Quantitative Methods 1 2

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747 Questions +
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CFA EXAM
Level 1
Study Session :
Quantitative Methods
02+03
Introduction by the Author :
Hi there, CFA fellows, here you are . You see , it doesn”t need to be an
expensive prep course to get first class preparation for the CFA exams.
The following questions are original CFA AIMR questions and not just
composed by prep course providers. They all come with a clear answer.
In order to understand why the questions are commented by “answer is

correct / incorrect” it is important to know that all questions have
automatically been responded with the first (and only the first ) answer.
Your CFA-Aficionado
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What simple annual interest rate would cause a $200 deposit to earn $15 interest in one year?
* 5.00%
* 12.50%
* 10.25%
* 7.5%
* 6.67%
That answer is incorrect.

Correct answer:
7.5%
To solve this question, rearrange the simple interest formula I=PRT to isolate R. On the BAII Plus,
press 15 divide 200 divide 1 = to see the answer. On the HP12C, press 15 ENTER 200 divide 1 divide
to see the answer. Note that the final division by 1 (which is the time T in this question) is not
necessary.
------------------------------
What percent of the observations will lie above the mean plus two standard deviations?
* 5%
* 68%
* 2.5%
* None of these answers
* 95%

Correct answer:
2.5%
95% of the observations lie between plus and minus two standard deviations from the mean.
Therefore, 2.5% lie over and above two standard deviations on each side of the mean.
------------------------------
Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)
What is the critical value necessary to determine a confidence interval for a 90% level of confidence?
* 1.638
* 1.533
* 2.132
* 2.353

Correct answer:
2.353
Look at the t tables for n-2 degrees of freedom at the 10% level. Here, we look for a two tailed test with
5-2 = 3 degrees of freedom. This is 2.353.
------------------------------
A coefficient of skewness of +2.48 indicates:
* all of these answers are correct

* the mean is larger than the median
* the tail of the distribution is to the right
* none of these answers are correct
* a large positive skewness
That answer is correct!
In a positively skewed distribution, the mean is greater than the median or mode. The coefficient of
skewness (Sk) generally lies between -3 and +3, therefore an Sk of +2.48 indicates significant positive
skewness.
------------------------------
If you deposit $250 a month, beginning next month, for 20 years into an account paying 7% per year,
compounded monthly, how much is in your account after that last deposit?
* $58,205.58
* $308,663.09
* $148,833.09
* $147,577.02
* $130,231.66

Correct answer:
$130,231.66
On the BAII Plus, press 240 N, 7 divide 12 = I/Y, 0 PV, 250 PMT, CPT FV. On the HP12C, press 240
n, 7 ENTER 12 divide i, 0 PV, 250 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1.
Note that the answer is displayed as a negative number.
------------------------------
* $13,678.56
* $12,282.85
* $9,600.00
* $12,097.91
* $23,585,957

Correct answer:
$12,282.85
On the BAII Plus, press 96 N, 6 divide 12 = I/Y, 0 PV, 100 PMT, CPT FV. On the HP12C, press 96 n,
6 ENTER 12 divide i, 0 PV, 100 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1.
------------------------------
If you need $25,000 in 10 years, how much must you deposit today, if your money will earn 6% per
year, compounded annually?
* $25,000
* $13,959.87
* $2,320.01
* $44,771.19
* $23,200.08

Correct answer:
$13,959.87
On the BAII Plus, press 10 N, 6 I/Y, 0 PMT, 25000 FV, CPT PV. On the HP12C, press 10 n, 6 i, 0
PMT, 25000 FV, PV. Note that the answer will be shown as a negative number.
------------------------------
How much would you have in a savings account 12 months from now if you start with a balance of
$3,000 today, make a deposit of $1,000 in 6 months and make another deposit 6 months after that of
$500? Assume that interest accrues at 6% per year, compounded monthly.
* $4,684.42
* $4,777.55
* $4,715.41
* $4,500.00
* $2,500.00

Correct answer:
$4,715.41
Find the answer to this question by solving a couple of compound interest problems. Move the $3,000
to month 12, then move the $1,000 forward 6 months to month 12, then add $500. On the BAII Plus,
press 12 N, 6 divide 12 = I/Y, 3000 PV, 0 PMT, CPT PV. Then press STO 1. Then press 6 N, 1000
PV, CPT FV. Then press + RCL 1 =. Make this number positive by pressing +/- and then press + 500
= to see the answer. On the HP12C, press 12 N, 6 ENTER 12 divide i, 3000 PV, 0 PMT, FV. Then
press STO 1. Then press 6 N, 1000 PV, FV. Then press RCL 1 +. Make this number positive by
pressing CHS and then press 500 + to see the answer. Make sure that the BAII Plus has the value of
P/Y set to 1.
------------------------------
Suppose you are modeling long-term interest rates, and you believe that supply of corporate debt is a
major contributing factor. Suppose you believe that the probability that rates will rise if supply of
corporate debt rises is 60%; if the supply of corporate debt stays constant, you believe that there is a
35% chance of increasing interest rates; if the supply of corporate debt falls, you believe that there is a
5% chance of rates increasing. You think that the likelihood of corporate debt increasing is 50%; of
staying the same is 40%; of dropping is 10%. What is the unconditional probability of interest rates
rising?
* 55.4%.
* 44.4%.
* 44.5%.
* 55.5%.

Correct answer:
44.5%.
We use the total probability rule: P(A), the unconditional probability, = P(A|S_1)*P(S_1) + P(A|S_2)
*P(S_3) + P(A|S_3) *P(S_3), where the S_i represent mutually exclusive and exhaustive events. So
the likelihood of interest rates increasing is 0.60 * 0.50 + 0.35 * 0.40 + 0.05 * 0.10 = 0.30 + 0.14 +
0.005 = 0.445.
------------------------------
If you deposit $1,111 a year, beginning next year, for 20 years into an account paying 7% per year,
compounded annually, how much is in your account after that last deposit?
* $50,598.15
* $47,003.98
* $45,545.99
* $30,118.37
* $48,304.12

Correct answer:
$45,545.99
On the BAII Plus, press 20 N, 7 I/Y, 0 PV, 1111 PMT, CPT FV. On the HP12C, press 20 n, 7 i, 0 PV,
1111 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is
displayed as a negative number.
------------------------------
The standard normal probability distribution is one which has:
* a mean of 0 and any standard deviation

* a mean of 0 and a standard deviation of 1
* any mean and a standard deviation of 1
* a mean of 1 and any standard deviation
* none of these answers are correct

Correct answer:
a mean of 0 and a standard deviation of 1
The standard normal probability distribution has a mean of 0 and std. deviation of 1.
------------------------------
A statistician has framed his hypothesis testing problem as:
Ho: mean = 100 H1: mean < 100
Specify the region for the p-statistic which will lead to the rejection of the null at the 80% significance
level.
* z-statistic < -0.84

* z-statistic > +1.19
* z-statistic < -1.35 or z-statistic > +1.35
Since the alternative is directional and to the left, we use a left-tailed test. For this, the critical value at
80% level is -0.84. -0.84 is the value above which 80% of the probability mass of the standard normal
distribution lies). The rejection region is then given by z-statistic < -0.84.
------------------------------
If you deposit $400 today into an account paying 8% per year, compounded quarterly, how much will
be in the account after 42 months?
* $10,135.79
* $1,174.88
* $918.90
* $927.54
* $527.79

Correct answer:
$527.79
There are 14 quarters in 42 months (42 divide 3 =). On the BAII Plus, press 14 N, 8 divide 4 = I/Y, 400
PV, 0 PMT, CPT FV. On the HP12C, press 14 n, 8 ENTER 4 divide i, 400 PV, 0 PMT, FV. Note that
the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set
to 1.
------------------------------
A market survey was conducted to estimate the proportion of homemakers who could recognize the
brand name of a cleanser based on the shape and color of the container. Of the 1,400 homemakers,
420 were able to identify the brand name. Using the 0.99 degree of confidence, the population
proportion lies within what interval?
* 0.250 and 0.350

* 0.268 and 0.332
* 0.950 and 0.997
* 0.100 and 0.400

Correct answer:
0.268 and 0.332
Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 1400, p = 414/1400 = 0.3
and z = 2.58 (for 99%).
Therefore 0.3 +/- 2.58*0.01225 and we get 0.268 and 0.332.
------------------------------
What annual interest rate, compounded annually, would cause a series of 10 deposits of $500 to
accumulate to $9,000, if the first deposit is made one year from today?
* 12.52%
* 15.38%
* 11.12%
* 8.04%
* 10.09%
On the BAII Plus, press 10 N, 0 PV, 500 PMT, 9000 +/- FV, CPT I/Y. On the HP12C, press 10 n, 0 PV,
500 PMT, 9000 CHS FV, i. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
How much would you need to deposit today in order to be able to withdraw $500 in 2 years and $700
in 4 years, if the account has nothing in it today and interest is 6% per year, compounded annually?
* $999.46
* $1,007.54
* $445.00
* $1,200.00
* $950.51
Work this question as two compound interest problems. On the BAII Plus, press 2 N, 6 I/Y, 0 PMT,
500 FV, CPT PV, which yields $445.00. Then press STO 1. Then press 4 N, 700 FV, CPT PV, which
yields $554.46. Then press + RCL 1 = to see the answer. On the HP12C, press 2 n, 6 i, 0 PMT, 500
FV, PV. Then press STO 1. Then press 4 n, 700 FV, PV. Then press RCL 1 + to see the answer. Note
that the answer will be displayed as a negative number.
------------------------------
You have invested in a long-term, fixed deposit account earning 4% per year for 20 years,
compounded annually. Your friend has invested in a similar account but one that earns 4.25% per
year, compounded semi-annually. If each of you deposited $5,000, by what amount is your friend
wealthier than you due to this deposit?
* $538
* $601
* $639
* $521

Correct answer:
$639
The friend's account has 5,000*(1+0425/2)^40 = 11,595 at the end of 20 years.

Your account has 5,000*(1.04^20) = 10,956. The difference is $639.
------------------------------
You are examining a group of 6 companies. Their average profit margins have been 49%, 10%, 5%,
35%, 30%, and 30%. What is the range of profit margins?
* 49.0%.
* 30.0%.
* 44.0%.
* 5.0%.

Correct answer:
44.0%.
The range = the maximum value - the minimum value. Here, we have 49% - 5% = 44%.
------------------------------
If the hypothesized value of a parameter under the null hypothesis lies outside the confidence interval,
the null hypothesis:
* none of these answers.

* cannot be rejected at the corresponding significance level.
* should be rejected at the corresponding significance level.
* is ill-specified.

Correct answer:
should be rejected at the corresponding significance level.
The confidence interval specifies the range over which the true value of the estimated parameter can
lie without rejecting the null hypothesis at the given level of significance.
------------------------------
What sample statistic is used to estimate a population value?

* Point estimate
* Parameter
* Interval estimate
* Sampling error

Correct answer:
Point estimate
The point estimate is the estimate of a particular value in the population.
------------------------------
What is the area under the normal curve for z > 1.79?

* 0.4633
* 0.0401
* 0.9599
* 0.0367

Correct answer:
0.0367
From the z-tables, z = 1.79 is 0.4633. So 1 - 0.4633*2 = 0.0734. Since it is on each side of the curve,
0.0734/2 = 0.0367.
------------------------------
What does it mean if r = -1.00?
* High values of one variable are associated with low values of the other variable
* Dependent variable can be perfectly predicted by the independent variable
* All of the variation in the dependent variable can be accounted for by the independent variable
* Coefficient of nondetermination equals zero
* All of these answers are correct

Correct answer:
All of these answers are correct
All the above are properties or explanations of the coefficient of correlation being equal to -1.0.
------------------------------
Type I error refers to the event that we will:
* Accept the alternative when it is true.

* Reject the null when it is true.
* Fail to reject the null when it is false.
* Reject the alternative when it is true.

Correct answer:
Reject the null when it is true.
Remember that the null hypothesis is the one that you maintain to be true unless there is sufficient
evidence to prove otherwise. Therefore, the first type of mistake that can happen is that you reject the
maintained hypothesis when in fact, it is true. This error is referred to as "Type I" error. On the other
hand, you may not have sufficient evidence to disprove the null when in fact, it is false. This failure to
appropriately reject the null is referred to as "Type II" error.
------------------------------
You are faced with a counting problem in which you must choose k objects from n total objects. The
order of choosing does not matter. The counting method you should use is:
* None of these answers is correct.

* The binomial formula.
* The multinomial formula.
* The multiplication rule.

Correct answer:
The binomial formula.
The combination, or binomial formula, gives the number of ways that k objects can be chosen from n
items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!].
------------------------------
In a statistical regression estimation, the R-square is found to be 39% and the slope coefficient is -0.3.
The percentage of variance of the dependent variable not explained equals ________.
* 0.30
* 0.61
* 0.09
* 0.39

Correct answer:
0.61
The R-square of the regression measures the amount of variance of the dependent variable explained
by the independent variable. This is given to be 39%. Hence, the amount not explained equals 100% -
39% = 61%.
------------------------------
A bell-shaped, symmetrical frequency distribution has a mean of 10. If 16% of the observations in the
distribution are negative, what is the coefficient of variation of X?
* 1.0
* 0.32
* 10.0
* 0.1
The fraction of observations which are less than zero equals 16% i.e. the fraction of observations
which are less than (mean - 10) equals 16% (given). Since the distribution is symmetrical about the
mean, this implies that the fraction of observations which are more than (mean + 10) also equals 16%.
Thus, the fraction of the observations lying between 0 and 20 equals 1-0.16-0.16 = 0.68. For a bell-
shaped, symmetrical frequency distribution, 68% of the observations lie within one standard deviation
of the mean. Hence, the standard deviation of the distribution equals 10. The coefficient of variation is
then equal to standard deviation/mean = 10/10 = 1.
------------------------------
A population consists of all the weights of all defensive tackles on Sociable University's football team.
They are: Johnson, 204 pounds; Patrick, 215 pounds; Junior, 207 pounds; Kendron, 212 pounds;
Nicko, 214 pounds; and Cochran, 208 pounds. What is the population standard deviation (in pounds)?
* About 4
* About 40
* About 100
* About 16
Population variance = (Sum of squared deviation from the mean)/N. The mean is 210. Population
variance = (36 + 25 + 9 + 4 + 16 + 4)/6 = 94/6 = 15.67. Population standard deviation is the square
root of the population variance = 3.958.
x x-mean (x-mean)^2
204 -6 36
215 5 25
207 -3 9
212 2 4
214 4 16
208 -2 4
------------------------------
Which measure of dispersion disregards the algebraic signs (plus and minus) of each difference
between X and the mean?
* Standard deviation
* Variance
* Mean deviation
* Mean

Correct answer:
Mean deviation
The mean deviation is the mean of the absolute values of the deviations from the mean.
------------------------------
Sweetwater & Associates write weekend trip insurance at a very nominal charge. Records show that
the probability that a motorist will have an accident during the weekend and file a claim is 0.0005.
Suppose they wrote 400 policies for the coming weekend, what is the probability that exactly two
claims will be filed?
* 0.0164
* 0.0001
* 0.8187
* 0.2500
This is a binomial probability. The probability of getting r successes out of n trials where the probability
of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by:
n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 400, r = 2,p = 0.0005 and q = 0.9995. Therefore we have
400!(0.0005^2)(0.9995^398)/2!398! = 0.0164.
------------------------------
The semiannually compounded rate is 10% quoted on an annualized basis. The equivalent annually
compounded rate is:
* 10.25%
* 10.5%
* 9.65%
* 10.1%
To solve such problems, think about investing a dollar for a year. The final amount should be the same
under both the quotations. Under annually compounded rate, r, $1 grows to 1+r in 1 year. Under
semiannual compounding, it grows to (1+0.1/2)^2 = 1.1025. Since these two should be equal, we get
1+r = 1.1025, giving r = 10.25%. Note that the annually compounded rate must be larger than the
semiannually rate, ruling out 9.65 automatically.
------------------------------
In hypotheses testing, what is the level of significance?
* Symbolized by the Greek letter "alpha"

* All of these answers are true
* Selected before a decision rule can be formulated
* Value between 0 and 1
* Risk of rejecting the null hypothesis when it is true

Correct answer:
All of these answers are true
All the above a correct descriptions of the level of significance.
------------------------------
A random variable can take on four values: 12, 36, 78, 111, each with probability 0.25. The standard
deviation of the random variable equals ________.
* 152.4
* 49.3
* 1,451
* 38.1

Correct answer:
38.1
Since all the observations occur with equal probability, the mean of the observations is (12 + 36 + 78 +
111)*0.25 = 59.25. The variance is then given by 0.25*( [12-59.25]^2 + [36-59.25]^2 + [78-59.25]^2 +
[111-59.25]^2) = 1451. The standard deviation is equal to sqrt(1451) = 38.1.
------------------------------
If you deposit $10,000 into an account paying 6% per year, compounded semiannually, how much do
you have in the account in 8 years?
* $15,938.48
* $16,047.06
* $12,667.70
* $14,800.00
* $25,403.52

Correct answer:
$16,047.06
6 ENTER 2 divide i, 10000 PV, 0 PMT, FV. Note that the answer will be displayed as a negative
number. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A cumulative frequency distribution on days absent during a calendar year by employees of a

manufacturing company is shown below.
Days Absent Cumulative Number of Employees
0-2 60
3-5 31
6-8 14
9 - 11 6
12 - 14 2
How many employees were absent more than five days?
* 14
*8
* 22
* 31
The cumulative number for class 6-8 will give us the number of people absent more than five days; 14.
------------------------------
Tran Holten, a quantitative analyst with Smith, Kleen & Beetchnutty Brokerage, has just been informed
of an important error in one of his recent statistical endeavors. Specifically, in one hypothesis test, Mr.
Holten rejected a null hypothesis that later was proven to be true. Which of the following best
describes this type of error in hypothesis testing? Further, if the confidence level of the test were
increased, would the probability of this error increase, decrease, or remain unchanged?
* Type I error; decrease

* Type I error; increase
* Type II error; decrease
* Type I error; remain unchanged
* Type II error; remain unchanged
* Type II error; increase
In this example, Tran Holten has incorrectly rejected a null hypothesis. This type of error in hypothesis
testing is called a Type I error. In hypothesis testing, the Type I error is given much more attention
than the Type II error. In most hypothesis tests, the probability of a null hypothesis is equal to the
significance level of the test. A significance level of 0.01, for example, indicates that a 1% chance
exists that the null hypothesis will be rejected when it is indeed true. Another way to think of the
probability of a Type I error is to observe the following relationship:
{Probability of a Type I error = (1 - confidence level)}.
For example, a confidence level of 95% leaves a 5% probability of a Type I error occurring. If this
confidence level were to increase to say, 98%, then the probability of a Type I error would reduce to
2%. As you can see, there is a relationship between the confidence level of a test and the probability
of a Type I error. If the confidence level of the test in this example were to increase, then the
probability of a Type I error would decrease.
------------------------------
You believe the stock of Microsquish reflects a 90% chance of a dismissal of its contractual liability
suit. If the suit is dismissed, you expect the stock of Microsquish and its partner, AWOL, to rise. If the
suit is not dismissed, both will fall in price. However, you think that AWOL's stock only reflects a 60%
chance of dismissal of this suit. What strategy would be optimal?
* Sell both short

* Buy Microsquish
* Sell AWOL
* Buy AWOL

Correct answer:
Buy AWOL
This is an example of the investment consequences of inconsistent probabilities. If the true probability
of a lawsuit dismissal is only 60%, then AWOL's stock is fairly valued, and Microsquish is overvalued.
If the true probability is 90%, then Microsquish is fairly valued, and AWOL is undervalued. Your can
thus construct a profitable risk-free strategy. You should buy AWOL, because at worst, the stock will
be fairly valued. At best, it is undervalued. You could also simultaneously short Microsquish, because
at best, it is fairly valued; there is a chance that it is overvalued. Note that this example ignores all
other factors other than the lawsuit.
------------------------------
If the correlation coefficient between two variables equals zero, what can be said of the variables X
and Y?
* Highly correlated
* Not correlated
* Dependent on each other
* None of these answers are correct

Correct answer:
Not correlated
r ranges from -1 to +1. The closer it is to -1 or +1, the stronger the relationship. Closer it is to zero, the
weaker.
------------------------------
How much must you deposit today in order to withdraw $500 in 1 year, $700 in 3 years and $500 in 4
years, assuming your money earns 6.5% per year, compounded annually?
* $1,200.00
* $1,503.27
* $1,240.80
* $1,421.95
* $1,437.64

Correct answer:
$1,437.64
Solve this question by working 3 compound interest problems. On the BAII Plus, press 1 N, 6.5 I/Y, 0
PMT, 500 FV, CPT PV, which yields $469.48. Then press STO 1. Then press 3 N, 700 FV, CPT PV,
which yields $579.49. Then press + RCL 1 = STO 1. Then press 4 N, 500 FV, CPT PV, which yields
$388.66. Then press + RCL 1 = to see the answer. On the HP12C, press 1 n, 6.5 i, 0 PMT, 500 FV,
PV. Then press STO 1. Then press 3 N, 700 FV, PV. Then press RCL 1 + STO 1. Then press 4 n, 500
FV, PV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative
number. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
A study of a company's practice regarding the payment of invoices revealed that on the average an
invoice was paid 20 days after it was received. The standard deviation equaled five days. Assuming
that the distribution is normal, what percent of the invoices were paid within 15 days of receipt?
* 37.91%
* 86.74%
* 15.87%
* 34.13%

Correct answer:
15.87%
z = (x-u)/sigma = 15 - 20/5 = -1.0. z = 1 is 0.3413. 1.0 - 0.8413 = 0.1587.
------------------------------
Which of the following is/are discrete random variables?
I. The height of a student selected at random from 217 students.

II. The slot number where the ball comes to rest in a roulette wheel.
III. The color of a playing card drawn at random from a pack.
IV. The speed of a car tracked by the radar gun of highway patrol.
* IV only
* II & III
* I, II & IV.
* II only
* III only
* I, II & III
* I only
* I & II

Correct answer:
II & III
A student's height and the speed of a car can take values over a continuum and hence, are not
discrete variables.
------------------------------
At a local burger joint, 3 workers receive $5.3 per hour, 4 workers receive $4.9 per hour and 2 workers
receive $8.1 per hour. The average pay of a worker at the joint is ________.
* $5.18
* none of these answers
* $5.74
* $6.10

Correct answer:
$5.74
There are 3 + 4 + 2 = 9 workers. The total wages paid equal 3*5.3 + 4*4.9 + 2*8.1 = $51.7. The
average pay equals 51.7/9 = $5.74
------------------------------
Which of the following measures of dispersion are based on deviations from the mean?

* Mean deviation
* All of these answers
* Variance

Correct answer:
All of these answers
The formulas for all three measures are based on the deviation of the mean. Note: variance is the
standard deviation squared.
------------------------------
What semiannual deposit is needed to accumulate $8,000 in 5 years if the account pays 7% per year,
compounded semiannually, assuming that the first deposit is made in 6 months and also assuming
that the account already has $1,250 in it today?
* $336.15
* $677.44
* $559.52
* $278.01
* $531.63

Correct answer:
$531.63
On the BAII Plus, press 10 N, 7 divide 2 = I/Y, 1250 PV, 8000 +/- FV, CPT PMT. On the HP12C, press
10 n, 7 ENTER 2 divide i, 1250 PV, 8000 CHS FV, PMT. Note that the answer this time is a positive
number. This means that the $531.63 is a deposit in addition to the $1,250 original deposit. The
$5,000 is entered as a negative number, because the $1,250 and the $531.63 are deposits and the
$8,000 is a withdrawal. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A variable, W, is normally distributed with a mean of 12. 68% of its observations lie between 8 and 16.
The coefficient of variation of W is ________.
* 0.66
* 1.5
* 3.0
* 0.33

Correct answer:
0.33
For a normal distribution, 68% of the observations lie within one standard deviation of the mean.
Hence, the standard deviation of X equals 12-8 = 4. The coefficient of variation is then equal to
standard deviation/mean = 4/12 = 0.33.
------------------------------
If you buy an item and pay for it with 48 monthly payments of $75, beginning next month, what was the
cash price today, if interest accrues at 13% per year, compounded monthly?
* $575.29
* $44.71
* $2,795.64
* $2,904.12
* $2,598.42

Correct answer:
$2,795.64
The cash price would be the present value of the payments made using the specified interest rate. On
the BAII Plus, press 48 N, 13 divide 12 = I/Y, 75 PMT, 0 FV, CPT PV. On the HP12C, press 48 n, 13
ENTER 12 divide i, 75 PMT, 0 FV, PV. Note that the answer will be shown as a negative number.
Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
A histogram is best described as:
* a collection of frequency classes in which the raw data are arranged.

* a bar chart of relative frequencies.
* a scatter plot of the raw data on the X-Y plane.
* a visual representation of a frequency distribution.

Correct answer:
a visual representation of a frequency distribution.
A histogram is best described as a visual representation of a frequency distribution.
------------------------------
Samples of the wires coming off the production line were tested for tensile strength. The statistical
results (in PSI) were:
Mean = 500
Median = 500
Mode = 500
Standard deviation = 40
Mean deviation = 32
Quartile deviation = 25
Range = 240
Number is sample = 100
The middle 95 percent of the wires tested between approximately what two values?
* 450 and 550

* 420 and 580
* 380 and 620
* 460 and 540

Correct answer:
420 and 580
95% of the observations lie between plus and minus two standard deviations from the mean, so it is
500 +/- 2(40).
------------------------------
Theta Corp.'s stock is expected to appreciate 6% per year. If no dividends are paid out over the next 5
year and the current stock price is $28, what's the expected price in 5 years?
* $39.6
* $37.5
* $41.2
* $34.9

Correct answer:
$37.5
The expected price in 5 years is 28*(1.06^5) = 37.5
------------------------------
The lowest significance level at which the null hypothesis can be rejected is called the:
* F-statistic of the test.

* t-value of the test.
* p-value of the test.
* critical value of the test.

