following information regarding two stocks is as available:

If the risk free rate is 5%. What is the sharpe ratio of the portfolio comprising of 40% of
stock A and 60% of T bills?
A. 0.696
B. 2.06
C. 1.28

Expected return Standard Dev Beta
Stock A 12% 3.45% 1.2
Stock B 15% 2.3 % 0.7
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Answer 17
B.
Expected return of the portfolio is E(r) = (1-y)*Rf+ y* Ra i.e. E(r)= 0.6*0.05+0.4*0.12 =
7.8%. Portfolio standard deviation is 0.034*0.4 = 1.36%. Sharpe ratio = (E(r) Rf)/r =
2.06

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Question 18
John and Wilma will retire in 30 years. They plan to save $4,000 each year in a
savings account, earning 8% annual interest. However, at the end of year 15, they
must pay $100,000 for their kids' college education, and they must fund this $100,000
payment out of their savings. How much will they have accumulated 30 years from
now?
A. $ 1,35,915.93
B. $ 1,08,608.46
C. $4,53,132.84

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Answer 18
A.
First find the FV of savings of 4000 @ of 8% per annum accumulated for 15 years i.e.
$1,08,608.46. After deducting $100000, 8608.46 grows for 15 years at the same time
the monthly investment of 4000 also continues. Both these cash flows grow to a FV
after 15 years to $1,35,915.93
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Question 19
An investor wants to have a corpus of $100000 at the end of 9 years. He would start
depositing some amount on a monthly basis in a fund that assures him 8% semi
annual compounded interest for 4 years. After 4 years the investor plans to deposit this
corpus in a fixed deposit earning 10% compounded per annum for the rest of the
period. What monthly amount should he invest?
A. $931.81
B. $1024.99
C. $1212.09

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Answer 19
A.
First find the PV of the cash flows at the end of 4 years that would have a FV of
100000 5 years later at 10%. Find the monthly payment that would give a FV equal to
this amount (PV) just calculated
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Question 20
Mr Y wants to purchase a house for $ 30000 and lease it for a period of 10 years. If the
lease rent available to him is $300 per month. What is the effective annual required
return on the investment that would help him break even in 10 years?
A. 3.46%
B. 3.52%
C. 5.62%

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Answer 20
B.

IRR =3.46% annual ; monthly IRR = 0.29%; EAR= (1+0.29)^12-1 = 3.52%

YEAR 0 1 2 3 4 5 6 7 8 9 10
CASH
FLOWS
-
30000 3600 3600 3600 3600 3600 3600 3600 3600 3600 3600
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Question 21
A returns distribution of an investment follows a normal distribution with a mean of 16%
and a standard deviation of 6%.Which of the following about the distribution is least
likely correct? Assume a level of significance of 5%.
A. 68.26% of the returns lie within 10% and 22%
B. The return with a z statistic of 2.3 is most likely to reject the null hypothesis
C. At least 88.9% of the results will lie within 2% and 34%
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Answer 21
C.
The distribution is a normal distribution, hence the empirical rule can be applied which
is 99.73% of the returns lie within 3 std deviations. Option C applies Chebyshevs rule
of 88.9% of returns lie between 3 std deviations i.e. -2% and 34%

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Question 22
Which of the following is least likely correct about a technical analysts approach?
A. The technical analyst would always try to predict the new equilibrium value of a new
trend and base his recommendation on this value
B. Technical analyst believes that if the efficient market hypothesis were true, gaining
from new information in the market would not be possible
C. Technical analysts do not rely on financial statements for projections about the
future price
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Answer 22
A.
Technical analysts only look for one equilibrium value to another equilibrium value but
do not attempt to predict the value themselves.
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Question 23
Which of the following numbers is closest to the golden ratio
A. 1.6:1
B. 1.5:1
C. 1.4:1

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Answer 23
A.
The golden ratio is close to 1.6180
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Question 24
Tracking error is defined as
A. Population mean minus Sample mean
B. Standard deviation of differences between portfolio return & benchmark return
C. Portfolio return minus Benchmark return
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Answer
C.
Tracking Error is difference between the return on a portfolio minus the return on
portfolios benchmark.
Tracking Risk is the standard deviation of differences between portfolio return &
benchmark return

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Nominal Scale: Observations classified with no order.

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