Multiple Choice Test Bank Questions No Feedback – Chapter 2

Correct answers denoted by an asterisk.

1. Financial econometrics can best be described as

(a)* The application of statistical techniques to problems in finance
(b) The application of mathematical models to problems in economics
(c) The application of financial techniques to problems in economics
(d) None of the above.

2. Which of the following is a serious problem encountered by applied

econometricians in economics?
(a) Small samples problems
(b) Measurement error
(c) Data revisions
(d)* All of the above.

3. Which of these is a characteristic of financial data?

(a) They are observed at much lower frequencies than macroeconomic data
(b) The number of observations is usually very small
(c)* They are considered to be very noisy
(d) It is easy to separate underlying trends from random and uninteresting features.

4. Data that have been collected over a period of time on one or more variables is
referred to as
(a) Cross-sectional data
(b) Time-cross-sectional data
(c)* Time-series data
(d) Panel data.

5. Data that have been collected on one or more variables at a single point in time is
referred to as
(a)* Cross-sectional data
(b) Time-cross-sectional data
(c) Time series data
(d) Panel data.

6. Data that have both time series and cross-sections is referred to as

(a) Cross-sectional data
(b) Time-cross-sectional data
(c) Time-series data
(d)* Panel data.

7. An individual invested £106.40 in the stock market and the value of his investment
two years later is £138.22. What are the simple and continuously compounded returns
on his investment?
(a) 26% and 30%, respectively
(b) –29% and -34%, respectively
(c)* 30% and 26%, respectively
(d) 30% and 30%, respectively.
8. An individual has £10000 capital to invest in the stock market. He invests 30% of
his capital in stock A, 25% in stock B and 45% in Stock C. What is the return on
his/her portfolio assuming that the simple returns on stocks A, B and C are 5%, 10%
and 12%, respectively?
(a)* 9.0%
(b) 9.7%
(c) 9.3%
(d) 9%.

The average nominal annual rent in the US denominated in dollars and the CPI (2008
levels) are given in the table below:
Year Average annual rent (US CPI (2008 levels)
Dollars)
2008 9908 100
2009 9998 99.7
2010 10012 101.3
2011 10180 104.5
2012 10396 106.7

9. What is the 2008 average annual rent in 2012 terms?

(a) 9743
(b)* 10572
(c) 9286
(d) 11093.

10. What is the 2012 average annual rent in 2008 terms?

(a)* 9743
(b) 10572
(c) 9286
(d) 11093.

11. The numerical score assigned to the credit rating of a bond is best described as
what type of number?
(a) Continuous
(b) Cardinal
(c)* Ordinal
(d) Nominal.

12. Suppose that we wanted to sum the 2007 returns on ten shares to calculate the
return on a portfolio over that year. What method of calculating the individual stock
returns would enable us to do this?
(a)* Simple
(b) Continuously compounded
(c) Neither approach would allow us to do this validly
(d) Either approach could be used and they would both give the same portfolio return.

13. If we wish to compare the spread of two series with considerably different mean
values, which of the following measures would be the most appropriate?
(a) The semi-interquartile range
(b) The standard deviation
(c) The range
(d) * The coefficient of variation.

14. For a series with a negative skew in its distribution (a long left tail), which of the
following best describes the relationship between its measures of central tendency?
(a) mean > median > mode
(b) * mode > median > mean
(c) mode > mean > median
(d) median > mode > mean.

15. Which of the following statements is TRUE concerning the correlation between
two series?
(a) * It is unit-free
(b) It scales with the product of the units of the two series
(c) It scales with the ratio of the units of the two series
(d) It will take the value –1 if there is no association between the two series.

16. What is the sum of the following infinite set of terms? 5, 2.5, 1.25, 0.625, …
(a) Infinity
(b) 5
(c) 20
(d) * 10.

17. What is the sum of the first 12 terms in the following sequence? 12, 24, 48, …
(a) * 49,140
(b) 24,576
(c) 768
(d) 98,292.

18. If I have £10,000 now and I want it to grow by 50% within eight years, what
interest rate, compounded annually, is required (to one decimal place)?
(a) * 5.2%
(b) 6.2%
(c) 4.6%
(d) 7.4%.

19. If a savings account pays a nominal interest rate of 10% per year, compounded
monthly, what is the effective interest rate to one decimal place?
(a) 11.2%
(b) 9.5%
(c) 10.0%
(d) * 10.5%.

20. If you place £10,000 in a savings account, how long would it take to reach
£20,000 assuming an annual interest rate of 3%, continuously compounded, rounded
to the nearest year?
(a) 26
(b) 34
(c) *23
(d) 20.
21. What would be a fair price to pay today, to the nearest dollar, for a zero coupon
bond having exactly six years to maturity and to be redeemed at $1000 if the annual
discount rate is 6%?
(a) $1000
(b) * $747
(c) $864
(d) $553.

22. Which of the following statements is FALSE concerning the internal rate of
return?
(a) For projects where the cashflow payments change sign, there can be more than one
internal rate of return
(b) The internal rate of return is the discount rate that sets the net present value of all
of the cashflows to be received equal to the asset’s purchase price
(c) * In order to calculate an internal rate of return, all of the incoming cashflows
must be identical
(d) We cannot calculate a different internal rate of return for each cashflow.