Correct answer:
p-value of the test.
The lowest significance level at which the null hypothesis can be rejected is called the p-value of the
test. Thus, if the p-value is less than the significance level, the null hypothesis can be rejected at that
significance level.
------------------------------
The sponsors of a well-known charity came up with a unique idea to attract wealthy patrons to the
$500 a plate dinner. After the dinner, it was announced that each patron attending could buy a set of
20 tickets for the gaming tables. The chance of winning a prize for each of the 20 plays is 50-50. If you
bought a set of 20 tickets, what is the chance that you will win 15 or more prizes?
* 0.021
* 0.250
* 0.006
* 0.750
n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 20, p = 0.5 and q = 0.5 and r = 15,16,17,18,19,20. Therefore we have
P(15) = 20!(0.5^15)(0.5^5)/15!5! = 0.0148

P(16) = 20!(0.5^16)(0.5^4)/16!4! = 0.0046
P(17) = 20!(0.5^17)(0.5^3)/17!3! = 0.0011
P(18) = 20!(0.5^18)(0.5^2)/18!2! = 0.0002
P(19) = 20!(0.5^19)(0.5^1)/19!1! = 0.00002
P(20) = 20!(0.5^20)(0.5^0)/20!0! = 0.000001
The sum adds up to 0.207.
------------------------------
David's gasoline station offers 4 cents off per gallon if the customer pays in cash and does not use a
credit card. Past evidence indicates that 40% of all customers pay in cash. During a one hour period
twenty-five customers buy gasoline at this station.
What is the probability that more than ten and less than fifteen customers pay in cash?
* .401
* .562
* .541
* .380

Correct answer:
.380
Binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. n = 25, r = 10, p = 0.4 q = 0.6

P(11) = 25!(0.4^11)(0.6^14)/11!14! = 0.1465
P(12) = 25!(0.4^12)(0.6^13)/12!13! = 0.1140
P(13) = 25!(0.4^13)(0.6^12)/13!12! = 0.0760
P(14) = 25!(0.4^14)(0.6^11)/14!11! = 0.0434
Summing up: 0.3799.
------------------------------
What monthly payment, beginning next month, would pay off a debt of $1,000 over 15 months, if the
interest rate on the debt is 18% per year, compounded monthly?
* $5.12
* $66.67
* $74.94
* $68.92
* $76.51

Correct answer:
$74.94
On the BAII Plus, press 15 N, 18 divide 12 = I/Y, 1000 PV, 0 FV, CPT PMT. On the HP12C, press 15
N, 18 ENTER 12 divide i, 1000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative
------------------------------
Suppose 1,600 of 2,000 registered voters sampled said they planned to vote for the Republican
candidate for president. Using the 0.95 degree of confidence, what is the interval estimate for the
population proportion (to the nearest tenth of a percent)?
* 77.7% to 82.3%
* 78.2% to 81.8%
* 69.2% to 86.4%
* 76.5% to 83.5%

Correct answer:
78.2% to 81.8%
and z = 1.96 (for 95%).
------------------------------
What is the present value today of these annual cash flows: $5,000, $4,000, $3,000, $2,000, $1,000?
Assume the first cash flow occurs 1 year from today and an interest rate of 8% per year, compounded
annually.
* $12,854.32
* $15,000
* $13,598.41
* $12,591.14
* $5,000
Correct answer:
$12,591.14
You could solve this question using 5 different compound interest problems, but it is easier to solve
them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER
DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 3000
ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 1000 ENTER DownArrow
DownArrow 2nd Quit. Then press NPV 8 ENTER DownArrow CPT. On the HP12C, press these keys:
0 BlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj 1000
BlueShift CFj. Then press 8 i, YellowShift NPV. The "DownArrow" represents the downward-pointing
arrow on the top row of the BAII Plus keyboard.
------------------------------
Which of the following are true assumptions underlying linear regression?
(1) For each value of X, there is a group of Y values which are normally distributed
(2) The means of these normal distributions of Y values all lie on the straight line of regression
(3) The standard deviations of these normal distributions are equal
* All of them
* None of them
* Only (2) and (3)
* Only (1) and (3)
* Only (1) and (2)
All are part of the assumptions of the linear regression. Make sure you know all the assumptions.
------------------------------
The average cost of tuition, room and board at a small private liberal arts college is reported to be
$8,500 per term, but a financial administrator at Moravian College believes that the average cost is
much higher. A study was conducted using 150 small liberal arts colleges and findings showed that
the average cost per term is $9,000 with a standard deviation of $1,200. Let alpha = 0.05. The Ho: Mu
less than or equal to $8,500. H1: Mu is bigger than $8,500.
What is the critical z-value for this test?
* -1.645
* +1.645
* -1.96
* +1.96

Correct answer:
+1.645
From the hypothesis, this is a one tailed test. Since alpha is 0.05. We have 0.05, which gives us a z
value of +/1.645. From the Ho we see that the rejection region lies to the right of the mean, so the
critical value is +1.645.
------------------------------
Which of the following is/are true?
I. There are as many values above the mode as below it.
II. The sum of the differences between the observations in a sample and the mode of the sample
equals zero.
III. The mode is not affected by "outliers."
IV. A sample has a unique mode.
* I only
* II, III & IV
* II only
* I, III & IV
* III only
* III & IV

Correct answer:
III only
A sample can have multiple modes, corresponding to all the numbers which appear with the maximum
frequency. Note that the mode is not affected by outliers unless an extreme value occurs frequently. In
such a case, it is likely that the observed data contain large errors and hence, it must be reexamined.
(I) holds for the median not the mode i.e. there are as many values above the median as below it. (II)
holds for the mean i.e. the sum of the differences between the observations in a sample and the mean
of the sample equals zero.
------------------------------
If the level of confidence is lowered from 95% to 90%, but the allowable error and the standard
deviation remain the same, what happens to the required sample size?

* Decreases
* Increases
* Remain unchanged

Correct answer:
Decreases
This is related to the degree or confidence and the maximum error allowed. If you want to have a
lower degree of confidence, you can have a smaller sample size (given that the standard deviation is
constant). If you want 100% confidence, you want to use the whole population as your sample.
------------------------------
Affirmative action commitments by industrial organizations have led to an increase in the number of
women in executive positions. Satellite Office Systems has vacancies for two executives, which it will
fill from among four women and six men.
What is the probability that no woman is selected?

* 2/15
* 1/3
* 8/15
* 1/5

Correct answer:
1/3
Probability of both positions being filled by men = 6/10*5/9 = 1/3.
------------------------------
Which measure of central tendency is found by arranging the data from low to high and selecting the
middle value?
* Geometric mean
* Median
* Mean
* Mode

Correct answer:
Median
This is exactly how the median is found. Make sure you know how to find the median in a frequency
distribution also.
------------------------------
How much would an original deposit of $500 grow to be after 8 and a half years, if the deposit earns
interest at 6.5% per year, compounded quarterly?
* $853.97
* $573.42
* $4,254.58
* $837.51
* $864.95

Correct answer:
$864.95
On the BAII Plus, press 500 PV, 0 PMT, 34 N, 6.5 divide 4 = I/Y, then press CPT FV. On the HP12C,
press 500 PV, 0 PMT, 34 n, 6.5 ENTER 4 divide i, then press FV. Note that N = 34 quarters and the
answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
The National Center for Health Statistics reported that of every 883 deaths in recent years, 24 resulted
from an automobile accident, 182 from cancer and 333 from heart disease. Using the relative
frequency approach, what is the probability that a particular death is due to an automobile accident?
* 182/883 or 0.206
* 24/883 or 0.027
* 24/333 or 0.072
* 539/883 or 0.610

Correct answer:
24/883 or 0.027
The probability is the number of automobile deaths divided by the total number of deaths.
------------------------------
You are examining a special group of 5 stock market indices. Of these 5, the returns were 4%, 8%,
12%, 16%, and 10%. What is the population standard deviation of this group of stock market indices?
* 10%.
* 4%.
* 0%.
* 16%.

Correct answer:
4%.
The population standard deviation is the positive square root of the population variance. The
population variance is equal to the sum of the squared differences between each population member
and the population mean, divided by the number of items in the population. In this case, we have a
mean of 10%. The first squared difference will be (4% - 10%)^2 = 0.0036. The others will be 0.0004,
0.0004, 0.0036, and 0. The sum of these squared differences is 0.008, and divided by 5, we get
0.0016 = 16%%. The square root of this gives us our population standard deviation of 4%.
------------------------------
Each salesperson in a large department store chain is rated either below average, average, or above
average with respect to sales ability. Each salesperson is also rated with respect to his or her potential
for advancement either fair, good, or excellent. These traits for the 500 salespeople were cross
classified into the following table.
Sales Ability Potential for Advancement
Fair Good Excellent

Below Average 16 12 22
Average 45 60 45
Above Average 93 72 135
What is the probability that a salesperson selected at random will have above average sales ability
and excellent potential for advancement?
* 0.20
* 0.50
* 0.75
* 0.27

Correct answer:
0.27
We need the prob(above average) = (93 + 72 + 135)/500 and prob(excellent given above average) =
135/300. Therefore 300/500*135/300 = 0.27
------------------------------
What is the Net Present Value of this series of annual cash flows at an interest rate of 12% per year:
Year 0: <$14,000>, Year 1: $5,000, Year 2: $4,000, Year 3: $5,000, Year 4 $4,000? (Note that the <>
are used to indicate a negative number).
* <$379.31>
* $114.37
* <$77.49>
* $51.21
* <$245.97>

Correct answer:
<$245.97>
On the BAII Plus, press CF 2nd CLRWork 14000 +/- ENTER DownArrow 5000 ENTER DownArrow
ENTER DownArrow DownArrow 2nd Quit. Then press NPV 12 ENTER DownArrow CPT. On the
HP12C, press these keys: 14000 CHS BlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 5000
BlueShift CFj 4000 BlueShift CFj. Then press 12 i, YellowShift NPV. The "DownArrow" represents the
downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the
value of P/Y set to 1.
------------------------------
Your investment rate of return is 6% per year and you invest according to the following schedule:
Beginning of year 1: $100

The amount you will have at the end of year 4 is:
* $1,125
* $640
* $808
* $845
This is a future value question. The amount at the end of year 4 = 100*(1.06^4) + 200*(1.06^3) +
300*(1.06^2) + 400*1.06 = 1,125
------------------------------
What quarterly payment is required beginning one period from today to pay off a $3,000 debt, if
interest accrues at 6% per year, compounded quarterly, and the debt is to be retired in 10 years?
* $107.41
* $88.63
* $114.29
* $87.83
* $100.28

Correct answer:
$100.28
On the BAII Plus, press 40 N, 6 divide 4 = I/Y, 3000 PV, 0 FV, CPT PMT. On the HP12C, press 40 n,
6 ENTER 4 divide i, 3000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative
------------------------------
Which of the following statements is false regarding confidence levels and/or tests of significance?
* In most hypothesis testing, the confidence level is equal to 0.10, 0.05, and 0.01.
* All else equal, the confidence interval of a hypothesis test with a 5% level of significance is less than
the confidence interval for a hypothesis test with a 1% level of significance.
* In most hypothesis tests, the power of the test is equal to (1 - alpha).
* More than one of these answers is incorrect.
* The significance level of a test is equal to (1 - confidence level).
* The power of a test is equal to the confidence level.

Correct answer:
More than one of these answers is incorrect.
More than one of these answers is incorrect. Specifically, in most hypothesis tests, the significance
level is equal to the probability of a Type I error (denoted by the Greek letter alpha) and the power of
the test can be found by (1 - beta), where beta represents the probability of a Type II error. Remember
that statisticians are much more concerned with the probability of a Type I error, which is defined as
the act of incorrectly rejecting the null hypothesis. A Type II error, which is defined as the act of
incorrectly failing to reject the null hypothesis, is much more difficult to predict. Second, power of a test
is not equal to the confidence level of the test.
------------------------------
Which of the following is not true regarding the normal distribution?
* It is symmetrical
* It has a single peak
* Mean, median and mode are all equal
* The points of the curve meet the X-axis at z = -3 and z = 3

Correct answer:
The points of the curve meet the X-axis at z = -3 and z = 3
Nothing is stated about the points where the curve meets the X axis (does it meet at all?)
------------------------------
You wish to count the number of ways in which n objects can be assigned to k different categories,
with n_i members in the ith category. The counting method you should use is:
* The permutation rule.


Correct answer:
The multinomial formula.
The number of ways that you can arrange n objects so that there are n_1 of one kind, n_2 of another
kind, and so on, up to n_k of a kth kind, is found by using the multinomial formula: n! / [(n_1)! * (n_2)! *
... * (n_k)!].
------------------------------
If you owe 3 debts ($800 due 3 months from now, $900 due 7 months from now, and $1,200 due 11
months from now), what single payment can you make today to settle them, if interest is assessed at
10% per year, compounded monthly?
* $2,387.29
* $2,600.00
* $3,552.39
* $2,724.84
* $2,504.88

Correct answer:
$2,724.84
Find the answer to this question by solving 3 compound interest problems. On the BAII Plus, press 3
N, 10 divide 12 = I/Y, 0 PMT, 800 FV, CPT PV which yields $849.21. Then press STO 1. Then press 7
N, 900 FV, CPT PV, which yields $780.33. Then press + RCL 1 = STO 1. Then press 11 N, 1200 FV,
CPT PV, which yields $1,095.31. Press + RCL 1 = to see the answer. On the HP12C, press 3 n, 10
ENTER 12 divide i, 0 PMT, 800 FV, PV. Then press STO 1. Then press 7 n, 900 FV, PV. Then press
RCL 1 + STO 1. Then press 11 n, 1200 FV, PV. Press RCL 1 + to see the answer. Make sure the BAII
Plus has the P/Y value set to 1.
------------------------------
If an investor who has a required rate of return of 7% per year pays $1,000 for a five-year ordinary
annuity, the annuity pays ________ per year.
* $244
* $256
* $271
* $263
If the annuity pays C per year, we have 1,000 = C/0.07*(1-1/(1.07^5)) => C = 1,000*0.07/0.287 = 244.
------------------------------
For a standard normal distribution what is the probability that z is greater than 1.75?
* 0.4599
* 0.0401
* 0.9599
* 0.0459

Correct answer:
0.0401
The area under the curve for z = 1.75 is 0.4599. Therefore, 0.4599*2 = 0.9198. We want z >1.75. So
we want (1 - 0.9198)/2 = 0.0401.
------------------------------
An automatic machine inserts mixed vegetables into a plastic bag. Past experience revealed that
some packages were underweight and some were overweight, but most of them had satisfactory
weight.
Weight % of Total
Underweight 2.5
Satisfactory 90.0
Overweight 7.5
Three packages are selected from the food processing line.
What is the probability of selecting and finding that all three of them are overweight?
* 0.0004218
* 0.0000156
* 0.075
* 0.0000001
P(all three overweight)=0.075*0.075*0.075 = 0.0004218.

------------------------------
Variables X and Y are perfectly negatively correlated. Given only this information, if you run a
regression of Y against X, which of the following is/are true?
I. The intercept term is zero.

II. The slope equals 1.
III. R-square equals 1.
IV. The percentage of unexplained variance equals 100%.
* I only
* III & IV
* IV only
* I & II
* III only
* I & III
* II only

Correct answer:
III only
If Y = aX + b, then X and Y are perfectly negatively correlated for any value of b and any negative
value of a. Hence, given the information in the question, the slope must be negative but not
necessarily equal to 1 and the intercept term cannot be determined. Since the correlation coefficient is
1, R-square is also 1, as expected, since all the variation in Y can be explained by variation in X. Note
that the percentage of unexplained variance equals zero.
------------------------------
If you make an initial deposit $500 now into an account, an additional deposit of $800 in 2 years, and a
final deposit of $300 in 4 years, how much is in your account in 5 years? Assume the account earns
interest at 8% per year, compounded annually.
* $2,120.04
* $2,408.29
* $2,066.43
* $1,905.51
* $2,331.88

Correct answer:
$2,066.43
Solve this question by working several compound interest problems, moving each dollar amount over
to year 5. On the BAII Plus, press 5 N, 8 I/Y, 500 PV, 0 PMT, CPT FV, which yields $734.66. Then
press STO 1, 3 N, 800 PV, CPT FV, which yields $1,007.77. Then press + RCL 1 = STO 1. Then
press 1 N, 300 PV, CPT FV, which yields $324.00. Then press + RCL 1 = to see the answer. On the
HP12C, press 5 n, 8 i, 500 PV, 0 PMT, FV. Then press STO 1, 3 n, 800 PV, FV. Then press RCL 1 +
STO 1. Then press 1 n, 300 PV, FV. Then press RCL 1 + to see the answer. Note that the answer will
be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on
the distance from year 5. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
What simple annual interest rate would cause a $110 deposit to grow to $120 in 2 years?
* 4.55%
* 9.09%
* 8.33%
* 54.55%
* 4.17%
To solve this question, we have to rearrange the simple interest formula, I=PRT so that the R is by
itself. Note that the I (interest) is equal to 10 (120 - 100). On the BAII Plus, press 10 divide 110 divide
2 = to see the answer. On the HP12C, press 10 ENTER 110 divide 2 divide to see the answer.
------------------------------
The probability that events A and B do not occur simultaneously equals 0.77. The probability of neither
A nor B occurring equals 0.38. If P(A) equals 0.26, the probability of B occurring equals ________.
* 0.43
* 0.59
* 0.62
* 0.21

Correct answer:
0.59
The probability that events A and B do not occur simultaneously equals one minus the probability that
events A and B occur simultaneously. Thus,
P(A and B) = 1 - 0.77 = 0.23.
The probability of neither A nor B occurring equals one minus the probability of either A or B occurring.
Thus, P(A or B) = 1 - 0.38 = 0.62.
Now, P(A or B) = P(A) + P(B) - P(A and B). Therefore, P(B) = P(A or B) - P(A) + P(A and B) = 0.62 -
0.26 + 0.23 = 0.59.
------------------------------
What is the slope of the regression line?

* 0.6
* 0.0
* 0.5
* 0.7

Correct answer:
0.7
For this, you need to create tables with columns for X,Y,XY,X^2,Y' and Y-Y'. This will be as follows.
X Y XY X^2 Y' Y-Y'

-2 0 0 4 -0.4 0.4
-1 0 0 1 0.3 -0.3
0 1 0 0 1 0
1 1 1 1 1.7 -0.7
2 3 6 4 2.4 0.6
Sum 0 5 7 10 0
N=5.
The regression equation is Y' = a + bX.
Then to find the slope, which is b, use the formula
b = [n(SXY)-(SX)(SY)]/[n(SX^2)-(SX)^2] where here S stands for "Sum of."
b = [5(0)-(0)(5)]/[5(10)-0] = 0.7
------------------------------
Which of the following statements regarding confidence levels and/or tests of significance is/are false?
Choose the best answer.
* In most hypothesis tests, the significance level is set equal to 0.10, 0.05, or 0.01.
* All else equal, the probability of a Type I error decreases as the level of confidence increases.
* The probability of a Type I error is denoted by the Greek letter alpha.
* The confidence level of a hypothesis test can be found by subtracting the level of significance from
the number one.
* More than one of these answers is false.
* The significance level of a test is equal to the power of a test.

Correct answer:
The significance level of a test is equal to the power of a test.
Remember that the power of the test is equal to (1 - Type II error probability). This is because in most
hypothesis tests, the level of significance, denoted by alpha, is set equal to the probability of a Type I
error. Statisticians are primarily concerned with the probability of a Type I error, and rarely specify the
probability of a Type II error. Determining the probability of a Type II error, which is defined as the act
of incorrectly failing to reject the null hypothesis, is inherently difficult to determine. The probability of a
Type I error, however, can be determined with relative ease. A Type I error is defined as the act of
incorrectly rejecting the null hypothesis.
The remaining answers are all correct.
------------------------------
In an investment environment, an initial outlay of $1 grows to $1.23 in 3 years. If you are expecting a
cash inflow of $500 in 3 years, what's the present value of the cash flow to you?
* $431.2
* $452.25
* $406.5
* $615
Correct answer:
$406.5
The discount factor for 3 years is 1/1.23. Hence, the PV of $500 in 3 years is 500/1.23 = 406.5.
------------------------------
The median and the mode of the sample:
3, 2, 4, 5, 6, 99, 99, 100
equal:
* 99, 6
* 6, 99
* 5, 99
* 5.5, 99

Correct answer:
5.5, 99
The mode equals the most common observation; in this case, it is 99.
If the number of observations is even, the median is the mean of the two middle observations. In this
dataset, arrange the data in ascending order and select the 4th and 5th observations. These happen
to be 5 and 6. The median is then 5.5.
------------------------------
What is the proportion of the total area under the normal curve within plus and minus two standard
deviation?
* 68%
* 95%
* 99.7%
* 34%

Correct answer:
95%
95% of the area under the curve lies within plus and minus one standard deviation of the mean.
------------------------------
Suppose the probability that oil prices will rise any given quarter is 0.51, and the probability that oil
prices will stay level or decline is 0.49. If oil prices rise, GNP will contract by 1% with 80% probability,
and expand by 0.5% with 20% probability. If oil prices decline or stay level, GNP will expand 3% with a
75% probability and contract 0.5% with a 25% probability. What is the expected change in GNP in the
next quarter?
* +0.68%
* -0.86%
* +0.86%
* -0.68%
We need the total probability rule for expected value, for which the formula is E(X) = E(X | S_1) *
P(S_1) + E(X |S_2) * P(S_2) + ... + E(X |S_n) * P(S_n). Here, E(X) is the expected change in GNP.
S_1 is the event that oil prices rise, and S_2 is the event that oil prices fall. Therefore, E(X) = 0.51 * (-
1%*80% + 0.5%*20%) + 0.49 * (3%*75% - 0.5%*25%) = 0.68%, an expansion.
------------------------------
If you already have $500 in a savings account, how much must you deposit 4 years from now in order
to have $5,000 in 8 years, assuming the account earns interest at 10% per year, compounded
annually?
* $4,500.00
* $732.05
* $2,683.02
* $3,415.07
* $2,332.54

Correct answer:
$2,683.02
The way to approach this question is to find the PV today of the $5,000 amount, determine the
difference between this PV and the existing $500 amount in the account, and then move this
difference out to the 4 year from now point. On the BAII Plus, press 8 N, 10 I/Y, 0 PMT, 5000 FV, CPT
PV. Then press + 500 =. Then press PV, 4 N, CPT FV to see the answer. On the HP12C, press 8 n,
10 i, 0 PMT, 5000 FV, PV. Then press 500 +. Then press PV, 4 n, FV to see the answer. Make sure
the BAII Plus has the P/Y value set to 1.
------------------------------
The joint probability of events A and B occurring equals 0.11. The probability of neither A nor B
occurring equals 0.64. If P(A) equals 0.24, the probability of B occurring equals ________.
* 0.46
* 0.29
* 0.51
* 0.23

Correct answer:
0.23
We are given that P(neither A nor B) = 0.64, P(A and B) = 0.11 and P(A) = 0.24.
The probability of neither A nor B occurring equals one minus the probability of either A or B occurring
i.e. P(neither A nor B) = 1 - P(A or B).
Thus, P(A or B) = 1 - P(neither A nor B) = 1 - 0.64 = 0.36.
Now, P(A or B) = P(A) + P(B) - P(A and B)
Therefore, P(B) = P(A or B) - P(A) + P(A and B) = 0.36 - 0.24 + 0.11 = 0.23.
------------------------------
I. There are as many values above the median as below it.

II. The sum of the differences between the observations in a sample and the median of the sample
equals zero.
III. The median is greatly affected by "outliers."
IV. A sample has a unique median.
* II & IV
* I, II & IV
* I only
* II only
* I & IV
* III only
* IV only
* I, III & IV

Correct answer:
I & IV
By definition, there are as many values above the median as below it. Each sample has a unique
median. (II) and (III) hold for the mean, not for the median.
------------------------------
compounded monthly, how much is in your account after the last deposit?
* $70,343.82
* $48,833.09
* $49,904.67
* $143,582.01
* $69,306.13

Correct answer:
$69,306.13
------------------------------

0-2 60
3-5 31
6-8 14
9 - 11 6
12 - 14 2
How many employees were absent fewer than six days?
* 60
* 91
* 46
* 31

Correct answer:
46
This is the difference between the cumulative numbers for the 0-2 group and the 6-8 group, 60 - 14 =
46. There are 46 people between those two groups and they were absent fewer than six days.
------------------------------
A perpetuity of $5,000 a year is priced at $40,000. The annual discount rate is:
* 12.5%
* 13.1%
* 11.8%
* 12.75%
If r is the discount rate, then 40,000 = 5,000/r, giving r = 12.5%
------------------------------
The formula for conditional probability is given by:
* P(A | B) = P(AB) / P(B)

* P(A | B) = P(AB) / P(A)
* P(A | B) = P(AB) * P(A)
* P(A | B) = P(AB) * P(B)
A conditional probability takes the form of P(A | B) = P(AB) / P(B), where P(B) does not equal 0. Note
that this is just a rearranged form of the formula for joint probability.
------------------------------
The closing prices of a common stock have been 61 1/2, 62, 61 1/4, 60 7/8, and 61 1/2 for the past
week. What is the range?

* $1.750
* $1.875
* $1.250
* $1.125

Correct answer:
$1.125
62 - 60.875 = 1.125
------------------------------
You run a mutual fund that holds 24 stocks. Each week, you intend to comprehensively review 3 of
them. Assuming this is the first week you are doing this, how many ways can you choose 3 from the
24?
* 2,024.
* 1,492.
* 1,024.
* 2,048.
items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!]. In
this case, we have (24 choose 3) = 24! / [3! * 21!] = (24 * 23 * 22 ) / (6!) = 2,024.
------------------------------
An empirical finance professor estimates the following regression between the return on a stock, R,
and the return on S&P 500 index, Rsp:
R = 5% + 1.1 Rsp + error term
If the regression R-square is 0.25, estimate the change in the return on the stock when the return on
the S&P 500 index changes from 12% to 15%.
* 19.5%
* 8.8%
* 18.2%
* 3.3%

Correct answer:
3.3%
With the given regression, the change in the return on the stock when the return on the S&P 500 index
changes by one unit equals the slope coefficient, 1.1. Hence, when the return on the S&P 500 index
changes by 3% from 12% to 15%, the return on the stock will change by 1.1*3% = 3.3%
------------------------------
The lengths of time (in minutes) several underwriters took to review applications for similar insurance
coverage are: 50, 230, 52 and 57. What is the median length of time required to review an
application?
* 141.0
* 54.5
* 109.0
* 97.25

Correct answer:
54.5
Order the numbers: 50,52,57,230. The median is (52 + 57)/2 = 54.5
------------------------------
Ho: mean = 0 H1: mean > 0
For the given sample, he calculates the z-statistic. Then, the region of rejection at the 99% level is
given by:

* z-statistic < 1.96
* z-statistic < -2.32 or z-statistic > +2.32
Since the alternative is directional and to the right, we use a right-tailed test. For this, the critical value
at 99% level is +2.32. +2.32 is the value above which only 1% of the probability mass of the standard
normal distribution lies). The rejection region is then given by z-statistic > +2.32.
------------------------------

Days Absent Cumulative ## of Employees

0-2 60
3-5 31
6-8 14
9 - 11 6
12 - 14 2
How many employees were absent between 6 and 11 days?
* 12
* 17
* 20
*8
This is found by the difference between the 6-8 class and the 12-14 class. In this case: 14 - 2 = 12.
------------------------------
Which of the following is the formula for the correlation between X and Y?
* Cov(X,Y)/[(sigma_X)*(sigma_Y)]^2.
* [Cov(X,Y)]^0.5
* (sigma_X)*(sigma_Y)/Cov(X,Y).
* Cov(X,Y)/[(sigma_X)*(sigma_Y)].

Correct answer:
Cov(X,Y)/[(sigma_X)*(sigma_Y)].
The correlation between two random variables X and Y is Cov(X,Y)/[(sigma_X)*(sigma_Y)].
------------------------------
The coefficient of variation of a distribution X is twice that of Y. If X and Y have the same means, the
variance of Y is:
* half that of X.
* twice that of X.
* same as that of X.

