Coaching - Quant (Buoi 2) - R4,5,6,7 - Answer

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IQUANTITATIVE METHODS
R4: COMMON PROBABILITY DISTRIBUTIONS
I. SUMMARY
Creating a mindmap summary for this reading
II. QUESTIONS
a. Section 1: Question bank
Question 3:
The average amount of snow that falls during January in Frostbite Falls is normally
distributed with a mean of 35 inches and a standard deviation of 5 inches. The probability
that the snowfall amount in January of next year will be between 40 inches and 26.75
inches is closest to:
A. 68%
B. 79%
C. 87%
Answer: B
Recall concepts: We can answer all probability questions about X using standardized values.
Standard normal distribution is normal distribution which has mean = 0 and standard
deviation = 1.
To calculate this answer, we will use the properties of the standard normal distribution.
Step 1: Determine z-value based on the value of mean and standard deviation
X - μ
The z-value must be calculated using the formula: Z =
σ
26.75 - 35
 Z26.75 = = –1.65 → 1.65 standard deviations to the left of the mean
5
40 - 35
 Z40 = = 1 → 1 standard deviation to the right of the mean
5
1
Normal distribution:
26.75 40
Standard normal distribution:
1.65s 0 1s
Step 2: Determine the probability
Approach 1: Using z-table Approach 2: Using confidence level

Remember that: The values in the z-table We have the approximations of the normal
are the probabilities of observing a z-value distribution:
that is equal or less than a given value, z.
[P(Z ≤ z)]
- To calculate the P(Z ≤ –1.65), we use the z-
table for z ≤ 0
P(Z ≤ z)]
68%
–Z
2.58s 1.96s 1.65s 1s 1s 1.65s 1.96s 2.58s
→ P(Z ≤ –1.65) = 4.95%
90%
- To calculate the P(Z ≤ 1), we use the z- 95%
table for z ≥ 0 99%
P(Z ≤ z)] - 68% of the observations fall within ± one

standard deviation of the mean.
→ 68%/2 = 34% of the area falls between 0
and +1 standard deviation from the mean.
Z
- 90% of the observations fall within ± 1.65
→ P(Z ≤ 1) = 84.13% standard deviations of the mean.
→ The probability that the snowfall amount → 90%/2 = 45% of the area falls between 0
in January of next year will be between 40 and +1.65 standard deviations from the
2
inches and 26.75 inches = 84.13% – 4.95% = mean.

79.18%.
→ The probability that the snowfall amount
in January of next year will be between 40
inches and 26.75 inches = 34% + 45% =79%.
→ B is correct.
Question 4:
The annual rainfall amount in Yucutat, Alaska, is normally distributed with a mean of 150
inches and a standard deviation of 20 inches. The 90% confidence interval for the annual
rainfall in Yucutat(=>n=1) is closest to:
A. 117 to 183 inches.
B. 110 to 190 inches.
C. 137 to 163 inches.
Answer: A
Recall concepts: The 90% confidence interval for X is X - 1.65s to X + 1.65s
We have: Mean X = 150 and sample standard deviation s = 20
Determine confidence interval:
 X - 1.65s = 150 – 1.65 x 20 = 117

 X + 1.65s = 150 + 1.65 x 20 = 183
→ A is correct.
Question 5:
A random variable X is continuous and bounded between zero and five, X:(0 ≤ X ≤ 5). The
cumulative distribution function (cdf) for X is F(x) = x / 5. Calculate P(2 ≤ X ≤ 4).
A. 0.50
B. 0.40
C. 1.00
Answer: B
Recall concepts: For a continuous distribution, the probability of outcomes between x1 and
x – x1
x2 : P( x1 ≤ X ≤ x2) = 2
b–a
4 –2
→ P(2 ≤ X ≤ 4) = = 0.4
5–0
→ B is correct.
3
0 1 2 3 4 5
b. Section 2: Curriculum
Question 21:
X is a discrete random variable with possible outcomes X = {1, 2, 3, 4}. Three functions—
f(x), g(x), and h(x)—are proposed to describe the probabilities of the outcomes in X.
Probability function
X=x
f(x) = P(X = x) g(x) = P(X = x) h(x) = P(X = x)
1 –0.25 (bỏ vì <0) 0.20 0.20
2 0.25 0.25 0.25
3 0.50 0.50 0.30
4 0.25 0.05 0.35
The conditions for a probability function are satisfied by:

A. f(x)
B. g(x)
C. h(x)
Answer: B
Recall concepts: The probability function has to satisfied following conditions:
 0 ≤ p ( x ) ≤ 1
 ∑ p ( x ) = 1
Case 1: f(x) fails to satisfy the first condition:
 0 ≤ p ( x ) ≤ 1 → fail to satisfy which this function has negative value (–0.25)
 ∑ p ( x ) = –0.25 + 0.25 + 0.50 + 0.25 = 0.75 → fail to satisfy
Case 2: g(x) satisfies both conditions:
 All of the outcomes have the value lie in the range between 0 and 1
 ∑ p ( x ) = 0.2 + 0.25 + 0.50 + 0.05 = 1
4
Case 3: h(x) fails to satisfy the second condition:

 All of the outcomes have the value lie in the range between 0 and 1
 ∑ p ( x ) = 0.2 + 0.25 + 0.30 + 0.35 = 1.1 → fail to satisfy
→ B is correct.
5
Question 22:
The cumulative distribution(phân phối tích lũy) function for a discrete random variable is
shown in the following table.
Cumulative distribution function

X=x
F(x) = P(X ≤ x)
1 0.15
2 0.25
3 0.50
4 0.60
5 0.95
6 1.00
The probability that X will take on a value of either 2 or 4 closest to:

A. 0.20
B. 0.35
C. 0.85
Answer: A
Recall concepts: For a discrete random variable, the cumulative distribution function (cdf) is:
F(x) = P(X ≤ x)
The probability that X will take on a value of either 2 or 4 is P(2) + P(4)
Step 1: Determine P(4)
 F(4) = P(X ≤ 4) = P(1) + P(2) + P(3) + P(4) = 0.6

 F(3) = P(X ≤ 3) = P(1) + P(2) + P(3) = 0.5
→ P(4) = 0.6 – 0.5 = 0.1
Step 2: Determine P(2)
 F(2) = P(X ≤ 2) = P(1) + P(2) = 0.25