Correct answer:
none of these answers.
The coefficient of variation equals the standard deviation divided by mean. Since X and Y have the
same mean, X must have a standard deviation which is twice that of Y for its coefficient of variation to
be twice that of Y. Then, the variance of X is 2^2 = 4 times that of Y.
------------------------------
Milton Samuel, a quantitative analyst with Middle Road Brokerage, is examining a data sample and
has amassed the following information:
Standard deviation of the sample: 12.37

Number of observations: 100
Sample mean: 231
Assume that Mr. Samuel formulates a null hypothesis stating that the population mean is equal to 212.
Additionally, assume that the population standard deviation is unknown. Given this information, what is
the standard error of the estimate? Further, what is the test statistic? Choose the best answer.
* 1.530; 10.19
* 1.250; 15.20
* 1.250; 16.91
* 1.237; 5.40
* 1.530; 12.42
* 1.237; 15.36

Correct answer:
1.237; 15.36
If the population standard deviation is unknown, as in this example, the standard error of the estimate
is found by using the following equation:
{Standard error = s / square root of n} where s = the sample standard deviation and n = the number of
observations in the sample.
In this example, all of the necessary information has been provided, and the determination of the
standard error of the estimate is found as:
{Standard error = [12.37 / 10] = 1.237}
Now that the standard error of the estimate has been calculated, the test statistic can be found by
using the following equation:
{Test statistic = [sample statistic - value of the population parameter under the null hypothesis] /
standard error of the sample statistic].
Again, all of the necessary information has been provided, and the calculation of the test statistic is
found as follows:
{Test statistic = [231 - 212] / 1.237 = 15.360}
------------------------------
If you deposit $123 into an account paying 6% per year simple interest, what is the balance in your
account 8 months later?
* $182.04
* $246.00
* $123.92
* $127.92
* $131.51

Correct answer:
$127.92
Calculate the simple interest earned and add it to the original deposit. On the BAII Plus, press 123 x
0.06 x 8 divide 12 = + 123 = to see the answer. On the HP12C, press 123 ENTER 0.06 x 8 x 12 divide
123 + to see the answer.
------------------------------
Suppose you were given $10,000 today and deposited it into an account paying 10% per year,
compounded monthly. If you know that you will need $5,000 in the account 5 years from now, what
monthly withdrawal can you make from the account, beginning one month from now, that will leave the
account with exactly $5,000 in it in 5 years?
* $147.90
* $83.33
* $1,066.81
* $140.04
* $1,001.65
On the BAII Plus, press 60 N, 10 divide 12 = I/Y, 10000 PV, 5000 +/- FV, CPT PMT. On the HP12C,
press 60 n, 10 ENTER 12 divide i, 10000 PV, 5000 CHS FV, PMT. Note that the answer is a negative
number. This is because it is a withdrawal from the account balance, just as the $5,000 is. Make sure
the BAII Plus has the value of P/Y set to 1.
------------------------------
How many deposits of $450 a month, beginning next month, are needed before an account has
$200,000 in it, assuming it had a balance of $0 at the beginning and that interest is 6% per year,
compounded monthly?
* 166.79
* 234.6
* 119.48
* No solution/Error
* 444.44

Correct answer:
234.6
One of the two dollar amounts must be entered as a negative number and the other as a positive
number or an error will result. On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 450 PMT, 200000 +/-
FV, CPT N. On the HP12C, press 6 ENTER 12 divide i, 0 PV, 450 PMT, 200000 CHS FV, n. Note that
the HP12C returns a result of 235. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
Suppose you need $1,500 in 15 months. How much must you deposit today, if the deposit will earn
interest at 8% per year, compounded monthly?
* $472.86
* $1,249.93
* $1,357.71
* $291.77
* $341.55

Correct answer:
$1,357.71
On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 0 PMT, 1500 FV, CPT PV. On the HP12C, press 15 n,
8 ENTER 12 divide i, 0 PMT, 1500 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
Where does the coefficient of variation (CV) generally lie between?
* -1 and +1
* -3 and +3
* 0% and infinity
* Unlimited values

Correct answer:
0% and infinity
CV always lies between 0% and infinity. The larger the CV, the larger the dispersion.
------------------------------
What deposit would you need to make today in order to withdraw $200 a month, beginning next
month, for the next 5 years, if the deposit will accrue interest at 8% per year, compounded monthly?
* $7,237.66
* $9,863.69
* $11,492.59
* $8,399.27
* $9,141.23

Correct answer:
$9,863.69
8 ENTER 12 divide i, 200 PMT, 0 FV, PV. The answer will be displayed as a negative number. Make
sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A survey of 144 retail stores revealed that a particular brand and model of a VCR retails for $375 with
a standard deviation of $20.
If 95% and 98% confidence intervals are developed to estimate the true cost of the VCR, what
difference would they have?
* Interval widths
* Z-variates
* Both interval widths and z-variates
* Standard errors

Correct answer:
Both interval widths and z-variates
The interval widths and the z variates differ according to the rule chosen. The standard error is the
same regardless.
------------------------------
What is a Type II error?
* Rejecting a false alternative hypothesis

* Accepting a false null hypothesis
* Accepting a false alternative hypothesis
* Rejecting a false null hypothesis

Correct answer:
Accepting a false null hypothesis
The type II error is accepting the null hypothesis when it is actually false.
------------------------------
Which of the following statements regarding hypothesis testing is false?
* If the population standard deviation is known, then the standard deviation of the sample is found by
dividing the population standard deviation by the square root of "n."
* The test statistic is also known as the "critical value."
* A Type II error is defined as the act of incorrectly failing to reject the null hypothesis.
* The level of significance is denoted by the Greek letter alpha.
* Despite the different ways to formulate a hypothesis, the null hypothesis is always tested at the point
of equality.

Correct answer:
The test statistic is also known as the "critical value."
The test statistic is measured AGAINST the critical value. The test statistic is defined as "...a quantity,
calculated on the basis of sample, whose value is the basis for deciding whether to reject or not reject
the null hypothesis." The critical value is found by referencing the probability distribution for the series
(z-distribution, t-distribution, Chi-squared distribution, F-distribution, etc.).
The remaining answers are correct.
------------------------------
What is the Net Present Value of this series of annual cash flows using an interest rate of 20% per
year: Year 0: <$6,000>, Year 1: $4,000, Year 2: $3,000, Year 3: $2,000, Year 4: $1,000? (Note that
the <> are used to indicate a negative number).
* $1,077.49
* $1,056.33
* $589.11
* $1,134.39
* $981.21

Correct answer:
$1,056.33
downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has
the P/Y value set to 1.
------------------------------
What is the variable used to predict another variable called?
* Important
* Causal
* Independent
* Dependent

Correct answer:
Independent
The dependent variable is the variable Y which is being predicted by the X variable, the independent
variable. The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of
the line. Y' is the predicted value of Y given a specific value of X.
------------------------------
If you deposit $345 into an account paying 5.45% per year simple interest, how much interest will be
earned after 10 months?
* $15.67
* $360.67
* $188.03
* $$359.59
* $14.59
The question only asks for the earned interest, not the total amount in the account. On the BAII Plus,
press 345 x 0.0545 x 10 divide 12 = to see the answer. On the HP12C, press 345 ENTER 0.0545 x 10
x 12 divide to see the answer.
------------------------------
If two events A and B are mutually exclusive, what does the special rule of addition state?
* P(A and/or B) = P(A) +P(B)

* P(A and B) = P(A) + P(B)
* P(A or B) = P(A) - P(B)
* P(A or B) = P(A) + P(B)

Correct answer:
P(A or B) = P(A) + P(B)
The key word is that these events are mutually exclusive. So P(A or B) = P(A) + P(B). The probabilities
stand alone.
------------------------------
Assume you deposit $300 now into an account that had nothing in it previously, make an additional
deposit of $400 in 1 year, and a final deposit of $200 in 4 years. How much is in your account in 6
years, if the account earns interest at 7% per year, compounded annually?
* $418.29
* $1,431.88
* $1,120.04
* $925.51
* $1,240.22

Correct answer:
$1,240.22
to year 5. On the BAII Plus, press 6 N, 7 I/Y, 300 PV, 0 PMT, CPT FV, which yields $450.22. Then
press STO 1, 5 N, 400 PV, CPT FV, which yields $561.02. Then press + RCL 1 = STO 1. Then press
2 N, 200 PV, CPT FV, which yields $228.98. Then press + RCL 1 = to see the answer. On the HP12C,
press 6 n, 7 i, 300 PV, 0 PMT, FV. Then press STO 1, 5 n, 400 PV, FV. Then press RCL 1 + STO 1.
Then press 2 n, 200 PV, FV. Then press RCL 1 + to see the answer. Note that the answer will be
displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the
distance from year 6.
------------------------------
If you were to receive $100 per year for the next 10 years, starting today, and the discount rate
applicable is 9% per year, what's the value of this stream of cash flows to you?
* $700
* $600
* $678
* $642
Since you receive one payment today, the stream of cash flow equals $100 plus a 9-year ordinary
annuity. The value of the annuity today = (100/0.09)*(1 - 1/(1.09^9)) = 600. Thus, the total value to you
is 600+100 = 700.
------------------------------
You have set up a test of a suitably phrased null hypothesis. After analyzing the statistical
underpinnings of the test and the stringency requirements you have imposed, you have determined
that the probability of rejecting the null hypothesis equals 30%. The probability that you will reject the
null hypothesis when it is true is equal to 13% and the probability that you will reject the null
hypothesis when it is false is equal to 17%. The significance level of your test equals ________.
* 17%
* 6%
* 30%
* 13%

Correct answer:
13%
The significance level equals the probability of making a Type I error, which is the error of rejecting the
null when it is, in fact, true. In this case, this has been given to be equal to 13%.
------------------------------
A study of business faculty at state supported institutions in Ohio revealed that the mean salary for
nine months is $52,000 and the standard deviation of the sample is $3,000. The study also showed
that the faculty had been employed an average (mean) of 15 years with a standard deviation of 4
years. How does the relative dispersion in the distribution of salaries compare with that of the lengths
of service?
* Salaries about 6%, service about 27%

The coefficient of variation = (s*100)/mean. Salary: 3,000*100/52,000 = 5.7%. Service: 4*100/15 =

26.7%.
------------------------------
Johnny deposited a check he received from his Aunt when he was 10 years old into an account paying
10% per year, compounded monthly. If the original check was for $100, how much does Johnny have
in his account today, 50 years later?
* $151.43
* $5,905.33
* $58,304.28
* $100.00
* $14,536.99

Correct answer:
$14,536.99
There are 600 months in 50 years (50 x 12). On the BAII Plus, press 600 N, 10 divide 12 = I/Y, 100
PV, 0 PMT, CPT FV. On the HP12C, press 600 n, 10 ENTER 12 divide i, 100 PV, 0 PMT, FV. Note
that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y
set to 1.
------------------------------
Past experience of a large manufacturing firm with administering a test to recent college graduates
who had applied for a job revealed that the mean test score was 500, and the standard deviation was
50. The distribution of the test scores was normal. Based on this experience, management is
considering placing a person whose scores is in the upper 6 percent of the distribution directly into a
responsible position. What is the lowest score a college graduate must earn to qualify for a
responsible position?

* 460
* 625
* 578
* 50

Correct answer:
578
Find the z value representing 44% of the area under the curve. From the z tables, z = 1.55. Using z =
(x-u)/sigma. 1.55 = (x-500)/50. x = 577.5
------------------------------
You are examining a portfolio composed of 33% money-market investments, 9.5% bonds, and 57.5%
stocks. Last year, the return on the money-market investments was 4%; the return on bonds was 9%,
and the return on stocks was -11%. What is the contribution of stocks toward the portfolio weighted
average return?
* -57.50%.
* -11.00%.
* -4.15%.
* -6.325%.

Correct answer:
-6.325%.
The portfolio weighted-average mean return is equal to the sum (as i goes from 1 to n) of w_i * X_i,
where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of
the ith asset. The contribution of any asset will equal its weight in the portfolio times its return. Here,
we get 0.575 * -0.11 = -6.325%.
------------------------------
When comparing the riskiness of investments with different expected returns, one must use ________.
* skewness
* the coefficient of variation
* the standard deviation
* kurtosis

Correct answer:
the coefficient of variation
The coefficient of variation equals the ratio of the standard deviation to the mean. Thus, it standardizes
the variation in the returns in terms of the expected values.
------------------------------
* 6.15%
* 4.94%
* 7.25%
* 2.78%
* 5.80%

Correct answer:
5.80%
On the BAII Plus, press 20 N, 0 PV, 500 PMT, 18000 +/- FV, CPT I/Y. On the HP12C, press 20 n, 0
PV, 500 PMT, 18000 CHS FV, i.
------------------------------
The heights of the five members in a family have been measured and found to be (in centimeters):
146, 162, 165, 187, 152
The range and the mean deviation of the heights are:
* 41, 46.9
* 41, 54.4
* 41, 10.9
* 49, 61.8

Correct answer:
41, 10.9
range = maximum value - minimum value = 187 - 146 = 41 centimeters.
To calculate the mean deviation, you have to first calculate the mean. The mean equals (146 + 162 +
165 + 187 + 152)/5 = 162.4. The total deviation is abs(146-162.4) + abs(162-162.4) + abs(165-162.4)
+ abs(187-162.4) + abs(152-162.4) = 16.4 + 0.4 + 2.6 + 24.6 + 10.4 = 54.4. Therefore, MD = 54.4/5 =
10.88.
------------------------------
How long will it take for an initial deposit of $2,500 to grow to be $4,000, if the interest rate is 5% per
* 32 years
* 9.63 years
* 7.72 years
* 6.93 years
* 14.48 years

Correct answer:
9.63 years
Either the $2,500 or the $4,000 must be entered as a negative number - it won't matter which. On the
BAII Plus, press 5 I/Y, 2500 PV, 0 PMT, 4000 +/- FV, CPT N. On the HP12C, press 5 i, 2500 PV, 0
PMT, 4000 CHS FV, n. Note that the HP12C will indicate 10 years for the answer.
------------------------------
If a 90% and 95% confidence intervals are developed to estimate the true cost of the VCR, what
similarities would they have?
* Standard errors
* Both point estimates and standard errors
* Z-variates
* Point estimates

Correct answer:
Both point estimates and standard errors
The point estimates and the standard errors will be the same. The z-variates will differ according to the
area under the curve.
------------------------------
I. Multiplying a variable by a positive constant will cause its standard deviation to be multiplied by the
square of that constant.
II. Multiplying a variable by a constant will cause its mean to be multiplied by that constant.
III. Adding a constant leaves the mean of a variable unchanged.
IV. Adding a positive constant to a variable causes the standard deviation of the variable to increase
by the same amount.
* IV only
* I, II and IV
* II only
* I only
* I & II
* III only
* II only
* II and IV

Correct answer:
II only
Adding a constant changes the mean by the same amount and leaves the variance and standard
deviation unchanged. Multiplying with a constant causes the mean and the standard deviation to be
multiplied by the same constant. The variance gets multiplied by the square of the constant.
------------------------------
If the alternate hypothesis states that u (Mu) does not equal 4,000, what is the rejection region for the
hypothesis test?
* Center
* Lower or left tail
* Upper or right tail
* Both tails

Correct answer:
Both tails
The alternate hypothesis says does not equal, which means it could be less or more than 4000. So we
must consider both tails.
------------------------------
An investor faces the following investment scenarios:
Scenario Probability Return

Bull market 60% 30%
Neutral market 30% 7%
Market crash 10% -25%
The variance of the investor's rate of return is ________.
* 17.6%%
* 4.17%%
* 307.4%%
* 6.17%%

Correct answer:
307.4%%
The expected return equals 0.6 * 30% + 0.3 * 7% + 0.1*(-25%) = 17.6%.
To calculate the variance, an easy way is to first calculate the second moment, which is the expected
value of the square of the return. Thus, the second moment equals 0.6*[(30%)^2] + 0.3*[(7%)^2)] +
0.1*[(-25%)^2] = 617.2%%.
The variance of a random variable equals the second moment minus the square of the mean. In this
case, the variance equals 617.2%% - 17.6%^2 = 307.4%%
------------------------------
According to Chebyshev's Theorem, what percent of the observations lie within plus and minus 1.75
standard deviations of the mean?
* Cannot compute because it depends on the shape of the distribution

* 56%
* 95%
* 67%

Correct answer:
67%
Chebyshev's theorem applies regardless of the shape of the distribution. The minimum proportion that
lie within k standard deviations of the mean is at least 1-[1/(k^2)]. In this case k = 1.75. k^2 = 3.0625.
So we get 67%.
------------------------------
I. The mean of a sample represents its average value.

II. The median can only be calculated if the sample contains an odd number of values.
III. The mode is not affected by extreme outliers in the data.
IV. For samples with an even number of data points, the mode is preferable to the median as a
measure of central tendency.
* III only
* IV only
* II only
* I only
* I & II
* I, III & IV
* II & III
* I & III

Correct answer:
I & III
Note that the mode is not affected by outliers unless an extreme value occurs frequently. In such a
case, it is likely that the observed data contain large errors and hence, it must be reexamined.
The median of a set with odd number of observations equals the "middle" observation. If the number
of observations is even, the median is the mean of the two middle observations. Thus, II is false.
Finally, there is no reason for a rule like (IV) to hold.
------------------------------
Consider the following three investments with annual compounding:
Present value years interest rate

1. $22,500 5 6% per year
2. $10,000 7 5% per year
3. $15,000 3 8% per year
The future values of the 3 investments, at the ends of their investment periods, are:
* $26,454, $12,067, $17,181

* $23,850, $10,500, $16,200
* $30,110, $14,071, $18,896
* $16,813, $7,107, $11,907

Correct answer:
$30,110, $14,071, $18,896
Future value = Present value*(1+r)^N for annual compounding. Therefore,
Present value years rate Future value

1. 22,500 5 6% 22,500*(1.06)^5 = 30,110
2. 10,000 7 5% 10,000*(1.05)^7 = 14,071
3. 15,000 3 8% 15,000*(1.08)^3 = 18,896
Note that the future value must always be greater than the present value.
------------------------------
________ states the range over which a population parameter likely lies.
* A point estimate
* A normal deviate
* A confidence interval
* A stratified range estimate

Correct answer:
A confidence interval
A confidence interval gives a range of values within which there is a high probability that the
population parameter occurs.
------------------------------
In graphs of return performance, which of the following scales is commonly used?
* Exponential scale.
* Semi-logarithmic scale.
* Arithmetic scale.
* Log-normal scale.

Correct answer:
Semi-logarithmic scale.
Historical returns are often graphed using a semi-logarithmic scale, where equally-large y-axis
movements correspond to equally-large percentage changes. An arithmetic scale, on the other hand,
has equally-large y-axis movements corresponding to equally-large arithmetic changes. So on an
arithmetic scale, the vertical movement for a price change from 100 to 110 is just as large as the
vertical movement from 10,000 to 10,010. This is widely considered a distortion (if you are considering
rates of return), so the semi-logarithmic scale is used instead.
------------------------------
A researcher has a sample of 900 observations from a population whose standard deviation is known
to be 3,381. The mean of the sample is calculated to be 465.2. The null hypothesis is stated as Ho:
mean < 200. The p-value in this case equals ________.
* 1.54%
* 2.26%
* 1.13%
* 0.94%

Correct answer:
0.94%
To test the hypothesis, you need to calculate the smallest z-statistic since the null hypothesis is
unidirectional and to the left. This makes it the hardest to reject the null and you should always use the
most stringent criterion for rejecting the null. After all, the null is the hypothesis maintained to be true
by default and only a sufficient weight of evidence should be used to reject that view.
The smallest z-statistic under the null is calculated to be (465.2 - 200)/(3381/(900^.5)) = 2.35. The
right-tailed probability of observing a z-statistic which is at least as big as 2.35 equals 1.0 - 0.9906 =
0.0094 = 0.94%. This is the p-value of the right-tailed test in this sample.
------------------------------
The weights (in kilograms) of a group of crates being shipped to Panama are 95, 103, 110, 104, 105,
112 and 92. What is the mean deviation?
* 52.50 kg
* 5.43 kg
* 0.53 kg
* 6.25 kg

Correct answer:
5.43 kg
The mean is 103. The mean deviation is the absolute values of the deviation from the mean: (8 + 0 + 7
+ 1 + 2 + 9 + 11)/7 = 38/7 = 5.43
------------------------------
A distribution has a mean of 7 and a range of -100 to +50. The distribution is ________.
* incomplete
* right skewed
* defective
* left skewed

Correct answer:
left skewed
The range of values is larger to the left of the mean. Hence, the distribution is left-skewed.
------------------------------
The distribution of a sample of the outside diameters of PVC gas pipes approximates a symmetrical,
bell-shaped distribution. The mean outside diameter of the sample is 14.0 inches, and the standard
deviation is 0.1 inches. About 68 percent of the outside diameters lie between what two amounts?
* 13.9 and 14.1 inches

Approximately 68% of observations will lie within plus and minus one standard deviation of the mean.
------------------------------
You borrow $100,000 at a mortgage rate of 8% per year. What's the annual payment you must make
to repay the loan in 25 years?
* $8,349
* $5,982
* $9,368
* $7,493

Correct answer:
$9,368
If P is the annual payment, then using the annuity formula,
100,000 = P/0.08*[1 - 1/1.08^25] = 10.67P
This gives P = $9,368
------------------------------
What are half of the observations always greater than?
* Median
* Geometric mean
* Mode
* Mean
By definition, the median is the middle point. It divides the observations into two. The mean is NOT the
answer because it may be affected by extreme values.
------------------------------
A random sample of 85 group leaders, supervisors, and similar personnel revealed that on the
average a person spent 6.5 years on the job before being promoted. The standard deviation of the
sample was 1.7 years. Using the 0.95 degree of confidence, what is the confidence interval within
which the population mean lies?
* 6.99 and 7.99

* 6.49 and 7.49
* 4.15 and 7.15
* 6.14 and 6.86

Correct answer:
6.14 and 6.86
Interval estimate can be found from x_bar +/-z*s/(n^0.5). Here we have n = 85, x_bar = 6.5 and z =
1.96 (for 95%) and s = 1.7.
Therefore 6.5+/-1.96*1.7/9.22 and we get 6.14 and 6.86.
------------------------------
You are examining a group of 20 mutual funds. You find that 10 have a 5% cash position, 4 have a
10% cash position, and 6 have a 2% cash position. What is the weighted average cash position of
these 20 mutual funds?
* 4.80%.
* 5.10%.
* 5.00%.
* 4.90%.

Correct answer:
5.10%.
A weighted-average is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the
percentage weight of the ith item, and X_i is the value of the ith item. Here, we get a weighted mean of
10/20 * 0.05 + 4/20 * 0.10 + 6/20 * 0.02 = 5.10%.
------------------------------
What is the critical z-value for a one tailed lower test at the 1% level of risk?
* + 2.58
* +2.33
* -2.58
* -2.33

Correct answer:
-2.33
This is found by subtracting the 0.01 from 0.5 and then finding the z-value for 0.49.
------------------------------
What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$15,000>,
Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5: $18,000? (Note that the <> are used
to indicate a negative number).
* 25.29%
* 18.91%
* 30.04%
* 22.49%
* 25.42%

Correct answer:
25.42%
DownArrow 0 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 0 ENTER
DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the
BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow"
represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII
------------------------------
Suppose you are modeling GNP, and you believe that the probability that GNP will expand if interest
rates fall is 70%; if interest rates stay constant, you believe that there is a 29% chance of expanding
GNP; if interest rates increase, you believe that there is a 1% chance of GNP expanding. You think
that the likelihood of interest rates falling is 60%; of staying the same is 30%; of increasing is 10%.
What is the unconditional probability of GNP expanding?
* 49.8%.
* 50.0%.
* 50.8%.
* 50.9%.
Correct answer:
50.8%.
We use the total probability rule: P(A), the unconditional probability, = P(A|S_1)*P(S_1) + P(A|S_2)
*P(S_3) + P(A|S_3) *P(S_3), where the S_i represent mutually exclusive and exhaustive events. So
the likelihood of interest rates increasing is 0.70 * 0.60 + 0.29 * 0.30 + 0.01 * 0.10 = 0.42 + 0.087 +
0.001 = 0.508.
------------------------------
The marketing department of a nationally known cereal maker plans to conduct a national survey to
find out whether or not consumers of flake cereals can distinguish one of their favorite flake cereals.
To test the questionnaire and procedure to be used, eight persons were asked to cooperate in an
experiment. Five very small bowls of flake cereals were placed in front of a person. The bowls were
labeled A, B, C, D, and E. The person was informed that only one bowl contained his or her favorite
flake cereal. Suppose that the eight persons in the experiment were unable to identify their favorite
cereal and just guessed which bowl it was in. What is the probability that none of the eight guessed
correctly?
* 0.168
* 0.788
* 0.125
* 0.009
n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 8, r = 0,p = 0.2 and q = 0.80. Therefore we have 8!(0.2^0)(0.8^8)/0!8!
= 0.168.
------------------------------
Which of the following is true?
* If the geometric return is zero, the arithmetic return must be negative.

* All of these answers are false.
* If the annual returns have zero volatility, the geometric return is equal to the arithmetic return.
* The geometric return is always less than the arithmetic return.

Correct answer:
If the annual returns have zero volatility, the geometric return is equal to the arithmetic return.
The mean and the geometric mean are equal when volatility in the rate of return is zero. For a non-
zero volatility, the mean exceeds the geometric mean and the difference is larger the higher the
volatility.
------------------------------
If you deposit $900 a year, beginning next year, for 20 years into an account paying 8% per year,
* $40,598.15
* $50,003.98
* $530,118.37
* $48,304.12
* $41,185.77

Correct answer:
$41,185.77
900 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is
displayed as a negative number.
------------------------------
In computing skewness, which of the following is true?
I. It uses the cubed deviation from the mean.

II. It raises the deviation from the mean to the third power.
III. The formula preserves the direction of the deviation.
* I and III
* II and III
* I, II, and III

Correct answer:
I, II, and III
I and II are true and equivalent. III is true because the cube of a negative number is still a negative
number: -2 * -2 * -2 = -8.
------------------------------
How much must you deposit today if you wish to have $30,000 in 20 years, assuming that interest
accumulates at 8% per year, compounded annually?
* $6,436.45
* $7,046.51
* $3,000.00
* $5,045.65
* $6,604.73
PMT, 30000 FV, PV. Note that the answer is displayed as a negative number. Make sure that the BAII
------------------------------
An investment of $2,300 grows to $2,904 in 4 years. The annually compounded rate of return is:
* 6.00%
* 6.25%
* 5.90%
* 6.37%
Let r be the annually compounded rate. Then, 2904 = 2300*(1+r)^4. Hence, r = (2904/2300)^(1/4) - 1 =
6%
------------------------------
Assume the least squares equation is Y' = 10 + 20X. What does the value of 10 in the equation
indicate?

* For each unit increased in X, Y increases by 10
* Y intercept
* For each unit increased in Y, X increases by 10

Correct answer:
Y intercept
The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of the line.
Y' is the predicted value of Y given a specific value of X. Here a=10.
------------------------------
What quarterly payment would you have to make to pay off a $5,000 debt in 7 years, assuming the
first payment is made 3 months from today and interest accrues at 6% per year, compounded
quarterly?
* $220.01
* $72.96
* $145.01
* $372.96
* $757.78
number. Make sure the BAII Plus has the P/Y value set to 1. The value of "N" is set to 28 since there
are 28 quarters in 7 years (7 x 4 = 28).
------------------------------
If you deposit $1,202.50 into an account paying 6% per year simple interest, how much interest will
you have earned in 2 years?
* $124.00
* $126.80
* $120.50
* $112.50
* $144.30

Correct answer:
$144.30
Since this is a simple interest question, the formula is I=PRT, with T here being 2, since the timeframe
is 2 years. On the BAII Plus, press 1202.50 x 0.06 x 2 = to see the answer. On the HP12C, press
1202.50 ENTER 0.06 x 2 x to see the answer. Since the question asks for the amount of interest
earned, the original deposit should not be added to this value.
------------------------------
In a large metropolitan area, past records revealed that 30 percent of all the high school graduates go
to college. From 20 graduates selected at random, what is the probability that exactly 8 will go to
college?
* 0.114
* 0.400
* 0.231
* 0.887
20!(0.3^8)(0.7^12)/8!12! = 0.114.
------------------------------
The following is a distribution of monthly commissions:
Monthly Commissions Class Frequencies
$600 - $799 3
$800 - $999 7
$1,000 - $1,199 11
$1,200 - $1,399 22
$1,400 - $1,599 40
$1,600 - $1,799 24
$1,800 - $1,999 9
$2,000 - $2,199 4
Referring to the table above, what is the relative frequency of those salespersons that earn more than
$1,599?
* 25.5%
* 29.5%
* 27.5%
* 30.8%

Correct answer:
30.8%
This is found by adding up all the frequencies of the classes above $1599. In this case 24 + 9 + 4 =
37. Then we divide this by the total frequencies, which is 120. Therefore, 37/120 = 30.8%
------------------------------
The probability of the occurrence of an airplane crash and a successful resolution to a labor strike is
called:
* a conditional probability.
* an unrelated probability.
* a joint probability.
* an unconditional probability.