 F(1) = P(X ≤ 1) = P(1) = 0.15
→ P(2) = 0.25 – 0.15 = 0.1
→ P(2) + P(4) = 0.1 + 0.1 = 0.2
→ A is correct.
6
Question 23:
Which of the following events can be represented as a Bernoulli trial?
A. The flip of a coin
B. The closing price of a stock
C. The picking of a random integer between 1 and 10
Answer: A
Recall concepts: A Bernoulli trial is an experiment with only two outcomes “failure” and
“success”.
A is correct because the trial of the flip of a coin only produces 2 outcomes.
Question 24:
The weekly closing prices of Mordice Corporation shares are as follows:
Date Closing price (€)
1 August 112
8 August 160
15 August 120
The continuously compounded return of Mordice Corporation shares for the period
August 1 to August 15 is closest to:
A. 6.90%
B. 7.14%
C. 8.95%
Answer: A
Recall concepts: With continuous compounding, effective annual rate = EAR = e R – 1 cc
→ Continuously compounded states annual rate formula for 2 consecutive periods:
Rcc = ln ( )
S1
S0
= ln (1 + EAR )
To calculate this question, we use the application of lognormal, the continuously

compounded return of an asset for the period August 1 to August 15 is equal to the natural
log of the asset’s price change during the period: Rcc = ln
120
112 ( )
= 0.069 or 6.9%
→ A is correct.
7
Question 25:
A stock is priced at $100.00 and follows a one-period binomial process with an up move
that equals 1.05 and a down move that equals 0.97. If 1 million Bernoulli trials are
conducted and the average terminal stock price is $102.00, the probability of an up move
(p) is closest to:
A. 0.375
B. 0.500
C. 0.625
Answer: C
Recall concepts:
 A Bernoulli trial is an experiment with two outcomes “failure” and “success”.

 Binomial random variable: variable X where X is the number of successes in n
Bernoulli trials.
Binomial tree for one-period:
T=0 Period 1
p Price = uS = $100 x 1.05 = $105
S = $100
1 – Price = d S = $100*0.97 = $97

p
Expected price (average terminal stock) = p x 105 + (1 – p) x 97 = 102

→ p = 0.625
→ C is correct.
8
Question 26:
A call option on a stock index is valued using a three-step binomial tree with an up move
that equals 1.05 and a down move that equals 0.95. The current level of the index is $190,
and the option exercise price is $200. If the option value is positive when the stock price
exceeds the exercise price at expiration and $0 otherwise, the number of terminal nodes
with a positive payoff is:
A. one
B. two
C. three
Answer: A
Binomial tree for three-stage:
T=0 Period 1 Period 2 Period 3
Up P = $209.48 x 1.05 = $219.95
Up P = $199.5 x 1.05 =
$209.48 Down P = $209.48 x 0.95 = $199.00
P = $190 x 1.05 =
$199.5 Up
Up P = $189.53 x 1.05 = $199.00
Down
P = $199.5*0.95 = $189.53
Down P = $189.53 x 0.95 = $180.05
$190
Up P = $189.53 x 1.05 = $199.00
Up P = $180.5 x 1.05 =
Down $189.53 Down P = $189.53 x 0.95 = $180.05
P = $190*0.95 = $180.5
Up P = $171.48 x 1.05 = $180.05
Down
P = $180.5*0.95 ≈ $171.48
Down P = $171.48 x 0.95 = $162.91
At the period 3 of the binomial, because the option value is positive when the stock price
exceeds the exercise price → only one terminal node that exceeds $200 which is the node
value of $219.95.
→ A is correct.
9
Question 27:
A random number between zero and one is generated according to a continuous uniform
distribution. What is the probability that the first number generated will have a value of
exactly 0.30?
A. 0%
B. 30%
C. 70%
Answer: A
Recall concepts: For a continuous random variable, the probability of a value is 0 even
though x can occur.
A is correct. The probability of generating a random number equal to any fixed point under
a continuous uniform distribution is zero.
Question 28:
A Monte Carlo simulation can be used to:
A. directly provide precise valuations of call options.
B. simulate a process from historical records of returns.
C. test the sensitivity of a model to changes in assumptions—for example, on distributions
of key variables.
Answer: C
C is correct. A characteristic feature of Monte Carlo simulation is the generation of a large
number of random samples from a specified probability distribution or distributions to
represent the role of risk in the system. Therefore, it is very useful for investigating the
sensitivity of a model to changes in assumptions—for example, on distributions of key
variables.
10
Question 29:
A limitation of Monte Carlo simulation is:
A. its failure to do “what if” analysis.
B. that it requires historical records of returns.
C. its inability to independently specify cause-and-effect relationships.
Answer: C
C is correct. Monte Carlo simulation is a complement to analytical methods. Monte Carlo
simulation provides statistical estimates and not exact results. Analytical methods, when
available, provide more insight into cause-and-effect relationships.
A and B is incorrect. These are limitations of historical simulation.
Question 30:
Which parameter equals zero in a normal distribution?
A. Kurtosis (đo chiều cao)
B. Skewness (đo chiều ngang, độ lệch)
C. Standard deviation
Answer: B
Recall concepts: Characteristics of normal distribution:
 Skewness = 0, meaning that the normal distribution is symmetric about its mean.
 `Kurtosis = 3 and excess kurtosis = 0.
 Mean = mode = median.
B is correct. A normal distribution has a skewness of zero (it is symmetrical around the
mean).
11
R5: SAMPLING AND ESTIMATION

I. SUMMARY
II. QUESTIONS
Question 3:
A range of estimated values within which the actual value of a population parameter will
lie with a given probability of 1 − α is a(n):
A. (1 − α) percent confidence interval.
B. α percent point estimate.
C. α percent confidence interval.
Answer: A
Recall concepts:
 Confidence interval: a range for which one can assert with a given probability 1 − α
that it will contain the parameter it is intended to estimate. This interval is refer to as
the 100(1 − α)% confidence interval for the parameter.
 Level of significance: a
 Degree of confidence: 1 – a
A is correct. A range of estimated values within which the actual value of a population
parameter will lie with a given probability of 1 − α is a (1 − α) percent confidence interval.
Question 4:
The average U.S. dollar/Euro exchange rate from a sample of 36 monthly observations is
$1.00/Euro. The population variance is 0.49. What is the 95% confidence interval for the
mean U.S. dollar/Euro exchange rate?
A. $0.5100 to $1.4900
B. $0.7713 to $1.2287
C. $0.8075 to $1.1925
Answer: B
We have:
 Sample size (n) = 36

 Sample mean (X ) = 1
 Population variance (σ2 ¿ = 0.49 → Population standard deviation (σ ) = 0.7
12
Assuming the population is normal, in this case the population standard deviation is known
and sample size is large, so we use z-statistic.
At a confidence level of 95%, α = 5% so z α/2 = z0.025 = 1.96. Thus, the 95% confidence interval
is calculated as follows:
σ 0.7
X ± zα/2 = 1 ± 1.96 = 1 ± 0.2287
√n √36
→ The 95% confidence interval ranges from 0.7713 to 1.2287.
→ B is correct.
Question 5:
When sampling from a population, the most appropriate sample size:
A. minimizes the sampling error and the standard deviation of the sample statistic around its
population value.
B. is at least 30.
C. involves a trade-off between the cost of increasing the sample size and the value of
increasing the precision of the estimates.
Answer: C
A and B is incorrect. A larger sample reduces the sampling error and the standard deviation
of the sample statistic around its population value. However, this does not imply that the
sample should be as large as possible, or that the sampling error must be as small as can be
achieved. In addition, larger samples might contain observations that come from a different
population, in which case they would not necessarily improve the estimates of the
population parameters.
C is correct. Cost also increases with the sample size. When the cost of increasing the
sample size is greater than the value of the extra precision gained, increasing the sample
size is not appropriate.
13
Question 15:
A population has a non-normal distribution with mean and variance. The sampling
distribution of the sample mean computed from samples of large size from that
population will have:
A. the same distribution as the population distribution
B. its mean approximately equal to the population mean
C. its variance approximately equal to the population variance
Answer: B
Recall concepts: The central limit theorem states that for simple random samples of size n
from a population with a mean µ and a finite variance σ2 , the sampling distribution of the
sample mean X approaches a normal probability distribution with mean µ and a variance
( )
2 2
σ σ
equal to as the sample size becomes large: X N μ,
n n
B is correct. Given a population described by any probability distribution (normal or non-