Correct answer:
a joint probability.
A joint probability takes the form of P(AB), the probability that an event A (an airplane crash) and an
event B (the resolution of a strike) both happen.
------------------------------
How much interest would an original $500 deposit earn at 5% per year simple interest after 14
months?
* $29.17
* $28.14
* $583.33
* $350.00
* $30.04
The question only asks for the interest, not the ending balance. On the BAII Plus, press 500 x 0.05 x
14 divide 12 = to see the answer. On the HP12C, press 500 ENTER 0.05 x 14 x 12 divide to see the
answer.
------------------------------
In the regression equation, what does the letter "a" represent?
* Slope of the line

* Y intercept
* Any value of the independent variable that is selected
Correct answer:
Y intercept
------------------------------
Suppose you have two assets, A and B. Over the past 3 periods, A has returned 8%, 2%, and 6%,
while B has returned 11%, -5%, and 20%. What is the return covariance between assets A and B?
* 0.0%%
* 19.79%%
* 10.21%%
* 31.38%%

Correct answer:
19.79%%
First we must find the expected returns for A and B. These are 5.33% and 8.67%. Second, we find the
difference between each observation and the average: (8% - 5.33%), (2% - 5.33%), and (6% - 5.33%)
for A, and (11% - 8.67%), (-5% - 8.67%), and (20% - 8.67%) for B. Next, we multiply these together
and sum them: (8% - 5.33%)*(11% - 8.67%) + (2% - 5.33%)*(-5% - 8.67%) + (6% - 5.33%)*(20% -
8.67%). The sum of these is 59.33%. The covariance is the probability weighted average of these
cross products, so we divide by 3 to get 19.78%%. Note, we could have divided each cross product by
3 rather than the sum of the cross products. If the observations did not have the same probability or
frequency, we would need to treat each cross product separately rather than divide at the end.
------------------------------
The mean amount of gasoline and services charged by Key Refining Company credit customers is
$70 per month. The distribution of amounts spent is approximately normal with a standard deviation of
$10. What is the probability of selecting a credit card customer at random and finding the customer
charged between $70 and $83?
* 0.4032
* 0.1962
* 0.3413
* 0.4750
z = (x-u)/sigma. z1 = 70 - 70/10 = 0 and z2 = 83 - 70/10 = 1.3. For z = 1.3, the area under the curve is
0.4032.
------------------------------
Two events, A and B, are independent if:
* P(A and B) = 1
* P(A and B) = P(A) + P(B)
* P(A and B) = 0
* P(A and B) = P(A) P(B)

Correct answer:
P(A and B) = P(A) P(B)
This is the definition of independence.
------------------------------
If you deposit $4,250 today into a savings account paying 6% per year, compounded semiannually,
how much is in your account in 4 years?
* $5,365.53
* $6,773.85
* $6,000.00
* $4,783.41
* $5,383.77

Correct answer:
$5,383.77
On the BAII Plus, press 8 N, 6 divide 2 = I/Y, 4250 PV, 0 PMT, CPT FV. On the HP12C, press 8 n, 6
ENTER 2 divide i, 4250 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number.
------------------------------
A stock has the following returns over 4 years: +5%, -6%, +8%, +3%. The annual arithmetic and
geometric rates of return over the 4 years are:
* 5%; 5.57%
* 2.5%; 9.79%
* 10%; 9.79%
* 2.5%; 2.36%

Correct answer:
2.5%; 2.36%
The mean equals (5% + (-6%) + 8% + 3%)/4 = 2.5%
The geometric mean equals (1.05 * 0.94 * 1.08 * 1.03)^(1/4) = 2.36%
Note that the geometric mean is less than the mean.
------------------------------
Year 1: $5,000, Year 2: $8,000, Year 3: $11,000? (Note that the <> are used to indicate a negative
number).
* 27.12%
* 23.74%
* 25.55%
* 26.61%
* 24.02%

Correct answer:
24.02%
DownArrow 8000 ENTER DownArrow DownArrow 11000 ENTER DownArrow DownArrow 2nd Quit.
Then press Irr CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 5000 BlueShift CFj
8000 BlueShift CFj 11000 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the
P/Y value set to 1.
------------------------------
You are examining a group of 4 stock analysts within an industry. The average stock analyst correctly
predicts the direction of a given stock 51% of the time. For these analysts, their accuracy has been
40%, 50%, 60%, and 70%. What is the mean absolute deviation of their accuracy from the average?
* 12%.
* 10%.
* 15%.
* 9%.

Correct answer:
10%.
The mean absolute deviation = the sum of (as i goes from 1 to n) of the absolute value of (X_i - Xbar),
divided by n. Here, we have [|40% - 51%| + |50% - 51%| + |60% - 51%| + |70% - 51%|]/4 = [11% + 1%
+ 9% + 19%] / 4 = 40%/4 = 10%.
------------------------------
Assume the least squares equation is Y' = 10 + 20X. What does the value of 20 indicate?
* For each unit increased in Y, X increases by 20

* Y intercept
* For each unit increased in X, Y increases by 20

Correct answer:
For each unit increased in X, Y increases by 20
Y' is the predicted value of Y given a specific value of X. Here b = 20.
------------------------------
How much would you need to deposit today in order to be able to withdraw $2,500 in 2 years and
$1,500 in 5 years, if the account has nothing in it today and interest is 8% per year, compounded
annually?
* $2,722.33
* $3,429.36
* $3,164.22
* $4,000.00
* $3,378.18

Correct answer:
$3,164.22
Work this question as two compound interest problems. On the BAII Plus, press 2 N, 8 I/Y, 0 PMT,
2500 FV, CPT PV, which yields $2,143.35. Then press STO 1. Then press 5 N, 1500 FV, CPT PV,
which yields $1,020.87. Then press + RCL 1 = to see the answer. On the HP12C, press 2 n, 8 i, 0
PMT, 2500 FV, PV. Then press STO 1. Then press 5 n, 1500 FV, PV. Then press RCL 1 + to see the
answer. Note that the answer will be displayed as a negative number.
------------------------------
How many monthly deposits of $50, beginning next month, will you need to make into an account that
pays 6% per year, compounded monthly, before you will have $20,000?
* 110.59
* 201.49
* 400.00
* 220.27
* 287.71

Correct answer:
220.27
On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 50 PMT, 20000 +/- FV, CPT N. On the HP12C, press
6 ENTER 12 divide i, 0 PV, 50 PMT, 20000 CHS FV, n. Note that the HP12C will display 221 as the
answer. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
What annual interest rate, compounded annually, would cause a series of 10 deposits of $1,000 to
* 14.49%
* 12.52%
* 12.69%
* 11.84%
* 35.82%

Correct answer:
12.52%
PV, 1000 PMT, 18000 CHS FV, i. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
What is the remaining balance on a $90,000 loan after making monthly payments of $660.39 for 10
years, if the interest rate is 8% per year, compounded monthly?
* $51,948.80
* $81,343.92
* $0
* $76,204.11
* $78,951.89

Correct answer:
$78,951.89
On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 90000 PV, 660.39 +/- PMT, CPT FV. On the HP12C,
press 120 n, 8 ENTER 12 divide i, 90000 PV, 660.39 CHS PMT, FV. The remaining balance will be
displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
Year 0: <$4,000>, Year 1: $2,000, Year 2: $0, Year 3: $0, Year 4 $4,000? (Note that the <> are used
* $214.37
* <$67.49>
* $122.71
* $1.21
* <$179.41>

Correct answer:
$122.71
DownArrow DownArrow 2nd Quit. Then press NPV 14 ENTER DownArrow CPT. On the HP12C,
press these keys: 4000 CHS BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 0 BlueShift CFj 4000
BlueShift CFj. Then press 14 i, YellowShift NPV. The "DownArrow" represents the downward-pointing
arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
You are examining a group of 20 mutual funds. You find that 5 have an 8% position in foreign stocks,
7 have a 9% position in foreign stocks, and 8 have no position in foreign stocks. What is the weighted
average position in foreign stocks of these 20 mutual funds?
* 5.10%.
* 5.20%.
* 5.25%.
* 5.15%.

Correct answer:
5.15%.
A weighted-average is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the
percentage weight of the ith item, and X_i is the value of the ith item. Here, we get a weighted mean of
5/20 * 0.08 + 7/20 * 0.09 + 8/20 * 0 = 5.15%.
------------------------------
* $38,444,973.53
* $30,000.00
* $54,883.81
* $3,091.62
* $58,402.98

Correct answer:
$54,883.81
------------------------------
The sum of the squares of 1,200 observations equals 9,830. The sum of the observations equals
1,510. The population standard deviation of the observations equals ________.
* 4.22
* 2.57
* 5.31
* 6.61

Correct answer:
2.57
For N observations, it is easy to show that
population variance*N = (sum of squares) - N*(mean^2)
The mean equals 1,510/1,200 = 1.258. Hence, population variance = (9,830 - 1,200*1.258^2 )/1,200=
6.608. The standard deviation then equals sqrt(6.608) = 2.57
Note: You should be careful about the difference between population variance and sample variance.
The formula for sample variance is:
sample variance*(N-1) = (sum of squares) - N*(mean^2)
You can expect an exam question which asks for population variance, with the choices given
containing both the population and the sample variances or vice versa.
------------------------------
* $15,403.52
* $18,061.11
* $18,938.48
* $21,667.70
* $17,800.00

Correct answer:
$18,061.11
------------------------------
weight.
Weight % of Total
Underweight 2.5
Satisfactory 90.0
Overweight 7.5
What is the probability of selecting and finding that all three of them are satisfactory?
* 0.900
* 0.075
* 0.729
* 0.810

Correct answer:
0.729
P(all three satisfactory) = 0.9*0.9*0.9 = 0.729.
------------------------------
The p-value in hypothesis testing:

* equals the significance level.
* is less than the probability of type I error.
* equals the probability of type II error.

Correct answer:
none of these answers.
significance level. None of the choices fit this definition of the p-value.
------------------------------
You are running a year-end bonus pool for your top credit analysts. You have 10 analysts, and you
wish to recognize the top 3. How many different possible outcomes are there, if all three get the same
bonus? How many different outcomes are there if the top analyst gets 50% of the bonus pool, the
second best analyst gets 30%, and the third best gets 20%?
* 720; 720.
* 720; 120.
* 120; 720.
* 120; 120.

Correct answer:
120; 720.
items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!]. In
this case, we have (10 choose 3) = 10! / [3! * 7!] = (10 * 9 * 8) / (6) = 120. In the second case, where
the order chosen does matter, we need the general permutation formula, which gives the number of
ways that k objects can be chosen from n items, with regard to order. The formula is n_P_k = n! / (n-
k)!. Here, it is 10! / (10-3)! = 720. For permutations, we don't consider choosing analysts 3, 7, and 6
the same as choosing analysts 7, 3, and 6, so there are more combinations than under the
combination formula.
------------------------------
If the cost of a hamburger is $1.99 today, what would it cost in 30 years, assuming the price increases
at a rate of 8% per year, compounded annually?
* $2.22
* $17.60
* $6.51
* $20.02
* $31.48

Correct answer:
$20.02
Consider the $1.99 as a PV and solve for the FV. On the BAII Plus, press 30 N, 8 I/Y, 1.99 PV, 0 PMT,
CPT FV. On the HP12C, press 30 n, 8 i, 1.99 PV, 0 PMT, FV. Make sure the BAII Plus has the P/Y
value set to 1.
------------------------------
The sampling method in which a sample is selected by first dividing the population into groups and
then selecting members from each group is known as:
* simple random sampling.

* stratified random sampling.
* cluster sampling.
* systematic random sampling.

Correct answer:
stratified random sampling.
The population is divided into strata or subcategories and a sample is randomly selected from each
strata.
------------------------------
What monthly payment is required over the next 48 months to pay off a $10,000 debt today, if interest
is charged at 14% per year, compounded monthly?
* $366.67
* $250.54
* $104.54
* $273.26
* $116.02

Correct answer:
$273.26
n, 14 ENTER 12 divide i, 10000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
If alpha = .05, what is the probability of making a Type I error?

* 20/20
*0
* 19/20
* 1/20

Correct answer:
1/20
Alpha is the probability of committing a type I error. So 0.05 = 1/20.

------------------------------
Year 1: $8,000, Year 2: $8,000, Year 3: $1,000, Year 4: $4,000 (Note that the <> are used to indicate
a negative number).
* 16.61%
* 17.12%
* 18.83%
* 15.55%
* 13.74%

Correct answer:
18.83%
ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys:
15000 CHS BlueShift CFo 8000 BlueShift CFj 8000 BlueShift CFj 1000 BlueShift CFj 4000 BlueShift
CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top
row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
The weights (in grams) of the contents of several small bottles are 4, 2, 5, 4, 5, 2 and 6. What is the
sample variance?
* 6.92
* 1.96
* 2.33
* 4.80

Correct answer:
2.33
Sample variance is given by: (Sum of squared deviation from the mean)/(n-1). Mean is 4. Sample
variance = 14/6 = 2.33
x x-mean (x-mean)^2
4 0 0
2 -2 4
5 1 1
4 0 0
5 1 1
2 -2 4
6 2 4
------------------------------
What semiannual deposits are needed to accumulate $7,000 in 5 years if the account pays 6% per
year, compounded semiannually, assuming that the first deposit is made in 6 months and also
assuming that the account already has $1,750 in it today?
* $405.46
* $377.44
* $436.15
* $459.52
* $578.01
number. This means that the $405.46 is a deposit in addition to the $1,750 original deposit. The
$7,000 is entered as a negative number, because the $1,750 and the $405.46 are deposits and the
$7,000 is a withdrawal. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A hypothesis test is conducted at the .05 level of significance to test whether or not the population
correlation is zero. If the sample consists of 25 observations and the correlation coefficient is 0.60,
then what is the computed value of the test statistic?
* 1.96
* 3.60
* 2.94
* 2.07

Correct answer:
3.60
Using the t statistics, t = r* [sq. root of ((n-2)/(1-r_squared))].
t = r*[n-2/(1-r^2)]^0.5. So t = 0.6*[23/0.64]^0.5 = 3.60.
------------------------------
You can enter a derivative contract that will pay $100 at the end of a year if the price of oil exceeds
$25 per barrel, or $50 if it is equal to $25 or lower. The probability that oil will exceed $25 by the end of
one year is 60%. If interest is 4% for one year, what should the fair price of the contract be?
* $80.00
* $76.92
* $60.00
* $83.20

Correct answer:
$76.92
The expected payoff for the contract is $100 * 0.60 + $50 * 0.40 = $80. At 4% interest, the present
value of the expected payoff is $80/1.04 = $76.92. A deviation from this value would represent an
example of the investment consequences of inconsistent probabilities.
------------------------------
What monthly payment, beginning next month, would repay a $25,000 car loan over 60 months,
assuming your loan has an interest rate of 6.9% per year, compounded monthly?
* $1,757.07
* $493.85
* $843.95
* $1,789.14
* $650.58

Correct answer:
$493.85
On the BAII Plus, press 60 N, 6.9 divide 12 = I/Y, 25000 PV, 0 FV, CPT PMT. On the HP12C, press
60 n, 6.9 ENTER 12 divide i, 25000 PV, 0 FV, PMT. Note that the answer will be displayed as a
negative number. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A new extended life light bulb has an average service life of 750 hours, with a standard deviation of 50
hours. If the service life of these light bulbs approximates a normal distribution, about what percent of
the distribution will be between 600 hours and 900 hours?
* 95%
* 68%
* 34%
* 99.7%

Correct answer:
99.7%
z = (X-u)/sigma. z1 = (600 - 750)/50 = -3.0. z2 = (900 - 750)/50 = 3.0. from the z tables, z = 3 is
0.4987. Therefore the area between z1 and z2 is 0.4987*2 = 0.9974
------------------------------
An employee had the following percentage increases in salary over the last 5 years: 4%, 7%, 10%,
15%, 12%. The geometric mean of his salary increases equals ________.
* 9.60%
* 9.22%
* 9.53%
* 8.72%

Correct answer:
8.72%
The straight geometric mean of the increases is (0.04*0.07*0.1*0.15*0.12)^(1/5) = 8.72%.
Note that this is different from geometric rate of change, which in this case would be
(1.04*1.07*1.1*1.15*1.12)^(1/5) - 1 = 9.53%. You should be very careful about this point since the
Mason & Lind textbook is quite ambiguous on this point. Finally, note that the geometric mean may not
be defined if some of the salary changes are negative.
------------------------------
Suppose that stocks A, B, C, and D are independent with respect to their price movement, and have
probabilities of increasing of 0.25, 0.50, 0.40, and 0.30. What is the probability that stocks A and C will
increase in price? In other words, find P(AC).
* 3.5%.
* 11%.
* 10%.
* 1.0%.

Correct answer:
10%.
If events are independent, then the joint probability of them occurring together is just the product of the
individual probabilities. So P(AC) = 0.25 * 0.40 = 10%. Note that we did not state whether the other
stocks, B and D, increased in value or not.
------------------------------
A stock has the following returns over 3 years: +2%, +15%, +25%. The annual geometric rate of return
over the three years is ________.
* 7.42%
* 19.36%
* 11.31%
* 9.34%
* 12.21%
* 10.15%
* 14.64%
* 13.61%

Correct answer:
13.61%
The annual geometric rate of return equals [(1+2%)(1+15%)(1+25%)]^(1/3) - 1 = (1.02 * 1.15 *

1.25)^0.33 - 1 = 0.1361 = 13.61%
------------------------------
* 9.04%
* 10.12%
* 7.32%
* 5.38%
* 10.09%

Correct answer:
7.32%
PV, 500 PMT, 50000 CHS FV, i. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
A true-false test consists of six questions. If you guess the answer to each question, what is the
probability of getting all six questions correct?

*0
* 0.06250
* 0.03125
* 0.0156

Correct answer:
0.0156
This is binomial distribution with p = 0.5, q = 0.5, n = 6, r = 6. Therefore 6!(0.5^6)(0.5^0)/6!0! = 0.0156.
------------------------------
If the decision in the hypothesis test of the population correlation is to reject the null hypothesis, what
can we conclude about the population correlation?
* None of these answers is correct

* Is not zero
* Equals the computed sample correlation
* Is zero
* Could be zero

Correct answer:
Is not zero
The Ho is always stated as Ho: Population parameter=0. So if we reject Ho, we say that it is not zero.
------------------------------
As the head of a trading desk at a major bank, it is your job to evaluate whether the superior
performance of a trader is due to skill or luck. To test this, you set up the following hypothesis:
Ho: Expected excess returns = 0

H1: Expected excess returns > 0
The excess returns are returns adjusted for risk using a proprietary factor model. In this set-up, which
of the following is/are true?
I. You must employ a one-tailed test.
II. H1 is a directional alternative.
III. Your critical z-statistics will be larger than the z-statistics in the case where the alternative is
specified as H1: Excess returns are non-zero.
* I only
* II & III
* I & III
* I & II
* III only
* II only
* I, II & III

Correct answer:
I & II
The alternative hypothesis, H1, does not assign a specific value to the expected excess return but
specifies a directional region. Since it specifies the region to the right of 0 as an alternative, he must
employ a right-tailed test i.e. a one-sided test. Note that the critical z-statistics in one-tailed
regressions are always lower than the z-statistics in the corresponding two-tailed test.
------------------------------
If you buy a computer for $950 and agree to pay for it with 24 payments of $35 with the first payment
occurring next month, what is the size of the final payment needed at month 24 to completely pay off
the computer? Assume the interest rate you are being charged is 16% per year, compounded monthly.
* $294.39
* $0.00
* $207.88
* $87.14
* $323.18

Correct answer:
$323.18
This question describes a situation often called a balloon payment. On the BAII Plus, press 24 N, 16
divide 12 = I/Y, 950 PV, 35 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 950
PV, 35 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the
value of P/Y set to 1.
------------------------------
What is the range of values for the coefficient of determination?

* 0 to +1 inclusive
* -1 to +1 inclusive
#AI -1 to 0 inclusive

Correct answer:
0 to +1 inclusive
R-square ranges from 0-1 inclusive.
------------------------------
A cola dispensing machine is set to dispense a mean of 2.02 liters into a container labeled 2 liters.
Actual quantities dispensed vary and the amounts are normally distributed with a standard deviation of
0.015 liter.
What is the probability a container will have less than 2 liters?
* 0.8741
* 0.0918
* 0.3413
* 0.1926

Correct answer:
0.0918
z = (x-u)/sigma = 2 - 2.02/0.015 = -1.33 (negative since it is below the mean). The area between -
infinity and z = -1.33 is 0.0918.
------------------------------
How long will it take for an initial deposit of $1,500 to grow to be $4,000, if the interest rate is 5% per
* 16.93 years
* 20.10 years
* 17.72 years
* 14.48 years
* 24.03 years

Correct answer:
20.10 years
Either the $1,500 or the $4,000 must be entered as a negative number - it won't matter which. On the
BAII Plus, press 5 I/Y, 1500 PV, 0 PMT, 4000 +/- FV, CPT N. On the HP12C, press 5 i, 2500 PV, 0
PMT, 4000 CHS FV, n. Note that the HP12C will indicate 21 years for the answer. Make sure the BAII
------------------------------
Ball-Bearing, Inc. produces ball bearings automatically on a Kronar BBX machine. For one of the ball
bearings, the mean diameter is set at 20mm. the standard deviation of the production over a long
period of time was computer to be 0.150 mm. What percent of the ball bearings will have a diameter of
20.27 mm or more?
* 41.00%
* 85.00%
* 12.62%
* 3.59%

Correct answer:
3.59%
z = (x-u)/sigma = 20.27 - 20/0.15 = 1.8. from the z-table, z = 1.8 is 0.4641. So 1.0 - 0.9641 = 0.0359.
------------------------------
In an investment environment, an initial outlay of $100 grows to $156 in 7 years. The quarterly
compounded rate of annual interest implicit in this is:
* 6.56%
* 6.40%
* 6.12%
* 6.73%

Correct answer:
6.40%
There are 28 quarters in 7 years. If the quarterly compounded rate is r, then we have
100*(1+r/4)^28 = 156, giving r = 6.4%
------------------------------
credit card. Past evidence indicates that 40% of all customers pay in cash. During a one-hour period
What is the probability that at least ten pay in cash?

* .575
* .425
* .416
* .586

Correct answer:
.575
This is a binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. n = 25, r = 10, p = 0.4 q = 0.6
P(10) = 25!(0.4^10)(0.6^15)/10!15! = 0.1612

P(11) = 25!(0.4^11)(0.6^14)/11!14! = 0.1465
P(12) = 25!(0.4^12)(0.6^13)/12!13! = 0.1140
P(13) = 25!(0.4^13)(0.6^12)/13!12! = 0.0760
P(14) = 25!(0.4^14)(0.6^11)/14!11! = 0.0434
P(15) = 25!(0.4^15)(0.6^10)/15!10! = 0.0212
P(16) = 25!(0.4^16)(0.6^9)/16!9! = 0.0088
P(17) = 25!(0.4^17)(0.6^8)/17!8! = 0.0031
Summing up we get close to 0.574.
We can continue until r = 25 but the probability gets smaller and converges to 0.575.
------------------------------
Consider the following three investments:
Future value years interest rate

1. $50,000 8 9% per year
2. $20,000 6 12% per year
3. $35,000 3 7% per year
The present values of the 3 investments are:
* $28,193, $12,145, $31,422

* $99,628, $39,476, $42,877
* $25,093, $10,133, $28,570
* $24,192, $11,876, $27,864

Correct answer:
$25,093, $10,133, $28,570
Future value = Present value*(1+r)^N for annual compounding. Therefore,
Future value years rate Present Value

1. 50,000 8 9% 50,000/(1.09)^8 = 25,093
2. 20,000 6 12% 20,000/(1.12)^6 = 10,133
3. 35,000 3 7% 35,000/(1.07)^3 = 28,570
Note that the future value must always be greater than the present value.
------------------------------
What is the relationship among the mean, median and mode in a symmetric distribution?
* Mean is always the smallest value

* Mean is always the largest value
* Mode is the largest value
* All equal

Correct answer:
All equal
Since the distribution is symmetric, all three are equal.
------------------------------
If you deposit $5,000 today and make an additional deposit of $3,000 in 3 years, how much is in the
account 6 years from today, if the money earns interest at 8% per year, compounded annually?
* $10,077.70
* $13,775.16
* $17,335.61
* $11,713.51
* $12,695.00

Correct answer:
$11,713.51
This question requires the solution of two problems. Find the FV of the original $5,000 deposit which
equals $7,934.37, then find the FV of the $3,000 deposit 3 years from now which equals $3779.14,
and add the two together. On the BAII Plus, press 6 N, 8 I/Y, 5000 PV, 0 PMT, CPT FV. Then press
STO 1. Then press 3 N, 3000 PV, CPT FV. Then press + RCL 1 = for the answer. On the HP12C,
press 6 n, 8 i, 5000 PV, 0 PMT, FV. Then press STO 1. Then press 3 n, 3000 PV, FV. Then press
RCL 1 + for the answer.
------------------------------
A study by the National Park Service revealed that 50% of the vacationers going to the Rocky
Mountain region visit Yellowstone Park, 40% visit the Tetons and 35% visit both. What is the
probability that a vacationer will visit at least one of these magnificent attractions?

* 0.55
* 0.95
* 0.05
* 0.35

Correct answer:
0.55
0.5 + 0.4 - 0.35 = 0.55
------------------------------
Assume you buy a computer for $1,450 and agree to pay for it with 36 monthly payments of $55,
beginning next month. What is the size of the final payment needed at month 36 to completely pay off
the computer, if the interest rate you are being charged is 16% per year, compounded monthly?
* $0.00
* $184.31
* $217.88
* $187.14
* $174.39

Correct answer:
$184.31
divide 12 = I/Y, 1450 PV, 55 +/- PMT, CPT FV. On the HP12C, press 36 n, 16 ENTER 12 divide i,
1450 PV, 55 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has
the value of P/Y set to 1.
------------------------------
A positively skewed distribution:
* has fat tails.

* is skewed to the right.
* has a large variance.
* is skewed to the left.

Correct answer:
is skewed to the right.
In a positively skewed distribution, large values are more common than correspondingly small values.
This skews the distribution to the right, moving the mean to the right of the median.
------------------------------
I. Type I error is the event in which we reject the null when it is false.
II. Type II error occurs when we accept the null when it is false
III. Type I error occurs if we accept the alternative when it is false.
IV. Type II error is the event where we reject the alternative when it is true.
* II, III & IV

* II only
* IV only
* I only
* II & IV
* I, II & IV
* I, II & III
* III only
Type I error is the event in which we reject the null when it is true. This is the same as accepting the
alternative when it is false.
Type II error is the event in which we fail to reject the null when it is false. This is the same as rejecting
the alternative when it is true.
------------------------------
If you owe a debt of $1,000 today and also owe $2,000 in 24 months, what single payment could you
make 15 months from today that would pay off both of these debts, if interest is assessed at 8% per
year, compounded monthly?
* $2,988.71
* $2,751.62
* $3,041.93
* $3,000.00
* $1,980.86
To solve this question, set the problem up as the sum of two compound interest calculations. Move the
$1,000 from today over to month 15 and add it to the $2,000 brought back from month 24 to month 15.
On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV which yields $1,104.80.
Then press STO 1. Then press 9 N, 2000 FV, CPT PV, which yields $1,883.91. Finally press + RCL 1
= to see the answer. On the HP12C, press 15 n, 8 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then
press STO 1. Then press 9 n, 2000 FV, PV. Finally press RCL 1 + to see the answer. Make sure the
BAII Plus has the value of P/Y set to 1.
------------------------------
You recently purchased a twin-engine plane after landing an ultra-lucrative job on Wall Street. The
annual payments on the plane are $8,000 per year and the installment plan extends over 5 years. The
payments start today. If your discount rate is 8.5% per year, how much would it have cost you to
purchase the plane on an all-cash basis?
* $34,205
* $40,611
* $41,232
* $36,429
The present value of the installment payments equals

8,000 + (8,000/0.085)*(1-1/(1.085^4)) = $34,205
------------------------------
A normal distribution has a mean of 39 and a variance of 625. The area under the distribution between
50 and 75 equals ________.
* 0.745
* 0.319
* 0.212
* 0.255

Correct answer:
0.255
First note that the area between two numbers under a probability distribution is the same as the
probability of getting a number between those two numbers.
The standard deviation of the distribution equals sqrt(625) = 25. The z-value of 50 equals (50-39)/25 =
0.44. The z-value of 75 equals (75-39)/25 = 1.44. Using the Normal probability tables, we get P(z <
0.44) = 0.67 and P(z < 1.44) = 0.9251. The area between 50 and 75 is then given by
P(0.44 < z < 1.44) = P(z < 1.44) - P(z < 0.44) = 0.9251 - 0.67 = 0.255.
------------------------------
How much would an original deposit of $900 grow to be after 10 and a half years, if the deposit earns
* $1,853.97
* $1,254.58
* $1,573.42
* $1,771.19
* $1,837.51

Correct answer:
$1,771.19
On the BAII Plus, press 42 N, 6.5 divide 4 = I/Y, 900 PV, 0 PMT, then press CPT FV. On the HP12C,
press 42 n, 6.5 ENTER 4 divide i, 900 PV, 0 PMT, then press FV. Note that N = 42 quarters (10.5 x 4
=) and the answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value
set to 1.
------------------------------
* $13,248.24
* $12,667.70
* $14,667.76
* $7,403.52
* $12,204.65
------------------------------
What disadvantage(s) are there of the mean deviation?
* None of these answers.

* It is based on only two observations.
* It is based on deviations from the mean.
* All of these answers.
* It uses absolute values, which are difficult to manipulate.

Correct answer:
It uses absolute values, which are difficult to manipulate.
Using absolute values can cause problems since they are difficult to work with.
------------------------------
In a stratified random sampling method,
* a sample is selected by randomly generating an integer, N, and selecting every Nth member of the
population.
* a sample is selected by first dividing the population into groups and then selecting members from
each group.
* a sample is selected by drawing numbers from a normal probability distribution.
* a sample selected such that every member of the population has the same chance of being
selected.

Correct answer:
a sample is selected by first dividing the population into groups and then selecting members from each
group.
The population is divided into strata or subcategories and a sample is randomly selected from each
strata.
------------------------------
Ten experts rated a newly developed chocolate chip cookie on a scale of 1 to 50. Their ratings were:
34, 35, 41, 28, 26, 29, 32, 36, 38 and 40. What is the mean deviation?
* 12.67
* 4.12
* 0.75
* 8.00

Correct answer:
4.12
The mean is 33.9. The mean deviation is the absolute values of the deviation from the mean. (0.1 +
1.1 + 7.1 + 5.9 + 7.9 + 4.9 + 1.9 + 2.1 + 4.1 + 6.1)/10 = 41.2/10 = 4.12
------------------------------
Which of the following are formulas for sample variance?
I. [1/(n-1)] * sum (as i goes from 1 to n) of (X_i - Xbar)^2.
II. [1/n] * sum (as i goes from 1 to n) of (X_i - Xbar)^2.
III. [1/(n-1)] * {sum (as i goes from 1 to n) of (X_i)^2 - (1/n) * [sum (as i goes from 1 to n) of (X_i)]^2}.
* I only.
* III only.
* II only.
Correct answer:
None of these answers is correct.
I and III are equivalent and correct; III is the computational formula for sample variance.
------------------------------
You are examining a group of 6 stocks. Their average annual standard deviations have been 25%,
20%, 15%, 25%, 16%, and 45%. What is the range of annual standard deviations?
* 25.0%.
* 15.0%.
* 30.0%.
* 29.0%.

Correct answer:
30.0%.
------------------------------
Routine physical examinations are conducted annually as part of a health service program for the
employees. It was discovered that 8% of the employees needed corrective shoes, 15% needed major
dental work and 3% needed both corrective shoes and major dental work. What is the probability that
an employee selected at random will need either corrective shoes or major dental work?
* 0.20
* 1.00
* 0.25
* 0.50
8% + 15% - 3% = 20%
------------------------------
Eternal Life Insurance has a policy that will pay $50,000 per year starting 20 years from now, to you
and all your progeny. If the appropriate discount rate is 10% per year and you have to pay premiums
every year for the next 15 years starting at the end of this year, what's the annual premium payment
that you and your heirs must make for this to be a fair deal?
* $10,749
* $14,495
* $9,771
* $12,189

You are entitled to a perpetuity which start paying 20 years from now. Therefore, at the end of year 19,
you will have an asset worth $50,000/0.1 = $500,000. The present value of this equals
$500,000/1.1^19 = $81,754.
Your premium payments are a 15-year annuity. If the annual premium is P, then this annuity has a
present value of P/0.1*[1 - 1/1.1^15] = 7.606P. This must equal the value of the perpetuity for this to
be a fair deal. This gives P = $81,754/7.606 = $10,749.
------------------------------
Delroy McWilliams, a quantitative analyst with Churn Brothers Brokerage, is examining a data sample
and has amassed the following information:
Standard deviation of the sample: 70

Sample mean: 812
Assume that Mr. McWilliams formulates a null hypothesis that states that the value of the population
mean is equal to 800. Additionally, assume that the population standard deviation is unknown. Given
this information, what is the standard error of the estimate? Further, what is the test statistic? Choose
the best answer.
* 8.370; 1.434
* 8.370; 4.148
* None of these answers is completely correct.
* 0.014; 11.834
* 0.014; 857.143
* 2.858; 1.40
* 2.858; 11.60

Correct answer:
None of these answers is completely correct.
The standard error and test statistic for this example is 2.858 and 4.199, respectively. Therefore, none
of these answers is correct.
{Standard error = [70 / 24.495] = 2.858}
found as follows:
{Test statistic = [812 - 800] / 2.858 = 4.199}

------------------------------
I. If a test always rejects the null, its significance level is zero.

II. If a test always accepts the null, the probability of type II error equals zero.
III. If the p-value exceeds the significance level, you cannot reject the null.
* II only
* I only
* III only
* II & III

Correct answer:
III only
significance level; otherwise, you must fail to reject the null.
The significance level in hypothesis testing refers to the probability that we will reject the null when it is
true. Hence, if we always reject the null, the probability of rejecting it when it is true equals 1.
A Type II error occurs when we fail to reject the null when in fact it is false. Therefore, if we always
accept the null, we will never reject it even when it is false. So the probability of Type II error will equal
1.
------------------------------
You are given n = 12, sum of the (X_i) = 2%, sum of the (X_i)^2 = 0.5%%. Find the sample standard
deviation.
* 1.27%.
* 1.73%.
* 1.23%.
* 1.11%.

Correct answer:
1.23%.
The sample standard deviation will be the positive square root of the sample variance. The sample
variance will be determined using the computational formula [1/(n-1)] * {sum (as i goes from 1 to n) of
(X_i)^2 - (1/n) * [sum (as i goes from 1 to n) of (X_i)]^2}. So we get 1/11 * (0.5 - 1/12*(2^2)) = 1.51%%.
The positive square root of 1.51%% is 1.23%.
------------------------------
Sharleef Nettleton, a quantitative analyst with Churn Brothers Brokerage, is examining a data sample
and has amassed the following information:

Degrees of freedom: 2
Sample mean: 114
Assume that Ms. Nettleton formulates a null hypothesis that states that the value of the population
mean is zero. Additionally, assume that the population standard deviation is unknown. Given this
information, what is the standard error of the estimate? Further, what is the test statistic? Choose the
best answer.
* 1.0199; 111.78
* 0.3517; 84.34
* 1.0199; 56.44
* 0.3517; 324.14
* 0.3570; 29.91
* 0.3570; 319.38

Correct answer:
0.3517; 324.14
{Standard error = [2.90 / 8.2462] = 0.3517}
found as follows:
{Test statistic = [114 - 0] / 0.3517 = 324.14}
This is a very large test statistic and the null hypothesis will likely be rejected unless a very low level of
confidence is employed.
------------------------------
If all the 10,000 data points in a regression lie exactly on a straight line, which of the following is/are
true?
I. The intercept term is zero.

II. The percentage of unexplained variance equals zero
III. The slope coefficient is positive.
IV. The correlation coefficient between the dependent and independent variables is 1.
* III only
* IV only
* II & IV
* III & IV
* II only
* I only

Correct answer:
II only
Since there is no error in the regression, the percentage of unexplained variance will be zero. The
intercept and slope terms can be any real numbers and the correlation coefficient will be either + 1 or -
1.
------------------------------
Which is true of a leptokurtic distribution?
I. It will be more peaked than the normal distribution.

II. It will have thinner tails than the normal distribution.
III. It will be less peaked than the normal distribution.
IV. It will have fatter tails than the normal distribution.
* I and II.
* I and IV.
* III and II.
* III and IV.

Correct answer:
I and IV.
I and IV are true of leptokurtic distributions. This is also called having "excess kurtosis." II and III are
characteristic of platykurtic distributions.
------------------------------
An experiment may have:
* Two or more results

* Only two results
* Only one result
Experiments may have many outcomes.
------------------------------
A sample of the paramedical fees charged by clinics revealed these amounts: $55, $49, $50, $45, $52
and $55. What is the median charge?

* $51.00
* $47.50
* $52.00
* $55.00

Correct answer:
$51.00
Order them: 45,49,50,52,55,55. The median is therefore (50 + 52)/2 = 51
------------------------------
A sample of 10 observations is drawn from a population with mean 17. The mean of the observations
equals 14.3 and the sample standard deviation equals 4.8. The sampling error in mean equals
________.
* 9.6
* -2.7
* 14.3
* 4.8

Correct answer:
-2.7
"Sampling error" refers to the difference between a sample statistic and the corresponding population
parameter. In this case, the sampling error equals 14.3 - 17 = -2.7.
------------------------------
What is the present value today of these annual cash flows: $3,000, $2,000, $1,000? Assume the first
cash flow occurs 1 year from today and an interest rate of 10% per year, compounded annually.
* $5,205.67
* $5,131.48
* $6,089.92
* $5,067.65
* $6,000.00

Correct answer:
$5,131.48
HP12C, press these keys: 0 BlueShift CFo 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj.
Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the
top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
A stock has the following returns over 3 years: -10%, +15%, +25%. The annual geometric rate of
return over the 3 years is ________.
* 19.36%
* 9.34%
* 10.15%
* 7.42%
* 13.31%
* 14.64%
* 12.21%
* 8.96%

Correct answer:
8.96%
The annual geometric rate of return equals [(1-10%)(1+15%)(1+25%)]^(1/3) - 1 = (0.9 * 1.15 *

1.25)^0.33 - 1 = 0.0896 = 8.96%
------------------------------
Monthly commissions of first-year insurance brokers are $1,270, $1,310, $1,680, $1,380, $1,410,
$1,570, $1,180 and $1,420. These figures are referred to as:

* Raw data
* Frequency distribution
* Ogive
* Histogram

Correct answer:
Raw data
Data or observations that have not been organized in any form are called raw data.
------------------------------
I. It is harder to reject the null under a two-tailed test than under a one-tailed test.
II. To test the hypothesis: Ho: X = 0, H1: X < 0, you have to employ a left-tailed test.
III. The acceptance region under a right tailed test extends from zero to positive infinity.
IV. The critical z-statistics in one-tailed tests are always lower than the z-statistics in the corresponding
two-tailed test.
* I, II, III & IV

* I, II & III
* I, II & IV
* II, III & IV

Correct answer:
I, II & IV
Under a two-tailed test, values on either side of the null can contribute to a rejection. Hence, the
critical values under a two-tailed test have to be higher than under a one-tailed test for a given level of
significance. This makes it harder to reject the null under a two-tailed test. This makes intuitive sense.
In a one-tailed test, you are specifying a stricter alternative than under a completely general, two-tailed
alternative (in the current example, you are claiming that X is less than zero as an alternative which is
a stronger statement than the claim that X is non-zero).
The rejection region in a right-tailed regression extends from the critical t-value associated with the
given significance level and positive infinity. This critical value is greater than zero.
------------------------------
year: Year 0: <$15,000>, Year 1: $5,000, Year 2: $8,000, Year 3: $11,000? (Note that the <> are used
* $2,589.11
* $3,104.37
* $2,981.21
* $5,077.49
* $2,629.65

Correct answer:
$2,629.65
Then press NPV 15 ENTER DownArrow CPT. On the HP12C, press these keys: 15000 CHS BlueShift
CFo 5000 BlueShift CFj 8000 BlueShift CFj 11000 BlueShift CFj Then press 15 i, YellowShift NPV.
The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.
------------------------------
How many monthly payments of $30, beginning next month, are needed to pay off a debt of $1,000, if
interest accrues at 10% per year, compounded monthly?
* No solution/Error
* 32.80
* 51.48
* 39.21
* 27.60

Correct answer:
39.21
On the BAII Plus, press 10 divide 12 = I/Y, 1000 PV, 30 +/- PMT, 0 FV, CPT N. On the HP12C, press
10 ENTER 12 divide i, 1000 PV, 30 CHS PMT, 0 FV, n. Note that the HP12C will display 40 as the
------------------------------
Management is considering adopting a bonus system to increase production. One suggestion is to pay
a bonus on the highest 5 percent of production based on past experience. Past records indicate that,
on the average, 4,000 units of a small assembly are produced during a week. The distribution of the
weekly production is approximately normally distributed with a standard deviation of 60 units. If the
bonus is paid on the upper 5 percent of production, the bonus will be paid on how many units or
more?

* 3196
* 5120
* 4099
* 6255

Correct answer:
4099
We want the area 1.0 - 0.55 = 0.45. For this we have a z value of 1.645. Now, using z = (x-u)/sigma,
we have 1.645 = (x-4000)/60. x = 4099.
------------------------------
A selected group of employees of Unique Buying Services is to be surveyed with respect to a new
pension plan. In depth interviews are to be conducted with each employee selected in the sample.
The employees are classified as follows.
Classification Event Number of Employees
Supervisors A 120
Maintenance B 50
Production C 1,460
Management D 302
Secretarial E 68
What is the probability that the first person selected is classified as a maintenance employee?
* 0.025
* 0.50
* 0.20
* 1.00
There are 2000 employees of which 50 are from maintenance. So 50/2000 = 0.025.
------------------------------
Which measure of central tendency is used to determine the average annual percent increase?
* Mode
* Mean
* Weighted mean
* Median
* Geometric mean
Correct answer:
Geometric mean
The formulaic presentation of the geometric mean is suited for calculating percentage changes. The
geometric mean of a set of n positive numbers and is defined as the nth root of the product of the n
numbers
The two main uses of the geometric mean (GM) are:
1. To average percents, indexes, and relatives, and
2. To determine the average percent increase in sales, production or other business or economic
series from one time period to another.
------------------------------
Given the following four points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)
What is the standard error of the regression line estimate?

* 0.135
*0
* 0.606
* 0.367

Correct answer:
0
X Y XY X^2 Y' Y-Y'

-2 0 0 4 -0.4 0.4
-1 0 0 1 0.3 -0.3
0 1 0 0 1 0
1 1 1 1 1.7 -0.7
2 3 6 4 2.4 0.6
Sum 0 5 7 10 0
N=5.
The standard error of estimate is
s = sq. root of [S(Y-Y')^2/n-2] where S stands for "Sum of."

S = [0^2/3] = 0.
------------------------------
A study of the opinion of designers with respect to the primary color most desirable for use in
executive offices showed that:
Primary Color Number of Opinions
Red 92
Orange 86
Yellow 46
Green 91
Blue 37
Indigo 46
Violet 2
What is the probability that a designer does not prefer yellow?
* 1.000
* 0.885
* 0.765
* 0.000

Correct answer:
0.885
There are 400 opinions. 46/400 prefer yellow. So 1 - 46/400 = 177/200 = 0.885 does not prefer yellow.
------------------------------
What is the median of 26, 30, 24, 32, 32, 31, 27 and 29?
* 32
* 30
* 29
* 29.5

Correct answer:
29.5
Ordering the numbers we have 24,26,27,29,30,31,32,32. Since there is an even number of

observations (8), the median is the average of the two middle observations (29 + 30)/2 = 29.5.
------------------------------
If the significance level of a test is the probability of incorrectly rejecting the null hypothesis, then the
"power of a test" is defined as which of the following? Choose the best answer.
* The probability of a Type II error.

* More than one of these answers is correct.
* The "power of a test" is a nonsensical term.
* The probability of incorrectly accepting the alternate hypothesis.
* The probability of correctly rejecting the null.
* The probability of a Type I error.

Correct answer:
The probability of correctly rejecting the null.
If the significance level of a test is the probability of incorrectly rejecting the null hypothesis (a Type I
error), then the power of the test is defined as the probability of correctly rejecting the null hypothesis.
In other words, the power of a test is equal to (1 - the probability of a Type II error). The standard
method of hypothesis testing involves stating only the significance level, which is equal to the
probability of a Type I error.
------------------------------
There are 2,000 eligible voters in a precinct. Despite protests from knowledgeable persons that a
sample size of 500 was too large in relation to the total, the 500 selected at random were asked to
indicate whether they planned to vote for the Democratic incumbent or the Republican challenger. Of
the 500 surveyed, 350 said they were going to vote for the Democratic incumbent. Using the 0.99
confidence coefficient, what is the confidence limits for the proportion who plan to vote for the
Democratic incumbent?
* 0.060 and 0.700

* 0.826 and 0.926
* 0.397 and 0.797
* 0.612 and 0.712

Correct answer:
None of these answers
and z = 2.58 (for 99%).
------------------------------
Three defective electric toothbrushes were accidentally shipped to a drugstore by the manufacturer
along with 17 nondefective ones. What is the probability that the first two electric toothbrushes sold will
be returned to the drugstore because they are defective?
* 1/4 or 0.25
* 3/20 or 0.15
* 3/17 or 0.176
* 3/190 or 0.01579

Correct answer:
3/190 or 0.01579
3/20*2/19 = 3/190
------------------------------
How many quarters will it take for an original $1,000 deposit to grow to be $2,000, if the deposit earns
interest at 6% per year, compounded quarterly?
* 22.15
* 11.90
* 41.12
* 51.52
* 46.56

Correct answer:
46.56
On the BAII Plus, press 1000 PV, 2000 +/- FV, 0 PMT, 6 divided by 4 = I/Y, then CPT N. On the
HP12C, press 1000 PV, 2000 CHS FV, 0 PMT, 6 ENTER 4 divide i, then press n. HP12C answer is
shown as 47. Answer should be in quarters, not years. Make sure the BAII Plus has the P/Y value set
to 1.
------------------------------
What does a regression equation do?
* Predicts the value of the independent variable based on the dependent variable
* Measures the association between two variables
* Predicts the value of the dependent variable based on the independent variable

Correct answer:
Predicts the value of the dependent variable based on the independent variable
variable. The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of
the line. Y' is the predicted value of Y given a specific value of X.
------------------------------
Under the null hypothesis, Ho, x = y. Under the alternative hypothesis, x does not equal y. If the critical
z-statistic for the desired significance level is 1.68 and you find the z-statistic to be -3.2, you should:
* Reject the alternative hypothesis.

* Reject the null hypothesis.
* Fail to reject the null hypothesis.
* Accept the null hypothesis.

Correct answer:
Reject the null hypothesis.
Since the z-statistic is larger in magnitude than the critical value, you should reject the null hypothesis.
Note that all the other alternatives loosely mean the same thing.
------------------------------
Kevin wants to retire a millionaire. If he is 45 years old today and already has $80,000 in the bank,
what monthly deposit would he need to make beginning one month from today and continuing until he
retires on his 65th birthday, if the money will earn 8% per year, compounded monthly?
* $1,028.58
* $1,760.14
* $407.81
* $1,138.45
* $2,119.81
The total number of deposits will be 240 (20 years x 12 months/year). On the BAII Plus, press 240 N,
8 divide 12 = I/Y, 80000 PV, 1000000 +/- FV, CPT PMT. On the HP12C, press 240 n, 8 ENTER 12
divide i, 80000 PV, 1000000 CHS FV, PMT. Note that the answer will be displayed as a negative
------------------------------
The employees of Cartwright Manufacturing are awarded efficiency ratings. The distribution of the
ratings approximates a normal distribution. The mean is 400, the standard deviation 50. What is the
area under the normal curve between 400 and 482?
* 0.4750
* 0.3413
* 0.5000
* 0.4495

Correct answer:
0.4495
z = (x-u)/sigma. z1 = 400 - 400/50 = 0 and z2 = 482 - 400/50 = 1.64. Therefore for z = 1.64, the area
under the curve is 0.4495.
------------------------------
Which of the following is/are true about a standard normal distribution?
I. It has zero skewness.

II. It is characterized completely by exactly one parameter.
III. It ranges from negative infinity to positive infinity.
IV. It has a non-zero mean and variance.
* I, II, III and IV

* I & III
* II only
* III only
* I only
* IV only
* II and III
* III and IV

Correct answer:
I & III
A normal distribution is characterized by two parameters, the mean and the variance. The standard
normal distribution, though, has a zero mean and a variance of 1 and hence, has no free parameters.
------------------------------
What annual interest rate, compounded annually, is equivalent to 7% per year, compounded
quarterly?
* 6.88%
* 7.19%
* 7%
* 7.03%
* 7.09%

Correct answer:
7.19%
Questions of this type are illustrating the concept of an Effective Interest Rate, which is a rate
compounded annually that has the same effect as a rate compounded more often than one time a
year. As such, a depositor or a creditor is indifferent between them, since they have the same effect.
To solve this question, make any deposit and see how much is in the account after one year. The ratio
of the ending FV to the beginning PV will indicate the annual rate earned. On the BAII Plus, press 4 N,
7 divide 4 = I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 4 n, 7 ENTER 4 divide i, 100 PV, 0
PMT, FV. The number displayed will be 107.19. In other words, after one year, $100 has become
$107.19. An interest rate of 7.19%, compounded annually, would cause a $100 deposit to become
$107.19 in one year. Choosing an initial deposit of $100 helps a great deal in these situations. Make
------------------------------
The following stock market return data were observed last year:
Returns # of stocks
less than -5% 129
between -5% and 0% 301
between 0% and 10% 636
between 10% and 20% 274
more than 20% 173
The probability that a randomly selected stock had either a negative return or a return more than 20%
equals ________.
* 0.27
* 0.53
* 0.60
* 0.40

Correct answer:
0.40
For a frequency distribution, the estimated probability of a particular class/event occurring equals the
relative frequency of that class. Now, the number of stocks that had either a negative return or a return
more than 20% equals 129 + 301 + 173 = 603. The total number of stocks equals 129 + 301 + 636 +
274 + 173 = 1513. Therefore, the estimated probability of a randomly selected stock having either a
negative return or a return more than 20% equals 603/1513 = 0.40.
------------------------------
What annual interest rate, compounded annually, is equivalent to 6% per year, compounded monthly?
* 6.01%
* 6.17%
* 6.09%
* 6%
* 5.87%

Correct answer:
6.17%
of the ending FV to the beginning PV will indicate the annual rate earned. On the BAII Plus, press 12
N, 6 divide 12 = I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 12 n, 6 ENTER 12 divide i, 100
PV, 0 PMT, FV. The number displayed will be 106.17. In other words, after one year, $100 has
become $106.17. An interest rate of 6.17%, compounded annually, would cause a $100 deposit to
become $106.17 in one year. Choosing an initial deposit of $100 helps a great deal in these situations.
Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
What is the Net Present Value of this series of annual cash flows: Year 0: <$20,000>, Year 1:
$15,000, Year 2: $5,000, Year 3: $7,500, using an interest rate of 10% per year? (Note that the <> are
used to indicate a negative number).
* $2,851.93
* $3,512.81
* $48.12
* $4,116.55
* $3,403.46

Correct answer:
$3,403.46
CFo 15000 BlueShift CFj 5000 BlueShift CFj 7500 BlueShift CFj Then press 10 i, YellowShift NPV.
The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.
------------------------------
Three young children approach a gum ball machine, each with a nickel to spend. The machine has
just been filled with 50 black, 150 white, 100 red and 100 yellow balls that have been thoroughly
mixed. Sue and Jim approached the machine first. They both said they wanted red gum balls. What is
the likelihood they both will get their wish?

* 0.062
* 0.33
* 0.75
* 0.50

Correct answer:
0.062
100/400*99/399 = 0.062
------------------------------
Which of the following is not a characteristic of the normal probability distribution?
* Bell shaped
* Symmetrical
* Positively skewed
* Asymptotic

Correct answer:
Positively skewed
The normal probability distribution is not skewed but bell shaped and symmetric.
------------------------------
In a regression, the independent variable explains 79% of the variance in the dependent variable,
leaving 21% unexplained. The slope coefficient is 0.67 and the intercept equals -10.2 The correlation
coefficient between the two variables is
* 0.21
* 0.89
* 0.31
* -0.79

Correct answer:
0.89
In a univariate regression, the correlation coefficient between the dependent and the independent
variables equals the square root of R-square. However, you should also be careful about the sign,
which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this
case, the slope coefficient is positive, implying that the dependent and the independent variables are
positively correlated. The R-square equals 79% so the correlation coefficient equals +sqrt(0.79) =
0.89.
------------------------------
RipOff Dealers, Inc. offers a financing plan for car purchases, charging 2% per month. If a car costs
$30,000, what's the monthly payment you will have to make - starting a month from now - if you need
5 years to pay off the debt on the car?
* $824
* $513
* $863
* $798

Correct answer:
$863
The payments constitute an ordinary annuity. The present value of an n-period annuity that starts
paying at the end of the current period equals
PV = (C/r)*[1 - 1/(1+r)^n]
where C is the payment per period and r is the one-period interest rate. In this example, the annuity is
over 5*12 = 60 periods and the per period rate equals 2%. So the present value of the payments
equals (C/0.02)*[1 - 1/1.02^60] = 30,000 (given). Solving for C gives the per month payment equal to
$863.
------------------------------
If you buy an item for $500 and agree to pay for it with 24 monthly payments of $24.50, beginning next
month, what annual interest rate, compounded monthly, are you being charged?
* 1.34%
* 26.53%
* 16.08%
* 11.15%
* 14.92%

Correct answer:
16.08%
The interest rate returned by the calculator will be the periodic interest rate. It must be multiplied by the
number of periods per year to have the correct answer. On the BAII Plus, press 24 N, 500 PV, 24.50
+/- PMT, 0 FV, CPT I/Y. Then press x 12 = to see the answer. On the HP12C, press 24 n, 500 PV,
24.50 CHS PMT, 0 FV, i. Then press 12 x to see the answer. Make sure the BAII Plus has the P/Y
value set to 1.
------------------------------
A bank savings account offers a savings rate of 3.5% per year, compounded annually. How long
would it take for an investment of $710 to grow to $1,000?
* 9 years
* 8 years
* 11 years
* 10 years
Correct answer:
10 years
If it takes n years for the growth, then 1000 = 710*(1+3.5%)^n. Solving for n gives 9.96 years.
------------------------------
Assume you buy a computer for $1,350 and agree to pay for it with 24 payments of $45, beginning
next month. What is the size of the final payment needed at month 24 to completely pay off the
computer, if the interest rate you are being charged is 16% per year, compounded monthly?
* $707.88
* $387.14
* $494.39
* $0.00
* $592.21

Correct answer:
$592.21
divide 12 = I/Y, 1350 PV, 45 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i,
1350 PV, 45 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has
the value of P/Y set to 1.
------------------------------
What amount would you have in your savings account in 5 years, if it has a balance of $1,234 today
and you deposit an additional $1,234 two years from today? Assume that the savings account earns
5% per year, compounded annually.
* $10,048.91
* $3,003.44
* $2,468.00
* $2,999.86
* $3,149.86

Correct answer:
$3,003.44
Solve this question as two compound interest problems. The first $1,234 will be in the account for 5
years. The second $1,234 will be in the account for 3 years. Find the FV of both values 5 years from
today and add them together. On the BAII Plus, press 5 N, 5 I/Y, 1234 PV, 0 PMT, CPT FV, which
yields $1,574.93. Then press STO 1. Then press 3 N, CPT FV, which yields $1,428.51. Press + RCL 1
= to see the answer. On the HP12C, press 5 n, 5 i, 1234 PV, 0 PMT, FV. Then press STO 1. Then
press 3 n, FV. Press RCL 1 + to see the answer. Note that the answer will be displayed as a negative
------------------------------
The probability that SUV sales will decline by over 10% by June 1 if gasoline prices increase by 50%
by May 1, is called:
* a lagged likelihood.