normal) with finite variance, the central limit theorem states that the sampling distribution
of the sample mean will be approximately normal, with the mean approximately equal to
the population mean, when the sample size is large.
Question 16:
A sample mean is computed from a population with a variance of 2.45. The sample size is
40. The standard error of the sample mean is closest to:
A. 0.039
B. 0.247
C. 0.387
Answer: B
Recall concepts: Standard error of the sample formula:
σ
 When the population’s standard deviation (σ) is known: σ X =
√n
s
 When the population’s standard deviation (σ) is unknown: s X =
√n
With n = 40, σ2 = 2.45, standard error is: σ X =

σ √2.45 = 0.247
=
√ n √ 40
→ B is correct.
14
Question 17:
An estimator with an expected value equal to the parameter that it is intended to
estimate is described as:
A. efficient
B. unbiased
C. consistent
Answer: B
Recall concepts: Desirable properties of an estimator
 Unbiasedness: An unbiased estimator is one whose expected value (the mean of its
sampling distribution) equals the parameter it is intended to estimate.
 Efficiency: An unbiased estimator is efficient if no other unbiased estimator of the
same parameter has a sampling distribution with smaller variance.
 Consistency: A consistent estimator is one for which the probability of estimates close
to the value of the population parameter increases as sample size increases.
B is correct. An unbiased estimator is one for which the expected value equals the
parameter it is intended to estimate.
Question 18:
If an estimator is consistent, an increase in sample size will increase the:
A. accuracy of estimates.
B. efficiency of the estimator.
C. unbiasedness of the estimator
Answer: A
Recall concepts: Desirable properties of an estimator
 Unbiasedness: An unbiased estimator is one whose expected value (the mean of its
sampling distribution) equals the parameter it is intended to estimate.
 Efficiency: An unbiased estimator is efficient if no other unbiased estimator of the
same parameter has a sampling distribution with smaller variance.
 Consistency: A consistent estimator is one for which the probability of estimates close
to the value of the population parameter increases as sample size increases.
A is correct. A consistent estimator is one for which the probability of estimates close to the
value of the population parameter increases as sample size increases → increase the
accuracy of estimates.
15
Question 19:
For a two-sided confidence interval, an increase in the degree of confidence will result in:
A. a wider confidence interval.
B. a narrower confidence interval.
C. no change in the width of the confidence interval.
Answer: A
Recall concepts: Confidence interval: A confidence interval is a range for which one can
assert with a given probability 1 – α, called the degree of confidence, that it will contain the
parameter it is intended to estimate.
2.58s 1.96s 1.65s

1.65s 1.96s 2.58s
90%
95%
99%
→ A is correct. As the degree of confidence increases (e.g., from 95% to 99%), a given
confidence interval will become wider.
Question 20:
For a sample size of 17, with a mean of 116.23 and a variance of 245.55, the width of a
90% confidence interval using the appropriate t-distribution is closest to:
A. 13.23
B. 13.27
C. 13.68
Answer: B
We have:

 Sample mean (X ) = 116.23
16
 Sample variance (σ2 ¿ = 245.55 → Sample standard deviation (σ ) = 15.67

Assuming the population is normal, in this case the population standard deviation is
unknown and sample size is small, so we use t-statistic.
At a confidence level of 90%, α = 10% so z α/2 = z0.05 = 1.96 and df = 17 – 1 = 16, we use t-
table.
The t-table extract from Curriculum
df 0.1 0.05 0.025 0.01 0.005
15 1.341 1.753 2.131 2.602 2.947
16 1.337 1.746 2.120 2.583 2.921
17 1.333 1.740 2.110 2.567 2.898
→ The reliability factor t α/2 is: t 16

0.05 = 1.746.
Thus, the 90% confidence interval is calculated as follows:

s 15.67
X ± t α/2 = 116.23 ± 1.746 = 116.23 ± 6.64
√n √17
the width of a 90% confidence interval = 122.87 – 109.59 = 13.28
→ B is correct.
Question 21:
For a sample size of 65 with a mean of 31 taken from a normally distributed population
with a variance of 529, a 99% confidence interval for the population mean will have a
lower limit closest to:
A. 23.64
B. 25.41
C. 30.09
Answer: A
We have:

 Sample mean (X ) = 31
 Population variance (σ2 ¿ = 529 → Population standard deviation (σ ) = 23
17
As the population is normal, in this case the population standard deviation is known and
sample size is large, so we use z-statistic.
At a confidence level of 99%, α = 1% so z α/2 = z0.005 = 2.58. Thus, the 99% confidence interval
is calculated as follows:
σ 23
X ± zα/2 = 31 ± 2.58 = 31 ± 7.36
√n √65
→ A is correct.
Question 22:
An increase in sample size is most likely to result in a:
A. wider confidence interval.
B. decrease in the standard error of the sample mean.
C. lower likelihood of sampling from more than one population.
Answer: B
B is correct. All else being equal, as the sample size increases, the standard error of the
sample mean decreases and the width of the confidence interval also decreases.
Question 23:
Otema Chi has a spreadsheet with 108 monthly returns for shares in Marunou
Corporation. He writes a software program that uses bootstrap resampling to create 200
resamples of this Marunou data by sampling with replacement. Each resample has 108
data points. Chi’s program calculates the mean of each of the 200 resamples, and then it
calculates that the mean of these 200 resample means is 0.0261. The program subtracts
0.0261 from each of the 200 resample means, squares each of these 200 differences, and
adds the squared differences together. The result is 0.835. The program then calculates an
estimate of the standard error of the sample mean. The estimated standard error of the
sample mean is closest to:
A. 0.0115
B. 0.0648
C. 0.0883
Answer: B
Recall concepts: Standard deviation of the sample mean in resampling:
18
√
B
1
∑ (θ^b - θ)
2
s X =
B - 1 b=1
Where:
• s X : the estimate of the standard error of the sample mean.
• B : the number of resamples drawn from the original sample.
• θ^b : the mean of a resample.
• θ : the mean across all the resample means.
We have:
 B = 200
B
2
 ∑ ( θ^b - θ ) = 0.835
b=1
 θ = 0.0261
√ √
B
1 1
∑ (θ^b - θ)
2
s X = = x 0.835 = 0.0648
B - 1 b=1 200 - 1
→ B is correct.
Question 24:
Compared with bootstrap resampling, jackknife resampling:
A. is done with replacement.
B. usually requires that the number of repetitions is equal to the sample size.
C. produces dissimilar results for every run because resamples are randomly drawn.
Answer: B
Recall concepts: Jackknife resampling:
 Jackknife samples are selected by taking the original observed data sample and
leaving out one observation at a time from the set (and not replacing it).
 For a sample of size n, jackknife resampling usually requires n repetitions.
→ B is correct.
A and C is incorrect. Bootstrap resampling is done with replacement and produces dissimilar
results for every run because resamples are randomly drawn.
19
Question 25:
A report on long-term stock returns focused exclusively on all currently publicly traded
firms in an industry is most likely susceptible to:
A. look-ahead bias.
B. survivorship bias.
C. intergenerational data mining.
Answer: B
Recall concepts:
 Look-ahead bias: exists if the model uses data not available to market participants at
the time the market participants act in the model.
 Survivorship bias: occurs if companies are excluded from the analysis because they
have gone out of business or because of reasons related to poor performance.
 Data-snooping bias (Data-mining bias): occurs when analysts repeatedly use the
same database to search for patterns or trading rules until one that “works” is
discovered.
B is correct. This type of bias is known as survivorship bias. A report that uses a current list
of stocks does not account for firms that failed, merged, or otherwise disappeared from the
public equity market in previous years. As a consequence, the report is biased.
Question 26:
Which sampling bias is most likely investigated with an out-of-sample test?
A. Look-ahead bias
B. Data-mining bias
C. Sample selection bias
Answer: B
Recall concepts:
 Look-ahead bias: exists if the model uses data not available to market participants at
the time the market participants act in the model.
 Selection bias: occurs when data availability leads to certain assets being excluded
from the analysis.
 Data-snooping bias (Data-mining bias): occurs when analysts repeatedly use the
same database to search for patterns or trading rules until one that “works” is
discovered.
An out-of-sample test is used to investigate the presence of datamining bias. Such test uses
a sample that does not overlap the time period of the sample on which a variable, strategy,
or model was developed.
20
For example, a model was built from data in the year between 2000 and 2015, but the
model was test in the data in the year between 2015 and 2020.
A variable or investment strategy that is statistically and economically significant in out-of-
sample tests, and that has a plausible economic basis, may be the basis for a valid
investment strategy.
→ B is correct. An out-of-sample test is used to investigate the presence of datamining bias.
Question 27:
Which of the following characteristics of an investment study most likely indicates time-
period bias?
A. The study is based on a short time-series.
B. Information not available on the test date is used.
C. A structural change occurred prior to the start of the study’s time series.
Answer: A
A is correct. A short time series is likely to give period-specific results that may not reflect a
longer time period.
B is incorrect. Look-ahead bias exists if the model uses data not available to market
participants at the time the market participants act in the model.
C is incorrect. Time-period bias is present if the period used makes the results period
specific or if the period used includes a point of structural change.
Additional question:
Schweser’s note question 7, module 5.2
Which of the following techniques to improve the accuracy of confidence intervals on a
statistic is most computationally demanding?
A. The jackknife
B. Systematic resampling
C. Bootstrapping
Answer: C
C is correct. Bootstrap uses computer simulation for statistical inference (find the standard
error or construct confidence intervals for the statistic of other population parameters, such
as the median) without using an analytical formula such as a z-statistic or t-statistic → a
powerful method for any complicated estimators and particularly useful when no analytical
formula is available → improve accuracy of confidence intervals on a statistic.
21
A is incorrect. As jackknife samples are selected by taking the original observed data sample
and leaving out one observation at a time from the set (and not replacing it), jackknife
technique is often used to reduce the bias of an estimator.
22
R6: HYPOTHESIS TESTING

I. SUMMARY
II. QUESTIONS
Question 1:
Which of the following statements about parametric and nonparametric tests is least
accurate?
A. The test of the mean of the differences is used when performing a paired comparison.
B. The test of the differences in means is used when you are comparing means from two
independent samples.
C. Nonparametric tests rely on population parameters.
Answer: C
Recall concepts:
 Parametric test: has at least one of the following two characteristics:

o It is concerned with parameters, or defining features of a distribution.
o It makes a definite set of assumptions.
 Nonparametric test: A non-parametric test is not concerned with a parameter, and
makes only a minimal set of assumptions regarding the population.
C is correct. Nonparametric tests do not rely on population parameters.
A is incorrect. The test of the mean of the differences is to test whether the means of the
differences between observations for the two samples are different → it is used when
performing a paired comparison.
B is incorrect. The test of the differences in means is to test whether there is a difference
between the means of two population → it is used when you are comparing means from
two independent samples.
23
Question 2:
Which of the following statements about hypothesis testing is most accurate?
A. If you can disprove the null hypothesis, then you have proven the alternative hypothesis.
B. The power of a test is one minus the probability of a Type I error.
C. The probability of a Type I error is equal to the significance level of the test.
Answer: C
Recall concepts: Level of significance
 Type I error: α , which is called level of significance – rejection of true null hypothesis
→ Correct decision: 1 – α , which is called confidence level
 Type II error: β – failure to reject false null hypothesis
→ Correct decision: 1 – β , which is called power of the test
C is correct. The probability of a Type I error is equal to the significance level of the test.
A is incorrect. Hypothesis testing does not prove a hypothesis, we either reject the null or
fail to reject it.
B is incorrect. The power of a test is one minus the probability of a Type II error.
Question 3:
The test of the equality of the variances of two normally distributed populations requires
the use of a test statistic that is:
A. z-distributed.
B. Chi-squared distributed.
C. F-distributed
Answer: C
Recall concepts:
 The z-test is used to test the mean of normally distributed population.
 The chi-square test is used to test the single population variance.
 The F-test is used to test the equality of two population variance.
C is correct. The F-test (or F-distributed) is used to test the equality of the variances of two
normally distributed populations.
24
Question 23:
The probability of correctly rejecting the null hypothesis is the:
A. p-value.
B. power of a test.
C. level of significance.
Answer: B
B is correct. The power of a test is the probability of rejecting the null hypothesis when it is
false.
A is incorrect. The p-value is the smallest level of significance for which the null hypothesis
can be rejected.
C is incorrect. The level of significance is the probability of rejecting the null hypothesis
when it is true.
Question 24:
The power of a hypothesis test is:
A. equivalent to the level of significance.
B. the probability of not making a Type II error.
C. unchanged by increasing a small sample size.
Answer: B
B is correct. The power of a hypothesis test is the probability of correctly rejecting the null
when it is false. Failing to reject the null when it is false is a Type II error. Thus, the power of
a hypothesis test is the probability of not committing a Type II error.
25
Question 25:
When making a decision about investments involving a statistically significant result, the:
A. economic result should be presumed to be meaningful.
B. statistical result should take priority over economic considerations.
C. economic logic for the future relevance of the result should be further explored.
Answer: C
C is correct. When a statistically significant result is also economically meaningful, one
should further explore the logic of why the result might work in the future.
A is incorrect. Statistically significance result does not imply economically significance result
as the economic decision takes into consideration not only the statistical decision but also
all pertinent economic issues, such as transaction costs, taxes and risk.
B is incorrect. Statistical result based on distributional assumptions and do not take into
consideration economic issues.
Question 26:
An analyst tests the profitability of a trading strategy with the null hypothesis that the
average abnormal return before trading costs equals zero. The calculated t-statistic is
2.802, with critical values of ±2.756 at significance level α = 0.01. After considering trading
costs, the strategy’s return is near zero. The results are most likely:
A. statistically but not economically significant.
B. economically but not statistically significant.
C. neither statistically nor economically significant.
Answer: A
 Test the statistically significance result: t-statistic = 2.802 > critical t-values = 2.756.
→ We rejected the null hypothesis and conclude that the average abnormal return
before trading costs is greater than 0%.
→ This result is statistically significant.
 Test the economically significance result: After considering trading costs, the
strategy’s return is near zero.
→ This investment does not gain profit after taking into consideration of economic
issues.
→ This result is not economically significant.
→ A is correct.
26
Question 27:
Which of the following statements is correct with respect to the p-value?
A. It is a less precise measure of test evidence than rejection points.
B. It is the largest level of significance at which the null hypothesis is rejected.
C. It can be compared directly with the level of significance in reaching test conclusions.
Answer: C
C is correct. When directly comparing the p-value with the level of significance, it can be
used as an alternative to using rejection points to reach conclusions on hypothesis tests.
A is incorrect. P-value is a more precise measure of test evidence than rejection points.
B is incorrect. The p-value is the smallest level of significance at which the null hypothesis is
rejected.
Question 28:
Which of the following represents a correct statement about the p-value?
A. The p-value offers less precise information than does the rejection points approach.
B. A larger p-value provides stronger evidence in support of the alternative hypothesis.
C. A p-value less than the specified level of significance leads to rejection of the null
hypothesis.
Answer: C
C is correct. The p-value is the smallest level of significance at which the null hypothesis can
be rejected for a given value of the test statistic. The null hypothesis is rejected when the p-
value is less than the specified significance level.
A is incorrect. The p-value offers more precise information than does the rejection points
approach.
B is incorrect. A smaller p-value provides stronger evidence in support of the alternative
hypothesis as the smaller the chance of making a type I error.
27
Question 29:
Which of the following statements on p-value is correct?
A. The p-value indicates the probability of making a Type II error.
B. The lower the p-value, the weaker the evidence for rejecting the Ho.
C. The p-value is the smallest level of significance at which Ho can be rejected.
Answer: C
C is correct. The p-value is the smallest level of significance (α) at which the null hypothesis
can be rejected.
A is incorrect. The p-value does not indicate the probability of making a Type II error.
B is incorrect. The lower the p-value, the stronger the evidence for rejecting the H o as the
smaller the chance of making a type I error.
Question 30:
The following table shows the significance level (α) and the p-value for two hypothesis
tests.
α p-value
Test 1 0.02 0.05
Test 2 0.05 0.02
In which test should we reject the null hypothesis?

A. Test 1 only
B. Test 2 only
C. Both Test 1 and Test 2
Answer: B
Recall concepts: Reject Ho when p-value < significant level.
B is correct. Test 2: We have p-value (0.02) < significant level (0.05) → Reject Ho
A is incorrect. Test 1: We have p-value (0.05) > significant level (0.02) → Do not reject Ho.
C is incorrect. We only reject Ho in test 2 only.
28
Question 31:
Which of the following tests of a hypothesis concerning the population mean is most
appropriate?
A. A z-test if the population variance is unknown and the sample is small
B. A z-test if the population is normally distributed with a known variance
C. A t-test if the population is non-normally distributed with unknown variance and a small
sample
Answer: B
Recall concepts: Hypothesis test concerning the population mean
 We use z-test when the population is normally distributed with known variance
 We use t-test when the population is normally distributed with unknown variance
B is correct. The z-test is theoretically the correct test to use in those limited cases when
testing the population mean of a normally distributed population with known variance.
A is incorrect. If the population variance in unknown and the sample is small but the
population is normally distributed, we use t-test.
C is incorrect. If the population is non-normally distributed with unknown variance and a
small sample, we use neither z-test or t-test.
Question 32:
For a small sample from a normally distributed population with unknown variance, the
most appropriate test statistic for the mean is the:
A. z-statistic.
B. t-statistic.
C. χ2 statistic.
Answer: B
B is correct. A t-statistic is the most appropriate for hypothesis tests of the population mean
when the variance is unknown and the sample is small but the population is normally
distributed.
29
Question 33:
An investment consultant conducts two independent random samples of five-year
performance data for US and European absolute return hedge funds. Noting a return
advantage of 50 bps for US managers, the consultant decides to test whether the two
means are different from one another at a 0.05 level of significance. The two populations
are assumed to be normally distributed with unknown but equal variances. Results of the
hypothesis test are contained in the following tables.
Sample size Mean return Standard

(%) deviation
US managers 50 4.7 5.4
European managers 50 4.2 4.8
Null and alternative hypotheses Ho: μUS – μ E = 0; Ha: μUS – μ E ≠ 0
Calculated test statistic 0.4893
Critical value rejection points ±1.984
The mean return for US funds is μUS , and μ E is the mean return for European funds
The results of the hypothesis test indicate that the:

A. null hypothesis is not rejected.
B. alternative hypothesis is statistically confirmed.
C. difference in mean returns is statistically different from zero.
Answer: A
We have: Calculated test statistic = 0.4893 < Critical value = +1.984
→ Do not reject H0
→ The mean returns are not different for two funds at 5% level of significance.
→ A is correct.
30
Question 34:
A pooled estimator is used when testing a hypothesis concerning the:
A. equality of the variances of two normally distributed populations.
B. difference between the means of two at least approximately normally distributed
populations with unknown but assumed equal variances.
C. difference between the means of two at least approximately normally distributed
populations with unknown and assumed unequal variances.
Answer: B
Recall concepts: The assumption that the variances are equal allows for the combining of
both samples to obtain a pooled estimate of the common variance.
B is correct. A pooled estimator is used when testing a hypothesis concerning the difference
between the means of two at least approximately normally distributed populations with
unknown but assumed equal variances.
Question 35:
When evaluating mean differences between two dependent samples, the most
appropriate test is a:
A. z-test
B. chi-square test
C. paired comparisons test
Answer: C
Recall concepts:
 The Z-test is used for hypothesis test concerning the single population mean
 The chi-square test is used for hypothesis test concerning the single population
variance.
 The paired comparisons test is used for hypothesis test concerning the mean
difference of two normally distributed populations, with the samples are assumed to
be dependent.
C is correct. A paired comparisons test is appropriate to test the mean differences of two
samples believed to be dependent. Contrast: test mean differences vs differences in means
31
Question 36:
A chi-square test is most appropriate for tests concerning:
A. a single variance.
B. differences between two population means with variances assumed to be equal.
C. differences between two population means with variances assumed to not be equal.
Answer: A
Recall concepts: The chi-square test is used for hypothesis test concerning the single
population variance.
A is correct. A chi-square test is used for tests concerning the variance of a single normally
distributed population.
B and C is incorrect. The F-test is used to test the equality of two population variance with
the samples are assumed to be independent.
Question 37:
Which of the following should be used to test the difference between the variances of two
normally distributed populations?
A. t-test
B. F-test
C. Paired comparisons test
Answer: B
Recall concepts:
 The t-test is used to test the used for hypothesis test concerning the means
 The F-test is used to test the difference between the variances of two normally
distributed populations with random independent samples.
 The paired comparisons test is used to test the mean difference of two normally
distributed populations, with the samples are assumed to be dependent.
B is correct. An F-test is used to conduct tests concerning the difference between the
variances of two normally distributed populations with random independent samples.
32
R7: INTRODUCTION TO LINEAR REGRESSION