Correct answer:
a conditional probability.
A conditional probability takes the form of P(A|B), the probability that a an event (A) will happen, given
the occurrence of another event, B. It is conditional because it is conditioned on another event, B.
------------------------------
You are examining a group of 6 stocks within an industry. The industry average profit margin is
expected to be 30%. For these stocks, the average profit margins have been 50%, 25%, 15%, 5%,
45%, and 30%. What is the mean absolute deviation of profit margins from the industry average?
* 13.3%.
* 13.7%.
* 13.5%.
* 13.0%.
divided by n. Here, we have [|50% - 30%| + |25% - 30%| + |15% - 30%| + |5% - 30%| + |45% - 30%| +
|30% - 30%|]/6 = 13.33%
------------------------------
A large group of inductees was given a mechanical aptitude and a finger dexterity test. The mean
score on the mechanical aptitude test was 200, with a standard deviation of 10. The mean and
standard deviation for the finger dexterity test were 30 and 6 respectively. What is the relative
dispersion in the two groups?
* Mechanical 5 percent, finger 20 percent

The respective CVs are found from (s*100)/mean. Mechanical: 10*100/200 = 5% and Finger: 6*100/30
= 20%.
------------------------------
A sample of the personnel files of eight male employees revealed that during a six month period, they
lost the following number of days due to illness: 2, 0, 6, 3, 10, 4, 1 and 2. What is the mean deviation
(in days)?
* 2 3/8
*1
*0
* 3 1/8
The mean is 3.5. The mean deviation is the absolute values of the deviation from the mean. (1.5 + 3.5
+ 2.5 + 0.5 + 6.5 + 0.5 + 2.5 + 1.5)/8 = 19/8 = 2.375
------------------------------
The slope coefficient in a regression measures:
* The significance of the regression line.

* The percentage change in the dependent variable caused by a 1% change in the independent
variable.
* The rate at which the dependent variable changes with respect to the independent variable.
* The change in the independent variable caused by a unit change in the dependent variable.

Correct answer:
The rate at which the dependent variable changes with respect to the independent variable.
In a univariate regression, the slope coefficient gives the change in the dependent variable caused by
a unit change in the independent variable. It thus measures the rate at which the dependent variable
changes with respect to the independent variable.
------------------------------
I. A sample is a subset of the population.
II. The population mean is used to estimate the sample mean.
III. The population mean equals the sum of all the available observations divided by the number of
observations.
IV. A sample has a unique mean.
* I, II, III & IV

* I, III & IV
* IV only
* I only
* I & III
* I & IV
* II only
* III only

Correct answer:
I & IV
The sample mean is used to estimate the population mean, not the other way around.
The sum of all the available observations divided by the number of observations is the sample mean,
not the population mean (unless the observation set equals the entire population, which is almost
never the case).
------------------------------
The R-square in a univariate regression measures:
* the significance of the regression.

* the variance of the error term.
* the amount of variance in the dependent variable caused by the variance in the independent
variable.
* the correlation between the dependent and the independent variables.

Correct answer:
the amount of variance in the dependent variable caused by the variance in the independent variable.
It should be noted that in a univariate regression, the square root of R-square equals the correlation
coefficient. The significance of a univariate or a multivariate regression is measured by the F-statistic.
------------------------------
John buys a house that costs $175,000 and agrees to pay for it with a 15 year mortgage at 7% per
year, compounded monthly. What is John's monthly payment on the loan?
* $972.22
* $552.12
* $12,218.50
* $12,250.06
* $1,572.95

Correct answer:
$1,572.95
On the BAII Plus, press 180 N, 7 divide 12 = I/Y, 175000 PV, 0 FV, CPT PMT. On the HP12C, press
180 n, 7 ENTER 12 divide i, 175000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to
1.
------------------------------
for advancement either fair, good, or excellent. These traits are the 500 salespeople were cross
Fair Good Excellent

Average 45 60 45
What is the probability that a salesperson selected at random will have average sales ability and good
potential for advancement?
* 0.09
* 0.12
* 0.525
* 0.30

Correct answer:
0.12
Prob. of selecting a person with average sales ability: (45 + 60 + 45)/500 = 3/10. Prob. of selecting
good potential amongst those with average sales ability: 60/150. Therefore: 3/10*6/15 = 0.12.
------------------------------
You are given a risk-free rate of 3% per year, a portfolio return of 8% per year, and a standard
deviation of portfolio return of 22% per year. What is the Sharpe measure of risk-adjusted
performance?
* 0.250.
* 0.234.
* 0.227.
* 0.222.

Correct answer:
0.227.
The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p
is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation
of portfolio return. In our case, we have (8% - 3%) / 22% = 5/22 = 0.227.
------------------------------
A random variable, X, has a mean of 10 and a standard deviation of 15. Another random variable, Y,
is defined by Y = 2X + 3. Then, which of the following is/are true?
I. The mean of Y is 33.

II. The variance of Y is 30.
III. The standard deviation of Y is 33.
IV. X and Y are perfectly correlated.
* II and IV
* I, II and IV
* II only
* III and IV
* IV only
* III only
* I only
Correct answer:
IV only
The mean of Y is 2*10 + 3 = 23. The standard deviation of Y is 2*15 = 30. Its variance is then equal to
30^2 = 900. Finally, since Y is a linear multiple of X, X and Y are perfectly correlated (positively, in this
case)
------------------------------
A systematic sampling method should not be used when:
* the data are commingled.

* the data are systematically biased.
* the data are already arranged in the form of a predetermined pattern.
* the data are divided into open-ended classes.

Correct answer:
the data are already arranged in the form of a predetermined pattern.
If the data are already arranged in the form of a predetermined pattern, using systematic sampling can
introduce a systematic pattern in the sample itself, which would lead to erroneous inferences about the
entire population.
------------------------------
What is the relationship between the variance and the standard deviation?
* Variance is the square root of the standard deviation

* No constant relationship between the variance and the standard deviation
* Variance is twice the standard deviation
* Variance is the square of the standard deviation

Correct answer:
Variance is the square of the standard deviation
The variance is the mean of the squared deviations from the mean. The standard deviation is the
positive square root of the variance.
------------------------------
A bell-shaped, symmetrical frequency distribution has a mean of 5 and a standard deviation of 2.5.
The percentage of observations less than zero is about:
* cannot be calculated
* 5%
* 10%
* 2.5%
Correct answer:
2.5%
Note that the mean is 2 standard deviations above zero. The fraction of observations in a bell-shaped,
symmetrical frequency distribution which lie outside the 2-sigma range around the mean is about 5%.
Since the distribution is symmetrical about the mean, the percentage of observations less than zero is
approximately equal to 5%/2 = 2.5%.
------------------------------
What is the area under the normal curve between z = 1.0 and z = 2.0?
* 1.0000
* 0.1359
* 0.7408
* 0.4772

Correct answer:
0.1359
From the z-tables, z = 1 is 0.3413 and z = 2 is 0.4772. So the area in between is 0.4772 - 0.3413 =
0.1359.
------------------------------
For a one-tailed hypothesis test, the critical value of the test statistic is -2.33. Which of the following is
true about the hypothesis test?
* alpha = .05 for a lower-tailed test

* alpha = .01 for an upper-tailed test
* alpha = .05 for an upper-tailed test
* alpha = .01 for a lower-tailed test

Correct answer:
alpha = .01 for a lower-tailed test
This is a one tailed test and the z-value of -2.33 suggests that it is a lower tailed test and that it is for a
1% level of significance.
------------------------------
To test whether small-cap stocks perform worse than large stocks under the Fama-French three-factor
model, you set up the following hypothesis:
Ho: Expected excess returns of small stocks = 0

H1: Expected excess returns of small stocks < 0
The excess returns are returns adjusted for risk using the Fama-French three-factor model. In this set-
up, which of the following is/are true?
I. You must employ a right-tailed test.
II. The rejection region for the z-statistic on the excess return extends from negative infinity to the
critical value associated with the significance level.
III. It is harder to reject the null than in the case where the alternative is specified as H1: Excess
returns are non-zero.
* II only
* I & III
* II & III
* I only
Since the rejection region for the null is to the left of the maintained null value of zero, you must
employ a left-tailed test. In that case, the rejection region for the z-statistic on the excess return
extends from negative infinity to the critical value associated with the significance level. Also note that
it is harder to reject the null under a two-tailed test than under a one-tailed test since the critical value
for any given significance level is higher (in magnitude) for a two-tailed test.
------------------------------
How many months will it take for an original $1,000 deposit to grow to be $2,000, if the deposit earns
* 9.93
* 10.24
* 117.19
* 125.42
* 119.17

Correct answer:
119.17
On the BAII Plus, press 1000 PV, 2000 +/- FV, 0 PMT, 7 divide 12 = I/Y, then CPT N. On the HP12C,
press 1000 PV, 2000 CHS FV, 0 PMT, 7 ENTER 12 divide i, then press n. HP12C answer is shown as
120. Answer should be in months, not years. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
You are examining the return on equity ratios of the nation's commercial airlines. You have calculated
the mean ROE to be 8%, and the sum of the squared ROEs is 0.27. Assuming there are 30
commercial airlines, what is the population variance of ROEs in this industry?
* 8%%.
* 12%%.
* 20%%.
* 26%%.

Correct answer:
26%%.
The population variance is equal to the sum of the squared differences between each population
member and the population mean, divided by the number of items in the population. There is,
however, an equivalent alternate formula that is more often used for large amounts of calculation. It is
equal to the average squared observation less the squared mean. In this case, we have the average
squared observation will be 0.27 / 30 = 0.009, less the squared mean of 8%. We have 0.009 - 0.0064
= 0.0026 = 26%%.
------------------------------
Suppose a research firm conducted a survey to determine the average amount of money steady
smokers spend on cigarettes during a week. A sample of 500 steady smokers revealed that the
sample mean is $20 and the sample standard deviation is $5. What is the point estimate?
* $20
* $25
* $0.04
* $5
The sample mean is a good estimate for the population mean.
------------------------------
A survey of passengers on domestic flights revealed these miles:
Miles Flown Number of Passengers
100 - 499 16
500 - 899 41
900 - 1299 81
1300 - 1699 11
1700 - 2099 9
2100 - 2499 6
What is the range (in miles)?
* 1,100
* 1,999
* 2,499
* 2,399

Correct answer:
2,399
2499 - 100 = 2399
------------------------------
The coefficient of variation is useful when:
I. The frequency distribution contains open-ended classes or overlapping classes.

II. The data sets being compared contain data in different measurement units.
III. The data sets being compared contain data with similar measurement units.
* I only
* I & II
* III only
* II only
* I & III

Correct answer:
II only
The coefficient of variation is useful when the means of the data sets are widely different or when the
observations are in different measurement units.
------------------------------
* 17.53%
* 14.15%
* 12.63%
* 12.92%
* 1.05%

Correct answer:
12.63%
value set to 1.
------------------------------
The semiannually compounded rate is 6% quoted on an annualized basis. The equivalent quarterly
compounded rate is:
* 6.12%
* 5.91%
* 5.96%
* 5.76%

Correct answer:
5.96%
To solve such problems, think about investing a dollar for 1 year. The final amount should be the same
under both the quotations. Under quarterly compounded rate, r, $1 grows to (1+r/4)^4 in 1 year. Under
semiannual compounding, it grows to (1+0.06/2)^2 = 1.0609. Since these two should be equal, we get
(1+r/4)^4 = 1.0609, giving r = 5.96%. Note that the quarterly compounded rate must be smaller than
the semiannually compounded rate, ruling out 6.12 automatically.
------------------------------
A mortgage holding company has found that 1% of its mortgage holders default on their mortgage and
lose the property. Furthermore, 90% of those who default are late on at least two monthly payments
over the life of their mortgage as compared to 45% of those who do not default.
What is the probability that a mortgagee with two or more late monthly payments will default on the
mortgage and lose the property?

* 0.019
* 0.009
* 0.020
* 0.018

Correct answer:
0.020
We have P(def) = 0.01. P(not def) = 0.99. P(two late payments/def) = 0.90. P(two late payments/not
def) = 0.45. Using Bayes formula:
p(def/two late payments) = (0.01*0.9)/(0.01*0.9 + 0.99*0.45) = 0.0198 = 0.020.
------------------------------
During the past six months, the purchasing agent bought:
Tons of Coal 1,200 3,000 500

Price Per Ton $28.50 $87.25 $88.00
What is the weighted mean price per ton?
* $89.18
* $68.47
* $87.25
* $72.33

Correct answer:
$72.33
(1200*28.5)+(3000*87.25)+(500*88) = 339950. Mean = 339950/4700 = 72.33
------------------------------
Sixty percent of the customers of a fast food chain order the Whopper, fries and a drink. If a random
sample of 15 cash register receipts is selected, what is the probability that 10 or more will show that
the above three food items were ordered?
* 0.186
* 1,000
* 0.403
* 0.000

Correct answer:
0.403
n!(p^r)[q^(n-r)]/r!(n-r)!. Therefore, we need to find out the probability of getting 10, 11,12,13,14,15
successes and add them up. Here n=15, p=0.6 and q=0.4. r changes from 10 to 15.
P(10 successes) = 15!(0.6^10)(0.4^5)/10!(15-10)! = 0.1859

P(11 successes) = 15!(0.6^11)(0.4^4)/11!(15-11)! = 0.1268
P(12 successes) = 15!(0.6^12)(0.4^3)/12!(15-12)! = 0.0634
P(13 successes) = 15!(0.6^13)(0.4^2)/13!(15-13)! = 0.0219
P(14 successes) = 15!(0.6^14)(0.4^1)/14!(15-14)! = 0.0047
P(15 successes) = 15!(0.6^15)(0.4^0)/15!(15-15)! = 0.00047
The sum of all the probabilities is 0.403.
------------------------------
What is the present value today of these annual cash flows: <$10,000>, $5,000, $4,000, $3,000,
$2,000? Assume the first cash flow occurs today and an interest rate of 8% per year, compounded
annually. (Note that the <> are used to indicate a negative number).
* $1,910.54
* $2,045.10
* $2,110.45
* $2,380.01
* $4,000.00
You could solve this question using several different compound interest problems, but it is easier to
solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 10000
+/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow
3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 2nd Quit. Then press
NPV 8 ENTER DownArrow CPT. On the HP12C, press these keys: 10000 CHS BlueShift CFo 5000
BlueShift CFj 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj. Then press 8 i, YellowShift
NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus
keyboard.
------------------------------
The number of work stoppages in a highly industrialized region for selected months are: 6, 0, 10, 14, 8
and 0. What is the median number of stoppages?
*7
*8
*0
*6
Order the observations: 0,0,6,8,10,14. The median is (6 + 8)/2 = 7
------------------------------
Which of the following is not one of the five steps in the hypothesis testing procedure?
* Identify the test statistic

* All of these answers are part of the five steps
* Select a level for beta
* State the null and alternate hypothesis
* Formulate a decision rule

Correct answer:
Select a level for beta
The beta is determined by our choice of the decision rule and significance level. It is not determine on
the outset.
------------------------------
accumulates at 10%, compounded annually?
* $20,153.37
* $21,500.00
* $9,143.39
* $26,474.73
* $23,132.60

Correct answer:
$23,132.60
PMT, 60000 FV, PV. Note that the answer is displayed as a negative number.
------------------------------
The results of the regressions using 200 observation on a variable Y against X are as follows:
Coefficient Standard error

intercept 3.6 2.1
slope -8.1 1.3
R square = 49%
The correlation coefficient between X and Y is ________.

* -0.49
* -0.70
* + 0.70
* -8.10

Correct answer:
-0.70
In a univariate regression, the correlation coefficient between the dependent and the independent
variables equals the square root of R-square. However, you should also be careful about the sign,
which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this
case, the slope coefficient is negative, implying that the dependent and the independent variables are
negatively correlated and the correlation coefficient equals -sqrt(0.49) = -0.7.
------------------------------
to be 136. The mean of the sample is calculated to be 17.2. The null hypothesis is stated as Ho: mean
= 4. The p-value under the alternative hypothesis H1: mean > 4 equals ________.
* 3.92%
* 5.2%
* 1.96%
* 2.6%

Correct answer:
2.6%
The z-statistic under the null is calculated to be (17.2 - 4)/(136/(400^.5)) = 1.94. The right-tailed
probability of observing a z-statistic at least as big as 1.94 equals 1.0 - 0.9738 = 0.026 = 2.6%. This is
the p-value of the right-tailed test in this sample.
------------------------------
You are given a portfolio mean return of 15%, and a standard deviation of portfolio return is 20%, and
a Sharpe ratio of 0.51. What is the risk-free rate?

* 4.0%.
* 5.0%.
* 4.2%.
of portfolio return. In our case, we have (15% - x%) / 20% = 0.51. Solving for x, we obtain x = 0.15 -
0.51 * 0.20 = 0.15 - 0.102 = 0.048 = 4.8%.
------------------------------
If you deposit $500 today into an account paying 8% per year, compounded quarterly, how much will
be in the account after 60 months?
* $717.54
* $702.48
* $751.59
* $724.46
* $742.97

Correct answer:
$742.97
There are 20 quarters in 60 months (60 divide 3 =). On the BAII Plus, press 20 N, 8 divide 4 = I/Y, 500
PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 8 ENTER 4 divide i, 500 PV, 0 PMT, FV. Note that
the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set
to 1.
------------------------------
An experiment involves selecting a random sample of 256 middle managers at random for study. One
item of interest is their mean annual income. The sample mean is computed to be $35,420 and the
sample standard deviation is $2,050. What is the point estimate?
* $138.36
* $2,050
* $34,520
* $35,420

Correct answer:
$35,420
------------------------------
Which of the following statements is false in reference to confidence intervals and/or tests of
significance? Choose the best answer.
* The three conventional level of confidence are 0.10, 0.05, and 0.01.
* All else equal, the confidence interval for a 1% significance level is larger than the confidence
interval for a 5% significance level.
* The confidence level is typically equal to (1 - the probability of a Type II error).
* The significance level is denoted by the Greek letter alpha.
* The confidence level is equal to the significance level.

Correct answer:
More than one of these answers is incorrect.
More than one of these answers is correct. First, the confidence level is not equal to the significance
level. Rather the confidence level is equal to (1 - the significance level). Remember that the
significance level of a test is used to quantify the probability of a Type I error, which is defined as the
act of incorrectly rejecting the null hypothesis. For example, a confidence level of 95% implies a 5%
probability of incorrectly rejecting the null hypothesis (i.e. a Type I error). For example, a hypothesis
test associated with a 0.01 significance level indicates a 0.99 level of confidence.
The second incorrect statement in this example is that the confidence level of a hypothesis test is
found by (1 - alpha), where "alpha" is equal to the probability of a Type I error.
Subtracting the probability of a Type II error from one will yield the power of the test.
The remaining answers are all correct.
------------------------------
Which of the following are true regarding covariance?
I. Covariance of returns on two assets is 0 when the returns are unrelated.
II. Covariance will be negative if, when the return on one asset is below expected value, the other
return will also be below its expected value.
III. The covariance of returns of an asset with itself is the asset's return variance.
IV. Covariance is the probability weighted average of the cross product of the deviation of each
random variable from its expected value.
* All but II.

* All but I.
* All but IV.
* All but III.
I, III, and IV are all true. II is false. To make II true, we would have to restate it as "Covariance will be
negative if, when the return on one asset is below expected value, the other return will be above its
expected value."
------------------------------
The U.S. Federal Aviation Administration reported that passenger revenues on international flights
increased from $528 million in 1972 to $5,100 million in 1995.
What is the geometric mean annual percent increase in international passenger revenues?

* 27.9
* 9.96
* 103.6
* 10.4

Correct answer:
10.4
There are 24 years involved. The geometric mean is = [(1 + 5100/528)^1/23]-1. In words, it is the 23rd
square root of (1 + 5100/528) minus 1. So we have GM = (1 + 9.66)^(1/23) - 1 = 0.1036 = 10.4%
------------------------------
I. There are as many values above the mean as below it.

II. The sum of the differences between the observations in a sample and the mean of the sample
equals zero.
III. The mean is greatly affected by "outliers."
IV. The mean is harder to estimate with reliability for open-ended data.
* I, II & III
* III only
* II & III
* II only
* I only
* IV only
* I & III
* II, III & IV

Correct answer:
II, III & IV
I would be correct if "mean" is replaced by "median" i.e. there are as many values above the median
as below it. Note that one of the advantages of using the median instead of the mean is that the mean
is greatly affected by outliers since it represents an average of all the observations while the median is
not affected in this fashion.
------------------------------
What degree of relationship do values of the correlation coefficient (r) with magnitudes close to 1.00
indicate?
* Weak
* Strong
* Moderate
* None

Correct answer:
Strong
The closer to 1, the stronger the relationship.
------------------------------
to be 1,235.6. The mean of the sample is calculated to be 219.2. The null hypothesis is stated as Ho:
mean = 150 and the alternative is non-directional. The p-value in this case equals ________.
* 10.16%
* 13.88%
* 6.94%
* 12.82%

Correct answer:
13.88%
The z-statistic under the null equals (219.2 - 150)/(1235.6/(700^.5)) = 1.48. Since the alternative is
non-directional, you must use a two-tailed test and ask the question, "What is the probability of
observing a z-statistic at least as large in magnitude as 1.48?" The answer to this will give you the p-
value for this sample under the two-tailed test.
The right-tailed probability of observing a z-statistic which is at least as big as 1.48 equals 1.0 - 0.9306
= 0.0694 = 6.94%. The left-tailed probability of observing a z-statistic which is at least as small as -
1.48 also equals 6.94% since the standard normal distribution is symmetrical about zero. Therefore,
the p-value of this two-tailed test in this sample equals 6.94%*2 = 13.88%.
------------------------------
In a sample of 2,000 persons, 1,600 favored more strict environmental protection measures. What is
the estimated population proportion?
* 0.82 or 82%
* 0.20 or 20%
* 0.16 or 16%
* 0.80 or 80%

Correct answer:
0.80 or 80%
Population proportion is given by 1600/2000 = 0.80
------------------------------
year: Year 0: <$10,000>, Year 1: $5,000, Year 2: $5,000, Year 3: $7,500? (Note that the <> are used
* $2,981.21
* $5,077.49
* $3,059.92
* $3,224.98
* $3,104.37

Correct answer:
$3,059.92
CFo 5000 BlueShift CFj 5000 BlueShift CFj 7500 BlueShift CFj Then press 15 i, YellowShift NPV. The
"DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.
------------------------------
The following are the weekly amounts of welfare payments made by the federal government to a
sample of six families: $139, $136, $130, $136, $147 and $136. What is the range?
* $52
* $14
* $17
* $0

Correct answer:
$17
Range = 147 - 130 = 17
------------------------------
A board of directors consists of eight men and four women. A four member search committee is to be
chosen at random to recommend a new company president. What is the probability that all four
members of the search committee will be women?

* 1/16 or 0.0625
* 1/495 or 0.002
* 1/8 or 0.125
* 1/120 or 0.00083

Correct answer:
1/495 or 0.002
4/12*3/11*2/10*1/9 = 1/495
------------------------------
You are evaluating 5 portfolio managers (A, B, C, D, and E) whose Sharpe ratios are 0.25, 0.41, 0.92,
0.78, and 0.51, respectively. Which manager would most risk-averse investors prefer?
* C.
* A.
* E.
of portfolio return. Thus, the manager with the highest Sharpe ratio is generating the largest return in
excess of the risk free rate, per unit of risk assumed. This is manager C, with a Sharpe ratio of 0.92.
------------------------------
The mean of a normal distribution is 400 pounds. The standard deviation is 10 pounds. What is the
area between 415 pounds and the mean of 400 pounds?

* 0.4332
* 0.3413
* 0.1932
* 0.5000

Correct answer:
0.4332
z = (x-u)/sigma. z = 415 - 400/10 = 1.5. From the z-tables, z = 1.5 is 0.4332. Since we are considering
just one side of the distribution and the area from the mean, then the area between the points is
0.4332.
------------------------------
Four of your firm's analysts have been chosen as finalists for the Wealth Magazine All-Star Analysts
team. They will get different bonuses depending on the order in which they finish among themselves.
How many different ways could they finish?
* 10.
* 24.
* 16.
* 36.