I. SUMMARY
II. QUESTIONS
Question 1:
The coefficient of determination for a linear regression is best described as the:
A. percentage of the variation in the dependent variable explained by the variation of the
independent variable.
B. percentage of the variation in the independent variable explained by the variation of the
dependent variable.
C. covariance of the independent and dependent variables.
Answer: A
Recall concepts: The coefficient of determination ( R 2) is the percentage of the variation of
the dependent variable that is explained by the independent variable.
A is correct. The coefficient of determination for a linear regression describes the
percentage of the variation in the dependent variable explained by the variation of the
independent variable.
B is incorrect: “variation in the independent variable explained by the variation of the
dependent variable”.
C is incorrect: “covariance”.
Question 2:
Consider the following analysis of variance (ANOVA) table:
Mean sum of
Source Sum of squares Degrees of freedom
squares
Regression 550 1 550.000
Error 750 38 19.737
Total 1,300 39
The F-statistic for the test of the fit of the model is closest to:
33
A. 0.97
B. 0.42
C. 27.87
Answer: C
Recall concepts: For simple linear regression there are only two variances, so k = 1:
MSR RSS /k RSS
F = = =
MSE SSE/(n – k – 1) SSE/(n - 2)
df numerator = k = 1
df denominator = n − k − 1 = n – 2
MSR 550.000
F-statistic = = = 27.87
MSE 19.737
→ C is correct.
Question 3:
Use the following t-table for this question:
A sample of 200 monthly observations is used for a simple linear regression of returns
versus leverage. The resulting equation is:
Returns = 0.04 + 0.894 x Leverage + ε
Degree of freedom
Probability
in right tail
196 197 198 199 200 201 202
5.0% 1.653 1.653 1.653 1.653 1.653 1.652 1.652
2.5% 1.972 1.972 1.972 1.972 1.972 1.972 1.972
1.0% 2.346 2.345 2.345 2.345 2.345 2.345 2.345
If the standard error of the estimated slope variable is 0.06, a test of the hypothesis that
the slope coefficient is greater than or equal to 1.0 with a significance of 5% should:
A. be rejected the test statistic of –1.77 is greater than the critical value.
B. be rejected because the test statistic of –1.77 is less than the critical value.
C. not be rejected because the test statistic of –1.58 is not less than the critical value.
Answer: B
Y i = b^0 + b^1 Xi with i = 1, 2, 3 …, n
Recall concepts: Linear equation: ^
- We have Linear equation: ^

Returns = 0.04 + 0.894 x Leverage + ε
34
→ Estimated intercept term ( ^

b0 ) = 0.04
Estimated slope coefficient ( ^

b1)= 0.894
- Hypothesis test of slope coefficients:

Step 1: State the hypotheses
H 0 : b1 ≥ 1
H α : b1 < 1
Step 2: Identify the appropriate test statistic

Here, we use t-distributed test statistic to test whether the slope coefficient is different than
1.0 with degrees of freedom df = n – 2 = 200 – 2 = 198.
Step 3: Specify the level of significance
α = 5% (one tail, left side)
Step 4: State the decision rule
 With df = 198 we use t-table for one-tailed test with significance level of 5%.
198
 With α = 0.05 and a one-tailed test, probability would be: t 0.05 = 1.653
→ We have t-critical = –1.653 → We reject H0 when Test statistic < –1.653.
Step 5: Calculate the test statistic
With estimated slope variable ( ^ b1) = 0.894, hypothesized population slope (B1) = 1.0 and
standard error of the estimated slope variable ( Sb^ ) is 0.06, we calculate the test statistic as
1
^
b1 - B1 0.894 - 1.0
follows: t = = = –1.77
S ^b
1
0.06
Step 6: Make a decision

t-statistic = –1.77 < t-critical = –1.653
→ Reject H 0
→ The intercept is less than 1.0.

→ B is correct.
35
Question 4:
A simple linear regression is performed to quantify the relationship between the return on
the common stocks of medium-sized companies (mid-caps) and the return on the S&P
500index, using the monthly return on mid-cap stocks as the dependent variable and the
monthly return on the S&P 500 as the independent variable. The results of the regression
are shown below:
Standard error of
Coefficient t-value
coefficient
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
Coefficient of determination = 0.599
The strength of the relationship, as measured by the correlation coefficient, between the
return on mid-cap stocks and the return on the S&P 500 for the period under study was:
A. 0.599
B. 0.774
C. 0.130
Answer: B
Recall concepts:
 The coefficient of determination is the percentage of the variation of the dependent
variable that is explained by the independent variable.
 The correlation coefficient is used to measure the strength of the relationship
between dependent and independent variable in the population.
With coefficient of determination R 2= 0.599, correlation coefficient is the square root of the
coefficient of determination for a simple regression: √ R 2 = √ 0.599 = 0.774.
→ B is correct.
36
Question 5:
Given the relationship: Y = 2.83 + 1.5X
What is the predicted value of the dependent variable when the value of the independent
variable equals 2?
A. –0.55.
B. 2.83
C. 5.83
Answer: C
Recall concepts: Formula for predicted value for a simple linear regression:
Y= ^
^ b0 + ^
b1 Xp
According to regression line, we have ^ b0 = 2.83, ^
b1 = 1.5 and X p = 2, so the predicted value
Y = ^
is determined as follows: ^ b0 + ^
b1 X p = 2.83 + 1.5 x 2 = 5.83.
→ C is correct.
Question 6:
Consider the following analysis of variance (ANOVA) table:
Mean sum of
Source Sum of squares Degrees of freedom
squares
Regression 556 1 556
Error 679 50 13.5
Total 1,235 51
The R2 for this regression is closest to:

A. 0.82
B. 0.45
C. 0.55
Answer: B
Recall concepts: Coefficient of determination (R 2) formula:
2 Sum of squares regression (RSS)
R=
Sum of squares total (SST)
According to the ANOVA table, we have S um of squares regression (RSS) = 556 and
556
Sum of squares total (SST) = 1,235, coefficient of determination equals: R 2= = 0.45
1,235
37
→ B is correct.
Question 7:
Which of the following is least likely an assumption of linear regression?
A. The variance of the error terms each period remains the same.
B. The error terms from a regression are positively correlated.
C. Values of the independent variable are not correlated with the error term.
Answer: B
Recall concepts: The following four key assumptions are needed to draw valid conclusions
from a simple linear regression model:
 Linearity: The underlying relationship between the dependent and independent
variables is linear.
 Homoskedasticity: The variance of the residuals is the same for all observations.
 Independence: The observations, pairs of Y sand X s, are uncorrelated with one
another.
 Normality: The residuals (е i), which is how much the observed value of Y i differs
from the ^ Yi estimated using the regression line (е i = Yi - Y ^ ), are normally
i
distributed.
B is correct. Under independence assumption, the error terms are independently
distributed, that the correlations between error terms are expected to be zero.
A is incorrect. Under homoskedasticity assumption, the variance of the error terms each
period remains the same.
C is incorrect. Under independence assumption, variance of the error terms is constant and
there is no correlation between the independent variable and the error term.
The following information relates to Questions 9–12:
Kenneth McCoin, CFA, is a challenging interviewer. Last year, he handed each job applicant a
sheet of paper with the information in the following table, and he then asked several
questions about regression analysis. Some of McCoin’s questions, along with a sample of the
answers he received to each, are given below. McCoin told the applicants that the
independent variable is the ratio of net income to sales for restaurants with a market cap of
more than $100 million and the dependent variable is the ratio of cash flow from operations
to sales for those restaurants. Which of the choices provided is the best answer to each of
McCoin’s questions?
Regression statistics
38
R2 0.7436
Standard error 0.0213
Observations 24
Sum of
Source df Mean square F p-value
squares
Regression 1 0.029 0.029000 63.81 0
Residual 22 0.010 0.000455
Total 23 0.040
Coefficients Standard error t-statistic p-value
Intercept 0.077 0.007 11.328 0
Net income to
0.826 0.103 7.988 0
sales (%)
→ From the table, we have:

 X (independent variable) is the ratio of NI to sales
 Y (dependent variable) is the ratio of CFO to sales
Question 9:
The coefficient of determination is closest to:
A. 0.7436
B. 0.8261
C. 0.8623
Answer: A
A is correct. The coefficient of determination has the denotation is R2, which is 0.7436 in the
table.
39
Question 10:
The correlation between X and Y is closest to:
A. −0.7436.
B. 0.7436.
C. 0.8623.
Answer: C
Recall concepts:
 The coefficient of determination is the percentage of the variation of the dependent
variable that is explained by the independent variable.
 The correlation coefficient is used to measure the strength of the relationship
between dependent and independent variable in the population.
With coefficient of determination R 2= 0.7436, correlation coefficient is the square root of
the coefficient of determination for a simple regression: √ R 2 = √ 0.7436 = 0.8623.
→ C is correct.
Question 11:
If the ratio of net income to sales for a restaurant is 5%, the predicted ratio of cash flow
from operations (CFO) to sales is closest to:
A. −4.054.
B. 0.524
C. 4.207.
Answer: C
Y= ^
^ b0 + ^
b1 Xp
CFO to sales = 0.077 % + 0.826 X p
- According to regression line, we have ^ b0 = 0.077%, ^ b1 = 0.826 and X p = 5%, so the
Y = ^
predicted value is determined as follows: ^ b0 + ^
b1 Xp = 0.077 + 0.826 x 5 = 4.207.
→ C is correct.
40
Question 12:
Is the relationship between the ratio of cash flow to operations and the ratio of net
income to sales significant at the 0.05 level?
A. No, because the Coefficient of determination is greater than 0.05
B. No, because the p-values of the intercept and slope are less than 0.05
C. Yes, because the p-values for F and t for the slope coefficient are less than 0.05
Answer: C
Recall concepts: We can use either F-test or t-test to assess how well the independent
variable explains the variation in the dependent variable.
C is correct. In case of using F-test, we use the principle that: the p-value is the smallest level
of significance at which the null hypotheses concerning the slope coefficient can be
rejected.
→ p-value = 0 < significant level = 5% → Reject Ho
→ The regression of the ratio of CFO to sales on the ratio of NI to sales is significant at the
5% level.
The following information relates to Questions 13–17:

Howard Golub, CFA, is preparing to write a research report on Stellar Energy Corp. common
stock. One of the world’s largest companies, Stellar is in the business of refining and
marketing oil. As part of his analysis, Golub wants to evaluate the sensitivity of the stock’s
returns to various economic factors. For example, a client recently asked Golub whether the
price of Stellar Energy Corp. stock has tended to rise following increases in retail energy
prices. Golub believes the association between the two variables is negative, but he does
not know the strength of the association. Golub directs his assistant, Jill Batten, to study the
relationships between (1) Stellar monthly common stock returns and the previous month’s
percentage change in the US Consumer Price Index for Energy (CPIENG) and (2) Stellar
monthly common stock returns and the previous month’s percentage change in the US
Producer Price Index for Crude Energy Materials (PPICEM). Golub wants Batten to run both a
correlation and a linear regression analysis. In response, Batten compiles the summary
statistics shown in Exhibit 1 for 248 months. All the data are in decimal form, where 0.01
indicates a 1% return. Batten also runs a regression analysis using Stellar monthly returns as
the dependent variable and the monthly change in CPIENG as the independent variable.
Exhibit 2 displays the results of this regression model.
Exhibit 1: Descriptive statistics
Stellar common Lagged monthly change