Correct answer:
24.
The factorial method allows you to determine the number of ways of arranging n things. Initially, there
are n choices for the first item, then n-1 for the second, and so on. The number of combinations is
therefore n! = n * (n-1) * (n-2) * (n-3) * ... * (1). Here, we wish to find out how many different orders can
be made with 4 persons. The answer is 4! = 4 * 3 * 2 * 1 = 24.
------------------------------
If you deposit $2,000 today, how much will you have in 3 years, if interest is earned at a rate of 8% per
* $2,519.42
* $2,576.14
* $2,400.00
* $3,121.88
* $2,614.09
FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y
value set to 1.
------------------------------
What are the critical values for a two-tailed test of hypothesis test if alpha = .01?
* +/- 1.645
* +/- 2.58
* +/- 1.96
* +/- 2.33

Correct answer:
+/- 2.58
For a level of significance of 0.01, we can find the z value by 1.0 - 0.505 = 0.495 which is 2.58.
------------------------------
A test statistic is:
* a value calculated from a sample and used to accept or reject the null hypothesis.
* all of these answers.
* a sample value that is used to measure a population parameter.
* a parameter characterizing the null hypothesis.
A test statistic is a value calculated from a sample and used to accept or reject the null hypothesis
concerning a population's parameter.
------------------------------
If you deposit $250 a year, beginning next year, for 30 years into an account paying 6% per year,
* $21,149.52
* $12,334.91
* $19,764.55
* $18,304.12
* $3,441.21

Correct answer:
$19,764.55
250 PMT, FV. Note that the answer is displayed as a negative number. Make sure the BAII Plus has
------------------------------
What is the present value of $250 per year for 6 years, with the first cash flow occurring today, rather
than 1 year from now? Assume interest is 7% per year, compounded annually.
* $1,209.48
* $1,500.00
* $1,191.63
* $1,275.05
* $1,293.55

Correct answer:
$1,275.05
Recognize that this question is an annuity due situation, since the first cash flow occurs immediately or
at the beginning of each period. Annuities where the first payment occurs 1 period from today (or at
the end of each period) are called "ordinary" annuities. This requires placing the calculator into "Begin"
mode prior to solving the question. NOTE: Be sure to place the calculator OUT OF annuity due mode
after this question before going on to subsequent questions, or you will get the wrong answers! On the
BAII Plus, press 2nd BGN. If the display shows END, then press 2nd SET and then 2nd Quit. This will
place the BAII Plus into annuity due mode (you can tell this because the BAII Plus will display BGN in
small letters). Now press 6 N, 7 I/Y, 250 PMT, 0 FV, CPT PV. Place the calculator back into End mode
(for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press 2nd
SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press BlueShift
END, which is the blue function on the front of the 8 digit key. This places the HP12C into Begin mode
(the HP12C shows the word BEGIN in the display when in this mode). Then press 6 n, 7 i, 250 PMT, 0
FV, PV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG
(the blue function written on the front of the 7 digit key). Note that the answer is displayed as a
------------------------------
Assume you buy a car for $20,000 today and agree to pay $200 a month, beginning next month, for 4
years with a final payment also due 4 years from today to pay off any remaining balance. How large
will that final payment be, if interest accrues at 5.9% per year, compounded monthly?
* $19,590.32
* $24,280.77
* $19,204.41
* $10,400.00
* $14,511.19

Correct answer:
$14,511.19
There are 48 months in 4 years. This is a problem known as a balloon payment. On the BAII Plus,
press 48 N, 5.9 divide 12 = I/Y, 20000 PV, 200 +/- PMT, CPT FV. On the HP12C, press 48 n, 5.9
ENTER 12 divide i, 20000 PV, 200 CHS PMT, FV. Note that the answer will be displayed as a
------------------------------
You are reviewing a list of 8 recommended securities and wish to invest in 4. You will put 40% of your
capital in one, 30% in another, 20% in the third, and 10% in the last one. How many different ways can
you choose among the 8 securities and invest according to your design?
* 1,980.
* 1,680.
* 1,774.
* 1,860.

Correct answer:
1,680.
items, without regard to the order of choosing. The formula is (n choose k) = n! / [k! *(n-k)!]. However,
in this case, the order does matter. If we choose stocks 3, 1, 7, and 5, we don't consider that the same
as choosing 5, 7, 1 and 3, because the portfolio weights would differ. We need the general
permutation formula, which gives the number of ways that k objects can be chosen from n items, with
regard to order. The formula is n_P_k = n! / (n-k)!. Here, it is 8! / (8-4)! = 8 * 7 * 6 * 5 = 1,680.
------------------------------
The significance level in hypothesis testing refers to the:
* probability of Type II error.

* 1-probability of Type I error.
* joint significance of the associated regression, indicated by the F-statistic.
* probability of Type I error.

Correct answer:
probability of Type I error.
Type I error refers to the event that we will reject the null when, in fact, it is true. The probability of this
error is called the "significance level" of the test used to evaluate the hypothesis. Clearly, lower
significance levels are better, all else equal.
------------------------------
What is the area under the normal curve between z = -1.0 and z = -2.0?
* 0.0228
* 0.4772
* 0.3413
* 0.1359

Correct answer:
0.1359
From the z-tables, z = 1 is 0.3413 and z = 2 is 0.4772. So the area in between is 0.4772 - 0.3413 =
0.1359.
------------------------------
Year 1: $5,000, Year 2: $4,000, Year 3: $5,000, Year 4 $4,000? (Note that the <> are used to indicate
a negative number).
* 10.69%
* 11.14%
* 12.04%
* 45.29%
* 10.49%

Correct answer:
11.14%
row of the BAII Plus keyboard. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
If the sample variance for a frequency distribution consisting of hourly wages was computed to be 10,
what is the sample standard deviation?
* $3.16
* $1.96
* $4.67
* $10.00
Sample standard deviation is the square root of the sample variance.
------------------------------
Type II error refers to the event that we will:

* Accept the alternative when it is false.
Remember that the null hypothesis is the one that you maintain to be true unless there is sufficient
evidence to prove otherwise. Therefore, the first type of mistake that can happen is that you reject the
maintained hypothesis when in fact, it is true. This error is referred to as "Type I" error. On the other
hand, you may not have sufficient evidence to disprove the null when in fact, it is false. This failure to
appropriately reject the null is referred to as "Type II" error.
------------------------------
Of 900 consumers surveyed, 414 said they were very enthusiastic about a new home decor scheme.
What is the 99% confidence interval for the population proportion (in percent)?
* 42 and 50
* 30 and 40
* 30 and 60
* 31 and 51
and z = 2.58 (for 99%).
------------------------------
What is the present value today of these annual cash flows: $300, $1,200, $2,500? Assume the first
* $3,215.70
* $2,989.06
* $3,244.09
* $3,298.82
* $3,308.86
DownArrow DownArrow 2nd Quit. Then press NPV 9 ENTER DownArrow CPT. On the HP12C, press
these keys: 0 BlueShift CFo 300 BlueShift CFj 1200 BlueShift CFj 2500 BlueShift CFj. Then press 9 i,
YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the
BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
A perpetual preferred stock has a face value of $1,000 and a coupon rate of 6% per year. If it is issued
at $850, what's the implicit annual discount rate?
* 6.94%
* 7.00%
* 7.19%
* 7.06%

Correct answer:
7.06%
A preferred stock is valued like a perpetuity. The price of a preferred stock with a face value F and a
coupon rate c equals F*c/r, where r is the implicit discount rate. In this case, we have 850 =
1,000*0.06/r, giving r = 7.06%.
------------------------------
* $4,587.85
* $10,487.15
* $3,330.55
* $4,857.58
* $4,930.03

Correct answer:
$4,930.03
------------------------------
The ages of all the patients in the isolation ward of the hospital are 38, 26, 13, 41 and 22. What is the
population variance?
* 91.4
* 106.8
* 240.3
* 42.4

Correct answer:
106.8
Population variance = (Sum of squared deviation from the mean)/N. the mean is 28. Population
variance = (100 + 4 + 225 + 169 + 36)/5 = 534/5 = 106.8
x x-mean (x-mean)^2
38 10 100
26 -2 4
13 -15 225
41 13 169
22 -6 36
------------------------------
* $2,131.88
* $58,902.04
* $4,576.20
* $61,549.18
* $24,000.00

Correct answer:
$58,902.04
------------------------------
Rhonda McLeavon, a quantitative analyst with Churn Brothers Brokerage, has been instructed to
perform a statistical analysis to test whether increases in marketing expenses amongst drug
companies is positively related to institutional buying of these same companies' common stock.
Rhonda begins her analysis and performs the following steps, in succession:
Step 1: Formulating and stating the hypothesis

Step 2: Identifying the appropriate test statistic and probability distribution
Step 3: Specifying the significance level
Step 4: Stating the decision rule
Now that these first four steps have been completed, Ms. McLeavon should proceed with which of the
following? Choose the best answer.

* Collecting the data and performing the calculations
* Determining the z-statistic
* Determining the p-value
* Performing and autocorrelation test to identify any heterskedasticity problems
* Evaluating the goodness of fit

Correct answer:
Collecting the data and performing the calculations
Hypothesis testing involves a series of seven explicit steps:

Step 2: Identifying the appropriate test statistic and its probability distribution
Step 5: Collecting the data and performing the necessary calculations
Step 6: Making the statistical decision
Step 7: Making the economic/investment decision.
------------------------------
As the size of the sample increases, what happens to the shape of the sampling mean?
* Negatively skewed
* Cannot be predicted in advance
* Positively skewed
* Approaches a normal distribution

Correct answer:
Approaches a normal distribution
The central limit theorem states that as the sample size gets larger, the sampling distribution of the
sample means becomes approximately normal.
------------------------------
The coefficient of variation (CV) for a set of annual incomes is 18%; the coefficient of variation for the
length of service with the company is 29%. What does this indicate?
* More dispersion in the distribution of the incomes compared with the dispersion of their length of
service
* Dispersions are equal
* Dispersions in the two distributions (income and service) cannot be compared using percents
* More dispersion in the lengths of service compared with incomes

Correct answer:
More dispersion in the lengths of service compared with incomes
The CV is the ratio of the standard deviation to the mean, express as a percent. The higher the
coefficient, the greater the dispersion.
------------------------------
Carlos Johanson, a quantitative analyst with Eastern Rhodium Institutional Brokerage, has been
instructed to perform a regression analysis to test whether the proliferation of neural networks is
positively related to the growth of domestic research grants. Mr. Johanson begins the process by
formulating and stating a hypothesis. Now that the hypothesis has been explicitly stated, Mr. Johanson
should proceed to which of the following steps? Choose the best answer.
* Specifying the significance level

* Stating the decision rule
* Identifying the appropriate test statistic and probability distribution
* Performing an autocorrelation test

Correct answer:
Identifying the appropriate test statistic and probability distribution

In this example, Carlos Johanson, a quantitative analyst, has been instructed to perform a regression
analysis analyzing the relationship between two sets of variables. Mr. Johanson began his task with
the appropriate first step - formulating and stating the hypothesis. The next step in the hypothesis
testing process is to identify the appropriate test statistic and its probability distribution.
------------------------------
What simple annual interest rate would cause a $120 deposit to grow to $125 in 6 months?
* 25%
* 7.89%
* 4.17%
* 3.14%
* 8.33%

Correct answer:
8.33%
itself. Note that the I (interest) is equal to 5 (125 - 120). Note also that the time component T of the
formula is 6/12. On the BAII Plus, press 5 divide 120 divide 6 x 12 = to see the answer. On the
HP12C, press 5 ENTER 120 divide 6 divide 12 x to see the answer.
------------------------------
number).
* 20.49%
* 21.17%
* 23.12%
* 18.32%
* 25.51%

Correct answer:
21.17%
downward-pointing arrow on the top row of the BAII Plus keyboard.
------------------------------
Stock A is highly volatile while stock B has low volatility. The difference between the arithmetic and
geometric rates of return will be:
* same for both stocks, since the difference is not dependent on volatility.
* larger for stock A or stock B, depending on their riskiness.
* larger for stock A.
* larger for stock B.

Correct answer:
larger for stock A.
The mean and the geometric mean are equal when volatility in the rate of return is zero. For a non-
zero volatility, the mean exceeds the geometric mean and the difference is larger the higher the
volatility.
------------------------------
There are 10 rolls of film in a box and 3 are defective. Two rolls are to be selected, one after the other.
What is the probability of selecting a defective roll followed by another defective roll?
* 1/120, or about 0.0083

* 1/15, or about 0.07
* 1/4, or 0.25
* 1/2, or 0.50

Correct answer:
1/15, or about 0.07
The probability of selecting a defective roll in the first selection is 3/10. The probability of choosing
another defective roll is 2/9. So 3/10*2/9 = 6/90 = 1/15.
------------------------------

intercept 3.6 2.1
slope 8.1 1.3
R square = 49%
The percentage of variance in the dependent variable not explained by the regression equals
________.
* 36.4%
* 49%
* 18%
* 51%

Correct answer:
51%
The R-square of the regression measures the amount of variance of the dependent variable explained
by the independent variable. This is given to be 49%. Hence, the amount not explained equals 100% -
49% = 51%.
------------------------------
What is the probability of making a Type II error if the null hypothesis is actually true?
* .05
* alpha
*1
*0

Correct answer:
0
The type II error is accepting a null hypothesis when it is actually false. The probability of committing
this error is called beta. Therefore the probability of making a type II error when the null is true is zero.
------------------------------
Which of the following is not a valid reason for selecting a sample instead of studying the whole
population?
* All of these answers reasons are valid

* Sample results have more accuracy than population results
* Cost of studying an entire population can be too high
* Population can be destroyed in the process of studying it
* Study of the population can be too time consuming

Correct answer:
Sample results have more accuracy than population results
Sample results cannot be more accurate since it is based on a subset of the population.
------------------------------
What annual interest rate, compounded annually, will cause an original deposit of $500 to grow to
$625, after 3 years?
* 7.27%
* 9.14%
* 6.78%
* 7.72%
* 2.57%

Correct answer:
7.72%
On the BAII Plus, press 500 PV, 625 +/- FV, 0 PMT, 3 N, then CPT I/Y. On the HP12C, press 500 PV,
625 CHS FV, 0 PMT, 3 n, then press i.
------------------------------

0-2 60
3-5 31
6-8 14
9 - 11 6
12 - 14 2
How many employees were never absent?

* 29
* Cannot be determined from the given data
* 31
* 60

Correct answer:
Cannot be determined from the given data
We were given only the number of employees in the 0-2 group. So we do not know how many were
never absent since this group includes those who were absent 1 and 2 days.
------------------------------
Judging from recent experience, 5 percent of the worm gears produced by an automatic, high speed
machine are defective. What is the probability that out of six gears selected at random, exactly zero
gears will be defective?
* 0.500
* 0.167
* 0.735
* 0.001

Correct answer:
0.735
Using Binomial probability with n = 6, p = 0.05 and q = 0.95 and r = 0 we get [6!(0.05^0)(0.95^6)]/0!(6 -
0)! = 0.735.
------------------------------
Armando Delrio, a quantitative analyst with Brown Brothers Brokerage, has been instructed to create a
regression analysis comparing the relationship between same store sales figures for a batch of retail
stocks and marketing expenses for the same series of stocks. In order to adhere to the traditional
seven-step method of hypothesis testing, Armando should begin his analysis by performing which of
the following actions? Choose the best answer.
* Formulating the hypothesis

* Collecting the data
* Stating the significance level
* Identifying the test statistic
* Identifying the probability distribution

In this example, Armando Delrio, a quantitative analyst, has been instructed to perform a regression
analysis in which a hypothesis is tested. The first step in this process is the formulation of the
hypothesis.
------------------------------
The sampling distribution of the sampling mean is:
* the distribution of the means of all possible samples of a given size from a given population.
* the distribution of all possible samples of a given population.
* the distribution of all possible means of a given population.
* the distribution of the means of all possible samples of a given population.
The sampling distribution of the sample means is a probability distribution of all possible sample
means of a specific sample size.
------------------------------
All possible samples of size n are selected from a population and the mean of each sample is
determined. What is the mean of the sample mean?
* Cannot be estimated in advance

* Exactly the same as the population mean
* Larger than the population mean
* Smaller than the population mean

Correct answer:
Exactly the same as the population mean
If we selected all possible samples from the population, then the sample mean will be equal to the
population mean. Only when we cannot select all possible samples will be a difference.
------------------------------
What deposit today is needed to have $2,000 in 4 years, assuming the money will earn interest at 6%
per year, compounded monthly?
* $1,934.02
* $1,290.81
* $1,574.20
* $1,384.57
* $1,900.00

Correct answer:
$1,574.20
------------------------------
A bell-shaped, symmetrical frequency distribution has a mean of 50. If 68% of the observations in the
distribution fall between 40 and 60, what's the range within which 99% of the observations in the
distribution fall?
* [19.79; 80.21]
* [23.1; 76.9]
* [30; 70]
* [24.2; 75.8]

Correct answer:
[24.2; 75.8]
For a bell-shaped, symmetrical frequency distribution, approximately 68% of the observations lie within
one standard deviation of the mean. The mean equals (40 + 60)/2 = 50. Therefore, the standard
deviation equals 50 - 40 = 10. Now, by the normal rule, 99% of the observations lie within 2.58
standard deviations of the mean. Hence, the requisite range equals [50 - 2.58*10, 50 + 2.58*10] =
[24.2, 75.8].
------------------------------
The significance level of a test is usually equal to which of the following:
* The power of a test.

* The probability of a Type I error.
* The probability of a Type II error.
* (1 - the probability of a Type I error).

Correct answer:
The probability of a Type I error.
The standard method of hypothesis testing involves stating the significance level as equal to the
probability of incorrectly rejecting the null hypothesis. This action is defined as a Type I error. The
converse of a Type I error, in which the null hypothesis is incorrectly rejected, is a Type II error, in
which a false null hypothesis is mistakenly accepted.
------------------------------
The first card selected from a standard 52 card deck was a king. If it is returned to the deck, what is
the probability that a king will be drawn on the second selection?
* 1/4 or 0.25
* 1/13, or 0.077
* 1/3 or 0.33
* 12/13, or 0.923

Correct answer:
1/13, or 0.077
There are still 4 kings out of 52 in the pack. So 4/52 = 1/13. The first selection does not affect the
second selection.
------------------------------
If your discount rate is 8% per year, calculate the present value of the following cash flows:
End of year 1: $2,200

* $11,239
* $14,155
* $9,876
* $10,404

Correct answer:
$10,404
The present value = 2,200/1.08 + 3,000/(1.08^2) + 7,300/(1.08^3) = 10,404
------------------------------
A firm's treasurer estimates that the firm will need about $15 million in 3 years' time to allow the
acquisition of a growing software firm. If the firm can invest in the capital market at the risk-free rate of
7% per year and wants to make sure it has the necessary funds available in 3 years, how much does it
need to invest today?
* $12.244 million
* $11.964 million
* $12.113 million
* $13.642 million
The amount needed today equals 15/(1.07^3) = $12.244 million
------------------------------
A tire manufacturer advertises that "one-half of our new all-season radial tire last at least 50,000 miles.
An immediate adjustment will be made on any tire that does not last 50,000 miles." You purchased
four of these tires. What is the probability that all four tires will wear out before traveling 50,000 miles?

* 1/10, or 0.10
* 1/4, or 0.25
* 1/16, or 0.0625
* 1/64, or 0.0156

Correct answer:
1/16, or 0.0625
1/2*1/2*1/2*1/2 = 1/16 where 1/2 is the probability that a tire will wear our before 50,000 miles.
------------------------------
The U.S. Department of Education reported that for the past six years 23, 19, 15, 30, 27 and 25
women received doctorate degrees in computer and information sciences. What is the mean
arithmetic annual number of women receiving this degree?
* 15.1
* 22.9
* 37.9
* 23.2

Correct answer:
23.2
(23 + 19 + 15 + 30 + 27 + 25)/6 = 23.2
------------------------------
If you have $4,000 in an account today and withdraw $2,000 in 3 years, how much can you withdraw
from the account in 5 years, if the account earns interest at 8% per year, compounded annually?
* $3,544.51
* $3,407.98
* $3,000.00
* $2,000.00
* $7,714.93
The way to approach this problem is to find the PV today of the $2,000 amount, determine the
difference between this amount and the original $4,000 amount, and then move this remaining amount
to the 5 year point. On the BAII Plus, press 3 N, 8 I/Y, 2000 FV, 0 PMT, CPT PV, which yields
$1,587.66. Then press + 4000 =. Then press PV, 5 N, CPT FV to see the answer. On the HP12C,
press 3 n, 8 i, 2000 FV, 0 PMT, CPT PV. Then press 4000 +. Then press PV, 5 n, CPT FV to see the
answer. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
If you buy a television for $650 and agree to pay for it with 24 payments of $30 (with the first payment
occurring next month), what is the size of the final payment needed at month 24 to completely pay off
the television? Assume the interest rate you are being charged is 16% per year, compounded monthly.
* $47.54
* $0.00
* $203.98
* $30.00
* $51.25

Correct answer:
$51.25
divide 12 = I/Y, 650 PV, 30 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 650
PV, 30 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the
P/Y value set to 1.
------------------------------
How many annual deposits of $1,500, beginning next year, would you need to make before you had
accumulated $30,000, if the money earns 9% per year, compounded annually? Assume the account
begins with a $0 balance.
* 14.01
* 20.00
* 11.95
* 25.51
* 5.19

Correct answer:
11.95
On the BAII Plus, press 9 I/Y, 0 PV, 1500 PMT, 30000 +/- FV, CPT N. On the HP12C, press 9 i, 0 PV,
1500 PMT, 30000 CHS FV, n. Note that the HP12C will display 12 as the answer.
------------------------------
The weekly mean income of a group of executives is $1,000 and the standard deviation of this group
is $100. The distribution is normal. What percent of the executive have an income of $925 or less?
* About 23%
* About 15%
* About 85%
* About 50%
z = (x-u)/sigma = 925 - 1000/100 = -0.75. From z-table z = 0.75 is 0.2734. So 1.0 - 0.7734 = 0.2266.
------------------------------
A stock's return has a mean of 6% and a coefficient of variation of 2. Its variance equals
* 144%%
* 3%%
* 6%%
* 12%%
Coefficient of variation = standard deviation/mean. Therefore, standard deviation = 2*6 = 12. Variance
= 12^2 = 144
------------------------------
The coefficient of determination measures:
* The percentage change in the dependent variable caused by a 1% change in the independent
variable.
* The degree of linear association between the dependent and the independent variables.
* the slope of the regression line.
* The amount of variance of the dependent variable explained by the independent variable.

Correct answer:
The amount of variance of the dependent variable explained by the independent variable.
The coefficient of determination, also known as the R-square of the regression, measures the amount
of variance of the dependent variable explained by the independent variable.
------------------------------
Which of the following statements regarding the coefficient of correlation is true?
* It ranges from -1.0 to +1.0 inclusive

* A value of 0.00 indicates two variables are not related
* It measures the strength of the relationship between two variables
Correct answer:
All of these answers are properties of the coefficient of correlation. Make sure you know the formula
for the coefficient of correlation.
------------------------------
What is the chart called when the paired date (the dependent and independent variables) are plotted?
* Linear regression
* Pie
* Bar
* Dotted-Swiss

Correct answer:
This chart is the scatter diagram.
------------------------------
semiannually?
* 8.04%
* 8.16%
* 7.82%
* 8.09%
* 8%

Correct answer:
8.16%
------------------------------
An insurance agent has appointments with four prospective clients tomorrow. From past experience
the agent knows that the probability of making a sale on any appointment is 1 out of 5. Using the rules
of probability, what is the likelihood that the agent will sell a policy to 3 of the 4 prospective clients?
* 0.410
* 0.250
* 0.026
* 0.500

Correct answer:
0.026
= 0.026.
------------------------------
An investor has a quarterly compounded required rate of return of 9% per year. How much will he pay
for a nine-year ordinary annuity that pays $100 per year?
* $599.5
* $574.3
* $592.6
* $594.6

Correct answer:
$592.6
The annually compounded rate equals (1 + 9%/4)^4 - 1 = 9.3%. Therefore, the present value of the
annuity equals 100/0.093*[1 - 1/1.093^9] = $592.6.
------------------------------
A relative frequency distribution is
* all of these answers.

* a collection of relative frequency classes with the relative frequencies.
* a grouping of data into non-overlapping categories.
* an aggregation of raw data in the form of a probability distribution.
A relative frequency distribution is an aggregation of raw data in the form of a probability distribution, a
collection of relative frequency classes with the relative frequencies, and a grouping of data into non-
overlapping categories.
------------------------------
Suppose the probability that electricity prices will rise any given quarter is 0.60, and the probability that
oil prices will stay level or decline is 0.40. If electricity prices rise, corporate profits will decline by 2%
with 90% probability, and increase by 0.5% with 10% probability. If electricity prices decline or stay
level, corporate profits will increase 3% with a 65% probability and decline 0.5% with a 35%
probability. What is the expected change in corporate profits in the next quarter?
* +0.34%.
* -0.34%.
* +0.43%.
* -0.43%.

Correct answer:
-0.34%.
We need the total probability rule for expected value, for which the formula is E(X) = E(X | S_1) *
P(S_1) + E(X |S_2) * P(S_2) + ... + E(X |S_n) * P(S_n). Here, E(X) is the expected change in
corporate profits. S_1 is the event that electricity prices rise, and S_2 is the event that electricity prices
fall. Therefore, E(X) = 0.60 * (-2%*90% + 0.5%*10%) + 0.40 * (3%*65% - 0.5%*35%)= -0.34%, a
decline.
------------------------------
What is the variable used to predict the value of another called?
* Correlation
* Determination
* Dependent
* Independent

Correct answer:
Independent
variable. The regression is written as Y = a + bX. The letter "a" is the Y intercept and b is the slope of
the line.
------------------------------
* 0.039
* 0.058
* 0.436
* 0.027

Correct answer:
0.058
We have P(def)=0.03. P(not def) = 0.97. P(two late payments/def) = 0.90. P(two late payments/not
p(def/two late payments) = (0.03*0.9)/(0.03*0.9 + 0.97*0.45) = 0.058.
------------------------------
Which of the following are true regarding correlation?
I. Correlation is a number between 0 and 1.

II. Correlation is a measure of the strength of the linear relationship between two variables.
III. The higher the correlation, the higher the covariance.
* All but I.
* All are true.
* All but III.
* All but II.
II is true. Because the correlation between two random variables X and Y is

Cov(X,Y)/[(sigma_X)*(sigma_Y)], III is true. I is false, because correlation is a number that can take on
values between -1 and +1, inclusive. A value of -1 indicates perfectly negative linear correlation.
------------------------------
You are examining a portfolio composed of 10% money-market investments, 30% bonds, and 60%
and the return on stocks was 7%. What is the portfolio weighted average return?
* 6.50%.
* 6.30%.
* 6.40%.

Correct answer:
6.40%.
the ith asset. Here, we get a weighted mean of 0.10 * 0.04 + 0.30 * 0.06 + 0.60 * 0.07 = 6.40%.
------------------------------
If you owe $4,500 today and will repay it with 8 annual payments of $900, beginning next year, what is
the interest rate per year, compounded annually, that you are paying?
* 10.41%
* 19.80%
* 11.81%
* 4.4%
* 14.4%
Correct answer:
11.81%
On the BAII Plus, press 8 N, 4500 PV, 900 +/- PMT, 0 FV, CPT I/Y. On the HP12C, press 8 n, 4500
PV, 900 CHS PMT, 0 FV, i. Note that the PMT must be entered with a sign that is opposite that given
the PV. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
How much will you have in an account two years from now if you start with $100 in it today and add
$300 to it one year from now? Assume that interest is 6% per year, compounded annually.
* $430.36
* $424.00
* $449.44
* $372.02
* $400.00
Solve this question by working 2 compound interest problems. On the BAII Plus, press 2 N, 6 I/Y, 100
PV, 0 PMT, CPT FV, which yields $112.36. Then press STO 1. Then press 1 N, 300 PV, CPT FV,
which yields $318.00. To find the answer, press + RCL 1 =. On the HP12C, press 2 n, 6 i, 100 PV, 0
PMT, FV. Then press STO 1. Then press 1 n, 300 PV, FV. Then press RCL 1 + to show the answer.
------------------------------
A sample of single persons receiving social security payments revealed these monthly benefits: $826,
$699, $1,087, $880, $839 and $965. How many observations are below the median?
*1
*3
*2
*0

Correct answer:
3
Order the sample: 699, 826, 839, 880, 965, 1087. The median is somewhere between 839 and 880.
So there are three observations below the median.
------------------------------
quarterly?
* 5.09%
* 4.97%
* 5.25%
* 5%
* 5.01%
------------------------------
If you deposit $204.50 into an account paying 3.15% per year simple interest, how much interest will
be earned after 3 years?
* $$19.59
* $19.33
* $24.59
* $16.67
* $18.03

Correct answer:
$19.33
press 204.50 x 0.0315 x 3 = to see the answer. On the HP12C, press 204.50 ENTER 0.0315 x 3 x to
see the answer.
------------------------------
In a management trainee program, 80 percent of the trainees are female, 20 percent male. Ninety
percent of the females attended college, 78 percent of the males attended college. A management
trainee is selected at random. What is the probability that the person selected is a female who did not
attend college?
* 0.8
* 0.25
* 0.20
* 0.08

Correct answer:
0.08
Prob. of choosing a female=0.8. Prob. of a female not attending college = 0.1. So 0.8*0.1 = 0.08.
------------------------------
Melissa Hart, a quantitative analyst with the Kansas City Federal Reserve, has been involved with
accumulating data for an essay regarding economic conditions in her area. Specifically, Melissa has
been gathering data related to the levels of consumer debt in the state of Missouri. The following is a
description of the data:
Sample mean: $3,451.00

Standard deviation of the sample: $819
Assume that Ms. Hart formulates a hypothesis test in which the null hypothesis specifies that the
population mean is equal to $4,600. Additionally, assume that the population standard deviation is
unknown. Given this information, what is the standard error of the estimate? Further, what is the test
statistic? Choose the best answer.
* The answer cannot be determined from the information provided.