stock monthly
return CPIENG PPICEM
41
Mean 0.0123 0.0023 0.0042
Standard deviation 0.0717 0.0160 0.0534
Covariance, Stellar vs CPIENG –0.00017
Covariance, Stellar vs PPCIEM –0.00048
Covariance, CPIENG vs
0.00044
PPICEM
Correlation, Stellar vs CPIENG –0.1452
Exhibit 2: Regression analysis with CPIENG
Regression statistics
R2 0.0211
Standard error 0.0710
Observations 248
Coefficients Standard error t-statistic
Intercept 0.0138 0.0046 3.0275
CPIENG (%) –0.6486 0.2818 –2.3014
Additional information:
One-sided, left side: −1.651
One-sided, right side: +1.651
Two-sided: ±1.967
→ From the table, we have:
 X (independent variable) is the CPIENG monthly returns
 Y (dependent variable) is the Stellar monthly returns
42
Question 13:
Which of the following best describes Batten’s regression?
A. Time-series regression
B. Cross-sectional regression
C. Time-series and cross-sectional regression
Answer: A
Recall concepts:
 Time-series data use many observations from different time periods for the same
company, asset class, investment fund, country, or other entity, depending on the
regression model.
 A cross-sectional regression involves many observations of X and Y for the same time
period. These observations could come from different companies, asset classes,
investment funds, countries, or other entities, depending on the regression model.
A is correct. The Batten’s regression is time-series regression. Here, the analyst use monthly
data from many years to test whether various economic factors determine the Stellar
Energy Corp. common stock.
Question 14:
Based on the regression, if the CPIENG decreases by 1.0%, the expected return on Stellar
common stock during the next period is closest to:
A. 0.0073 (0.73%).
B. 0.0138 (1.38%).
C. 0.0203 (2.03%).
Answer: C
Y= ^
^ b0 + ^
b1 Xp
Stellar = 0.0138 + ( –0.6486 ) X p
- According to regression line, we have ^
b0 = 0.0138, ^b1 = –0.6486 and X p = –0.01, so the
Y = ^
predicted value is determined as follows: ^ b0 + ^
b1 Xp = 0.0138 + (–0.6486) x (–0.01) =
0.0203.
→ C is correct.
43
Question 15:
Based on Batten’s regression model, the coefficient of determination indicates that:
A. Stellar’s returns explain 2.11% of the variability in CPIENG.
B. Stellar’s returns explain 14.52% of the variability in CPIENG.
C. changes in CPIENG explain 2.11% of the variability in Stellar’s returns.
Answer: C
Recall concepts: The coefficient of determination is the percentage of the variation of the
dependent variable that is explained by the independent variable.
C is correct. From the table, we have the coefficient of determination (R2) is 0.0211. In this
case, it shows that 2.11% of the variability in Stellar’s returns is explained by changes in
CPIENG.
Question 16:
For Batten’s regression model, 0.0710 is the standard deviation of:
A. the dependent variable.
B. the residuals from the regression.
C. the predicted dependent variable from the regression.
Answer: B
B is correct. The standard error of the estimate is the standard deviation of the regression
residuals.
Question 17:
For the analysis run by Batten, which of the following is an incorrect conclusion from the
regression output?
A. The estimated intercept from Batten’s regression is statistically different from zero at the
0.05 level of significance.
B. In the month after the CPIENG declines, Stellar’s common stock is expected to exhibit a
positive return.
C. Viewed in combination, the slope and intercept coefficients from Batten’s regression are
not statistically different from zero at the 0.05 level of significance.
Answer: C
1. Hypothesis test of slope coefficient ( b1) 2. Hypothesis test of intercept ( b0)
44
Step 1: State the hypotheses Step 1: State the hypotheses

H 0 : b1 = 0 H 0 : b0 = 0
H α : b1 ≠ 0 Hα : b0≠ 0
Step 2: Identify the appropriate test Step 2: Identify the appropriate test
statistic statistic
Here, we use t-distributed test statistic to Here, we use t-distributed test statistic to
test whether the slope coefficient is test whether the intercept is different than
different than 0 0
Step 3: Specify the level of significance Step 3: Specify the level of significance
α = 5% (two tail) α = 5% (two tail)
Step 4: State the decision rule Step 4: State the decision rule
From the additional data, we have t-critical From the additional data, we have t-critical
= ±1.967 = ±1.967
→ We reject H0 when Test statistic > +1.967 → We reject H 0 when Test statistic > +1.967
or test statistic < –1.967. or test statistic < –1.967.
Step 5: Calculate the test statistic Step 5: Calculate the test statistic
From the table, we have t-statistic = – From the table, we have t-statistic = 3.0275
2.3014
Step 6: Make a decision Step 6: Make a decision

t-statistic = –2.3014 < t-critical = –1.967 t-statistic = 3.0275 > t-critical = +1.967
→ Reject H0 → Reject H0
→ The slope coefficient is different from 0. → The intercept is different from 0.

→ A is incorrect.
→ C is correct.
45

Coaching - Quant (Buoi 2) - R4,5,6,7 - Answer

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SAPP Academy Tel 0466 709 888

Standard normal distribution:

Step 2: Determine the probability

Approach 1: Using z-table Approach 2: Using confidence level

P(Z ≤ z)] - 68% of the observations fall within ± one

inches and 26.75 inches = 84.13% – 4.95% = mean.

 X - 1.65s = 150 – 1.65 x 20 = 117

1 –0.25 (bỏ vì <0) 0.20 0.20

2 0.25 0.25 0.25

3 0.50 0.50 0.30

4 0.25 0.05 0.35

The conditions for a probability function are satisfied by:

Case 3: h(x) fails to satisfy the second condition:

Cumulative distribution function

The probability that X will take on a value of either 2 or 4 closest to:

 F(4) = P(X ≤ 4) = P(1) + P(2) + P(3) + P(4) = 0.6

 F(2) = P(X ≤ 2) = P(1) + P(2) = 0.25

Date Closing price (€)

→ Continuously compounded states annual rate formula for 2 consecutive periods:

To calculate this question, we use the application of lognormal, the continuously

 A Bernoulli trial is an experiment with two outcomes “failure” and “success”.

p Price = uS = $100 x 1.05 = $105

1 – Price = d S = $100*0.97 = $97

Expected price (average terminal stock) = p x 105 + (1 – p) x 97 = 102

T=0 Period 1 Period 2 Period 3

Up P = $209.48 x 1.05 = $219.95

R5: SAMPLING AND ESTIMATION

 Sample size (n) = 36

B is correct. Given a population described by any probability distribution (normal or non-

With n = 40, σ2 = 2.45, standard error is: σ X =

2.58s 1.96s 1.65s

 Sample size (n) = 17

 Sample variance (σ2 ¿ = 245.55 → Sample standard deviation (σ ) = 15.67

df 0.1 0.05 0.025 0.01 0.005

15 1.341 1.753 2.131 2.602 2.947

16 1.337 1.746 2.120 2.583 2.921

17 1.333 1.740 2.110 2.567 2.898

→ The reliability factor t α/2 is: t 16

Thus, the 90% confidence interval is calculated as follows:

 Sample size (n) = 65

• s X : the estimate of the standard error of the sample mean.

• B : the number of resamples drawn from the original sample.

• θ^b : the mean of a resample.

• θ : the mean across all the resample means.

R6: HYPOTHESIS TESTING

 Parametric test: has at least one of the following two characteristics:

Test 1 0.02 0.05

Test 2 0.05 0.02

In which test should we reject the null hypothesis?

Sample size Mean return Standard

US managers 50 4.7 5.4

European managers 50 4.2 4.8

Null and alternative hypotheses Ho: μUS – μ E = 0; Ha: μUS – μ E ≠ 0

Calculated test statistic 0.4893

Critical value rejection points ±1.984

The results of the hypothesis test indicate that the:

R7: INTRODUCTION TO LINEAR REGRESSION

Regression 550 1 550.000

Error 750 38 19.737

5.0% 1.653 1.653 1.653 1.653 1.653 1.652 1.652

2.5% 1.972 1.972 1.972 1.972 1.972 1.972 1.972

1.0% 2.346 2.345 2.345 2.345 2.345 2.345 2.345

- We have Linear equation: ^