* $39.09; 1.17
* $1.86; (617.74)
* $39.00; 0.52
* $39.00; (29.46)
* $1.86; 862.00
* $39.09; (29.39)

Correct answer:
$39.00; (29.46)
{Standard error = [$819 / 21] = $39}
found as follows:
{Test statistic = [$3,451 - $4,600] / $39 = (29.46)}
This is a rather large test statistic, and will likely result in the rejection of the null hypothesis unless a
very low level of confidence is employed.
------------------------------
How many years would it take for a deposit of $10,000 to become $200,000, if interest of 9% per year
is compounded annually?
* 400.93
* 28.89
* 134.64
* 34.76
* 8.04

Correct answer:
34.76
On the BAII Plus, press 10000 PV, 0 PMT, 200000 +/- FV, 9 I/Y, CPT N. On the HP12C, press 10000
PV, 200000 CHS FV, 9 i, then press n. Note that the HP12C shows 35 as the answer.
------------------------------
Year 0: <$30,000>, Year 1: $5,000, Year 2: $8,000, Year 3: $11,000, Year 4 $15,000? (Note that the
<> are used to indicate a negative number).
* $951.21
* <$1,795.81>
* $1,104.37
* <$1,077.49>
* <$1,579.31>

Correct answer:
<$1,795.81>
BlueShift CFj 15000 BlueShift CFj. Then press 12 i, YellowShift NPV. The "DownArrow" represents
the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has
------------------------------
What is a listing of all possible outcomes of an experiment and their corresponding probability of
occurrence called?
* Random variable
* Subjective probability
* Probability distribution

Correct answer:
Probability distribution
The probability distribution shows the outcomes with corresponding probabilities.
------------------------------
0-2 60
3-5 31
6-8 14
9 - 11 6
12 - 14 2
How many employees were absent between 3 and 5 days?
* 29
* 17
* 14
* 31
*2

Correct answer:
17
To find the number of people absent between 3-5 days, we need to get the difference in the
cumulative number of employees between the 3-5 days group and the group after it, the 6-8 group. So
we have 31 - 14 = 17.
------------------------------
What annual interest rate, compounded quarterly, would cause a series of 20 quarterly deposits of
$800 to accumulate to $25,000, if the first deposit is made three months from today?
* 12.31%
* 19.94%
* 19.78%
* 17.85%
* 18.15%

Correct answer:
17.85%
The value returned by the calculator will be the periodic interest rate which must be multiplied by the
number of periods per year to have the correct answer. On the BAII Plus, press 20 N, 0 PV, 800 PMT,
25000 +/- FV, CPT I/Y. Then press x 4 = to see the answer. On the HP12C, press 20 n, 0 PV, 800
PMT, 25000 CHS FV, i. Then press 4 x to see the answer. Make sure the BAII Plus has the P/Y value
set to 1.
------------------------------
Bert wants to retire a millionaire. If he is 40 years old today and already has $40,000 in the bank, what
monthly deposit would he need to make beginning one month from today and continuing until he
* $703.26
* $739.04
* $738.95
* $770.98
* $742.77

Correct answer:
$742.77
------------------------------
quarterly?
* 9%
* 9.25%
* 9.01%
* 9.30%
* 8.95%

Correct answer:
9.30%
------------------------------
Suppose you have two assets, A and B. A has returns of 10%, 2%, and 15%, with probabilities 40%,
50%, and 10% respectively. B has returns of 5%, 10%, and -20%, with probabilities 40%, 50%, and
10% respectively. What is the return covariance between assets A and B?
* -50.23%%
* -60.65%%
* -10.78%%.
* -32.45%%

Correct answer:
-32.45%%
First we must find the expected returns for A and B. These are 6.50% and 5.00%, respectively.
Second, we find the difference between each observation and the average: (10% - 6.5%), (2% -
6.5%), and (15% - 6.5%) for A, and (5% - 5%), (10% - 5%), and (-20% - 5%) for B. Next, we take the
probability weighted cross product of these differences and sum them. So we get 3.5% * 0% * 40% +
(-4.5%) * 5% * 50% + 8.5% * (-25%) * 10% = -32.45%%.
------------------------------
The probability that GNP will expand in the next 12 months is called:
* a guess.
An unconditional probability takes the form of P(A), the probability that an event (A) will happen. It is
unconditional because it is not conditioned on any other event.
------------------------------
"Sampling error" refers to:
* an incorrect selection of a sampling method.

* the standard error of the normal deviates of a sample drawn from a population.
* the difference between a sample statistic and the corresponding population parameter.
* an incorrect usage of a sampling method.

Correct answer:
the difference between a sample statistic and the corresponding population parameter.
Sampling error is the difference between the population's actual parameter and the parameter
estimate that results from analysis of the sample.
------------------------------
A perpetuity pays $1,000 a year. You have a discount rate of 10% per year. If you are indifferent
between buying this perpetuity and a 7-year annuity, how much does the annuity pay per year?
* $2,054
* $3,199
* $1,867
* $1,429
The value of the perpetuity is 1,000/0.1 = $10,000. If the annuity pays $C per year, then its value is
C/0.1*[1 - 1/(1.1)^7] = 4.868C. For you to be indifferent between these two, the two values must be
equal, giving C = 10,000/4.868 = $2,054.
------------------------------
What annual deposit would you need to make, beginning one year from today, into an account paying
11% per year, compounded annually, in order to have $1,000,000 in 30 years?
* $6,129.83
* $33,333.33
* $418.67
* $5,024.60
* $1,374.48

Correct answer:
$5,024.60
On the BAII Plus, press 30 N, 11 I/Y, 0 PV, 1000000 FV, CPT PMT. On the HP12C, press 30 n, 11 i, 0
PV, 1000000 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the
BAII Plus has the P/Y value set to 1.
------------------------------
The probability of getting a value less than 1.3 from a standard normal distribution equals ________.
* 0.4032
* 0.6847
* 0.9032
* 0.8192

Correct answer:
0.9032
The z-value of a selected observation, X, from a normal distribution with mean M and standard
deviation S equals z = (X-M)/S. For a standard normal distribution, M = 0 and S = 1. Therefore, for X =
1.3, z = 1.3. Using the Normal probability tables, we get P(Y < 1.3) = 0.9032.
------------------------------
* $368.00
* $402.55
* $390.08
* $357.61
* $398.00

Correct answer:
$390.08
small letters). Now press 10 N, 6 I/Y, 50 PMT, 0 FV, CPT PV. Place the calculator back into End mode
(the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 6 i, 50 PMT, 0
FV, PV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG
------------------------------
The Investment Company Institute reported in its Mutual Fund Fact Book that the number of mutual
funds increased from 410 in 1985 to 857 in 1995. What is the geometric mean annual percent
increase in the number of funds?
* 48.66
* 1.12
* 19.41
* 7.65

Correct answer:
7.65
There are 11 years involved. The geometric mean = [(1 + 857/410)^1/10]-1. In words, it is the 10th
square root of (1 + 857/410) minus 1. So we have GM = (1 + 2.09)^(1/10) - 1 = 0.0765 = 7.65%
------------------------------
You are faced with a counting problem in which you must choose k objects from n total objects. The
order of choosing matters. The counting method you should use is:


Correct answer:
The permutation rule.
We need the general permutation formula, which gives the number of ways that k objects can be
chosen from n items, with regard to order. The formula is n_P_k = n! / (n-k)!
------------------------------
How much would an original deposit of $2,500 grow to be after 6 and a half years, if the deposit earns
interest at 8.5% per year, compounded monthly?
* $4,335.53
* $5,541.02
* $3,601.34
* $10,183.49
* $3,570.42
On the BAII Plus, press 2500 PV, 0 PMT, 78 N, 8.5 divided by 12 = I/Y, then press CPT FV. On the
HP12C, press 2500 PV, 0 PMT, 78 n, 8.5 ENTER 12 divide i, then press FV. The answer will be
displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
If you buy an item and pay for it with 60 monthly payments of $75 that begin next month, what was the
cash price today, if interest accrues at 11% per year, compounded monthly?
* $4,598.42
* $3,544.71
* $2,545.29
* $3,904.12
* $3,449.48

Correct answer:
$3,449.48
The cash price would be the present value of the payments made using the specified interest rate. On
the BAII Plus, press 60 N, 11 divide 12 = I/Y, 75 PMT, 0 FV, CPT PV. On the HP12C, press 60 n, 11
ENTER 12 divide i, 75 PMT, 0 FV, PV. Note that the answer will be shown as a negative number.
------------------------------
Suppose that stocks A, B, C, and D are independent with respect to their price movement, and have
probabilities of increasing of 0.25, 0.50, 0.40, and 0.30. What is the probability that stocks A and C will
increase in price, while stocks B and D fail to increase?
* 11%.
* 2.5%.
* 3.5%.
* 10%.

Correct answer:
3.5%.
individual probabilities. So P(AC) = 0.25 * 0.40 = 10%. To this, we multiply the probabilities of B and D
failing to increase: 10% * (1 - 0.50)*(1 - 0.30) = 3.5%.
------------------------------
In the equation Y' - a + bX, what is Y'?
* Slop of the line

* Value of Y when X=0
* Predicted value of Y, given a specific X value
* Y intercept

Correct answer:
Predicted value of Y, given a specific X value
Y' is the predicted value of Y given a specific value of X.
------------------------------
What deposit would you need to make today in order to withdraw $100 a month for the next 5 years,
beginning next month, if the deposit will accrue interest at 8% per year, compounded monthly?
* $5,141.23
* $492.59
* $1,237.66
* $399.27
* $4,931.84

Correct answer:
$4,931.84
8 ENTER 12 divide i, 100 PMT, 0 FV, PV. The answer will be displayed as a negative number. Make
------------------------------
If the 1% level of significance is used and the computed value of z is +6.00, what is our decision?
* Do not reject Ho
* Reject Ho
* This cannot be answered

Correct answer:
Reject Ho
This falls beyond the critical value of 1.645. Therefore it falls in the rejection region.
------------------------------
A stock's return is normally distributed with a mean of 16% and a standard deviation of 8%. The
probability that an investment in the stock will result in a loss in one year is approximately:
* 5%
* 2.5%
* cannot be calculated
* 10%

Correct answer:
2.5%
Note that the mean is 2 standard deviations above zero. The probability that the stock's return will lie
outside the 2-sigma range around the mean equals 5% for a standard normal distribution. This implies
that the stock return will be either less than 0% or more than 32% with a 5% probability. Since the
normal distribution is symmetrical about the mean, the probability that the stock return will be less than
zero equals 5/2 = 2.5%.
Instead of the above, you could also solve the problem using the z-score and the normal probability
distribution table. You should, however, be aware of short-cuts like the above.
------------------------------
Which of the following is not a characteristic of a binomial probability distribution?
* Probability of success remains constant from trial to trial

* Each outcome results from two trials
* Each trial is independent
* All of these answers are characteristics of the binomial distribution?
* Each outcome is mutually exclusive

Correct answer:
Each outcome results from two trials
The binomial distribution does not state that outcomes have to come from a certain number of trials.
------------------------------
The probability that a technology stock will fall in price over the next 12 months, given a decline in
consumer confidence over the same period, is called:
* a likelihood.

Correct answer:
a conditional probability.
A conditional probability takes the form of P(A|B), the probability that a an event (A) will happen, given
the occurrence of another event, B. It is conditional because it is conditioned on another event, B.
------------------------------
The sampling method commonly employed when the population is scattered over a large geographic
area is known as:
* systematic random sampling.

* simple random sampling.
* stratified random sampling.
* cluster sampling.

Correct answer:
cluster sampling.
Cluster sampling is a modified form of stratified random sampling used to reduce sampling costs when
the population is scattered over a large geographic area.
------------------------------
Giorgio offers the person who purchases an 8 ounce bottle of Allure two free gifts, either an umbrella,
a 1 ounce bottle of Midnight, a feminine shaving kit, a raincoat or a pair of rain boots. If you purchased
Allure what is the probability you selected at random an umbrella and a shaving kit in that order?

* 0.00
* 0.20
* 0.05
* 1.00

Correct answer:
0.05
There are 5 types of gifts. The probability of choosing an umbrella first is 1/5. Then the probability of
choosing a shaving kit from the remaining four gifts is 1/4. So 1/5*1/4 = 1/20 = 0.05.
------------------------------
The quarterly compounded rate is 8% quoted on an annualized basis. The equivalent annually
compounded rate is:
* 8.00%
* 8.24%
* 8.16%
* 7.95%

Correct answer:
8.24%
To solve such problems, think about investing a dollar for a year. The final amount should be the same
under both the quotations. Under annually compounded rate, r, $1 grows to 1+r in 1 year. Under
quarterly compounding, it grows to (1+0.08/4)^4 = 1.0824. Since these two should be equal, we get
1+r = 1.0824, giving r = 8.24%. Note that the annually compounded rate must be larger than the
quarterly rate, ruling out (d) automatically.
------------------------------
The least squared regression minimizes the:
* adjusted R-square.
* absolute value of the distance between the observed points and the regression line.
* explained variance.
* the square of the distance between the observed points and the regression line.

Correct answer:
the square of the distance between the observed points and the regression line.
The least squared regression minimizes the square of the distance between the observed points and
the regression line.
------------------------------
You are faced with a counting problem in which the number of outcomes is infinite. The counting
method you should use is:


Correct answer:
If the number of outcomes is infinite, a counting method should not be used at all, and the question
cannot be answered with counting methods. None of the above is the correct response.
------------------------------
A joint probability is expressed symbolically as:
* P(A | B).
* P(B | AB).
* P(AB).
* P(A or B).

Correct answer:
P(AB).
A joint probability takes the form of P(AB), the probability that a an event A and an event B will both
happen.
------------------------------
A bar owner in Wisconsin has just won the Illinois Big Lotto jackpot that pays $200 million dollars in 25
equal installments paid annually. The bar owner can either accept the annual payments starting today
or receive a lump sum today, using a discount rate of 9% per year. If the bar owner chooses to accept
the lump sum, how much will he receive today?
* $85.65 million
* $91.33 million
* $101.31 million
* $105.13 million
The annual lotto payments equal 200/25 = 8 million dollars per year. Since the payments start today,
the cash stream equals a payment of 8 million dollars today and an ordinary annuity with 24 payments.
Thus, the present value of the lotto equals
8 + 8/0.09*(1-1/(1.09^24)) = 85.65 million dollars.
------------------------------
A sample of size 600 is drawn from a population. The sample mean equals 329. The total width of the
99% confidence interval for the population mean is 893. The estimated population variance equals
________.
* 6.7
* 4.9
* 6.3
* 7.3

Correct answer:
6.3
If z is the z-value corresponding to the specified confidence level, the sample mean is M and the
standard deviation is D in a sample size N, the confidence interval is specified as [M - z*D/sqrt(N), M +
z*D/sqrt(N)]. Thus, the width of the interval equals 2*z*D/sqrt(N).
In the present case, for the 99% confidence interval, the normal probability table gives z = 2.58. The
sample standard deviation equals sqrt(893) = 29.88. Therefore,
the width of the 99% interval is 2*2.58*29.88/sqrt(600) = 6.30.
------------------------------
The monthly compounded rate is 15% quoted on an annualized basis. The equivalent quarterly
compounded rate is:
* 15.19%
* 15.05%
* 15.31%
* 14.8%
under both the quotations. Under quarterly compounded rate, r, $1 grows to (1+r/4)^4 in 1 year. Under
monthly compounding, it grows to (1+0.15/12)^12 = 1.1608. Since these two should be equal, we get
(1+r/4)^4 = 1.1608, giving r = 15.19%. Note that the quarterly compounded rate must be larger than
the monthly compounded rate, ruling out 14.8% automatically.
------------------------------
An accelerated life test on a large number of type-D alkaline batteries revealed that the mean life for a
particular use before they failed is 19.0 hours. The distribution of the lives approximated a normal
distribution. The standard deviation of the distribution was 1.2 hours. About 95.44 percent of the
batteries failed between what two values?
* 16.6 and 21.4

* 14.1 and 22.1
* 12.2 and 14.2
* 8.9 and 18.9
.9544/2 = 0.4772. For an area under the curve of 0.4772, the z value is (+/-)2.
We know that z = (x-u)/sigma. Therefore, +/-2 = (x-19)/1.2. Rearranging we get x = u +/- z*sigma. So x
= 19 +/- 2*1.2 = 19+/-2.4. x is 16.6 and 21.4.
------------------------------
If the p-value is ________ the significance level, the null hypothesis ________.
* less than; can be rejected

* more than; can be rejected
* less than; cannot be rejected
significance level. To fix this in your mind, think about the p-value as the maximum probability that the
null hypothesis is true despite observing the value of the test statistic that you have in the sample at
hand. For e.g., suppose the p-value for a given sample turns out to be 3%. Then, if you reject the null,
the probability that you have made an error in rejecting it is at most 3%. Clearly, if a critic asked you,
"Is the probability that you have made an error less than 5%?" your answer would be, "yes." The critic
will then conclude that your test is significant at the 5% level and perhaps even at a lower level.
------------------------------
At the end of every year for the next 3 years, you deposit $400 in an account that pays 5% per year,
annually compounded. After that, you do not make any more deposits. The amount that you can
withdraw after 7 years is:
* $1,533
* $1,492
* $1,917
* $1,261
For the first 3 years, your regular deposits constitute an annuity and after that, a simple term deposit.
The future value of an n-period annuity that starts paying at the end of the current period equals
FV = (C/r)*[(1+r)^n - 1]
where C is the payment per period and r is the one-period interest rate. In this example, the annuity is
over 3 periods, C = 400 and the per period rate equals 5%. So the future value of the deposits after 3
years equals (400/0.05)*[1.05^3 - 1] = 1,261. Starting in year 3, this amount grows at an annual rate of
5% for a period of 7-3 = 4 years. So in 7 years, the amount in the account equals 1,261*1.05^4 =
$1,533.
------------------------------
The coefficient of variation of X is three times that of Y. If X and Y have the same means, the variance
of Y is:

* same as that of X.
* three times that of X.
* one-third that of X.
The coefficient of variation equals the ratio of the standard deviation to the mean. Hence, if X and Y
have the same means, then the standard deviation of X must be 3 times the standard deviation of Y.
------------------------------
A variable, Z, is regressed against variables X and Y and the following equation is estimated: Z = -3.0
+ 1.2X - 2.5Y + error. If X = 5 and Y = 3, the estimated value of Z is ________.
* -3.0
* cannot be estimated since the error term is unknown
* -1.5
* -4.5

Correct answer:
-4.5
With the given data, Z = -3 + 1.2*5 - 2.5*3 = -4.5
------------------------------
If the alternate hypothesis specifies a particular direction for the population parameter, it is appropriate
to use:
* a z-statistic test.
* a stratified sampling test.
* a one-tailed test.
* a two tailed test.

Correct answer:
a one-tailed test.
A one-tailed test is used when the alternate hypothesis specifies a particular direction for the
population parameter.
------------------------------
If you buy a house costing $120,000 and pay for it over 30 years, what is your monthly payment, if
your loan's interest rate is 7% per year, compounded monthly and the first payment is due next
month?
* $4,371.83
* $8,400.00
* $798.36
* $665.30
* $804.39

Correct answer:
$798.36
360 n, 7 ENTER 12 divide i, 120000 PV, 0 FV, PMT. Note that the answer will be displayed as a
------------------------------
Suppose a tire manufacturer wants to set a mileage guarantee on its new XB 70 tire. Life test revealed
that the mean mileage is 47,900 and the standard deviation of the normally distributed distribution of
mileage is 2,050 miles. The manufacturer wants to set the guaranteed mileage so that no more than 5
percent of the tires will have to be replaced. What guaranteed mileage should the manufacturer
announce?
* 32,960
* 44,528
* 49,621
* 40,922

Correct answer:
44,528
Find the z-value for an area under the curve of 1.0 - 0.55 = 0.45. For an area of 0.45, z = -1.645.
Using z = (x-u)/sigma. -1.645 = x - 47900/2050. x = 44528.
------------------------------
If you have $5,000 in an account today and withdraw $2,000 in 3 years, how much can you withdraw
from the account in 5 years, if the account earns interest at 8% per year, compounded annually?
* $3,000.00
* $5,013.84
* $4,407.98
* $5,714.93
* $2,000.00

Correct answer:
$5,013.84
The way to approach this problem is to find the PV today of the $2,000 amount, determine the
difference between this amount and the original $5,000 amount, and then move this remaining amount
to the 5 year point. On the BAII Plus, press 3 N, 8 I/Y, 2000 FV, 0 PMT, CPT PV. Then press + 5000
=. Then press PV, 5 N, CPT FV to see the answer. On the HP12C, press 3 n, 8 i, 2000 FV, 0 PMT,
CPT PV. Then press 5000 +. Then press PV, 5 n, FV to see the answer. Make sure the BAII Plus has
------------------------------
The monthly compounded rate is 4% quoted on an annualized basis. The equivalent semiannually
compounded rate is:
* 4.25%
* 4.03%
* 4.12%
* 3.96%

Correct answer:
4.03%
under both the quotations. Under semiannually compounded rate, r, $1 grows to (1+r/2)^2 in 1 year.
Under monthly compounding, it grows to (1+0.04/12)^12 = 1.0407. Since these two should be equal,
we get (1+r/2)^2 = 1.0407, giving r = 4.03%. Note that the semi-annually compounded rate must be
larger than the monthly compounded rate, ruling out 3.96 automatically.
------------------------------
You are examining a portfolio composed of 33% money-market investments, 9.5% bonds, and 57.5%
and the return on stocks was -11%. What is the portfolio weighted average return?
* -4.05%.
* -4.15%.
* -3.90%.

Correct answer:
-4.15%.
the ith asset. Here, we get a weighted mean of 0.33 * 0.04 + 0.095 * 0.09 + 0.575 * -0.11 = -4.15%.
------------------------------
You are examining the return on equity ratios of the nation's publicly owned companies. You wish to
calculate a typical deviation from the average ROE, but you do not have time to gather data on all the
firms. What measure should you use?
* Population variance.
* Sample variance.
* Population standard deviation.
* Sample standard deviation.

Correct answer:
Sample standard deviation.
A typical deviation is going to be a standard deviation, not a variance. When using a sample, instead
of the entire population, you have sample standard deviation, not population standard deviation.
------------------------------
Three banks have quoted interest rates as follows:
Bank A: 10% per year, compounded quarterly.

Bank B: 11% per year, compounded annually.
Bank C: 10.5% per year, compounded semi-annually.
Which bank should you choose to invest with for a period of one year and what's the effective annual
rate?
* Bank B, 11%
* Bank A, 10.38%
* Bank C, 12.01%
* Bank A, 11.19%
The annual yield for Bank A is (1+10%/4)^4 - 1 = 10.38%, that for Bank B is 11% and that for Bank C
is (1+10.5%/2)^2 - 1 = 10.78%. Therefore, you should invest with Bank B.
------------------------------
Which is true for a binomial distribution?

* Value of p is equal to 1.50
* Probability of success remains the same from trial to trial
* There are three or more possible outcomes

Correct answer:
Probability of success remains the same from trial to trial
The probability of success is a constant in a binomial distribution.
------------------------------
* 8.57%
* 6.58%
* 7.27%
* 6.14%
* 5.78%

Correct answer:
6.58%
On the BAII Plus, press 7 N, 400 PV, 0 PMT, 625 +/- FV, then CPT I/Y. On the HP12C, press 7 n, 400
PV, 0 PMT, 625 CHS FV, then press i. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
What is the critical value necessary to determine a confidence interval for a 95% level of confidence?
* 2.776
* 3.182
* 2.132
* 2.353

Correct answer:
3.182
Look at the t tables for n-2 degrees of freedom at the 5% level. Here, we look for a two tailed test with
5-2 = 3 degrees of freedom. This is 3.182.
------------------------------
The net incomes of a sample of importers were organized into the following table:
Net Income (in $ millions) Number of Importers

2-4 1
5-7 4
8 - 10 10
11 - 13 3
14 - 16 2
What is the mean net income?

* $7.65 million
* $14.2 million
* $9.15 million
* $9.00 million

Correct answer:
$9.15 million
(3*1)+(6*4)+(9*10)+(12*3)+(15*2) = 183. Mean is 183/20 = 9.15
------------------------------
Tom wants to retire a millionaire. If he is 30 years old today, what monthly payment would he need to
make beginning one month from today and continuing until he retires on his 65th birthday, if the
money will earn 8% per year, compounded monthly?
* $670.98
* $435.94
* $2,380.95
* $5,803.26
* $439.04

Correct answer:
$435.94
8 divide 12 = I/Y, 0 PV, 1000000 FV, CPT PMT. On the HP12C, press 420 n, 8 ENTER 12 divide i, 0
PV, 1000000 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the
------------------------------
* $3,290.81
* $3,276.28
* $4,000.00
* $384.57
* $3,934.02

Correct answer:
$3,276.28
------------------------------
Year 1: $5,000, Year 2: $8,000, Year 3: $11,000, Year 4 $15,000? (Note that the <> are used to
indicate a negative number).
* 5.55%
* 13.74%
* 14.61%
* 9.56%
* 7.12%

Correct answer:
9.56%
row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
What is the difference between a sample mean and the population mean called?
* Sampling error
* Point estimate
* Standard error of the mean
* Interval estimate
This is the error incurred when sampling from a population.
------------------------------
* 21.45%
* 9.14%
* 6.94%
* 9.01%
* 8.87%

Correct answer:
8.87%
On the BAII Plus, press 400 PV, 725 +/- FV, 0 PMT, 7 N, then CPT I/Y. On the HP12C, press 400 PV,
725 CHS FV, 0 PMT, 7 n, then press i. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
The weight of an offensive lineman may be 210 pounds, 210.1 pounds, 210.13 pounds or 210.137
pounds depending on the accuracy of the scale. What is this an illustration of?

* discrete random variable
* continuous random variable
* all of these answers
* complement rule

Correct answer:
continuous random variable
The weight changes are in a random fashion and without a separate interval. Therefore it is
continuous and random.
------------------------------
Suppose the least squares regression equation is Y' = 1202 + 1,133X. When X=3, what does Y'
equal?

* 5,734
* 4,601
* 8,000
* 4,050

Correct answer:
4,601
Y' = 1202 + 1133(3) = 4601.
------------------------------
The following is a distribution of monthly commissions:
Monthly Commissions Class Frequencies
$600 - $799 3
$800 - $999 7
$1,000 - $1,199 11
$1,200 - $1,399 22
$1,400 - $1,599 40
$1,600 - $1,799 24
$1,800 - $1,999 9
$2,000 - $2,199 4
Referring to the table above, what is the relative frequency for those salespersons that earn between
$1,600 and $1,799?
* 24%
* 2.4%
* 20%
* 2%

Correct answer:
20%
The sum of all the class frequencies is 120. The relative frequency for the $1600-$1799 class is
therefore 24/120 = 20%
------------------------------
You are examining a group of 3 stocks within an industry. The industry average debt-to-equity ratio is
expected to be 40%. For these stocks, the average debt-to-equity ratios have been 50%, 40%, and
30%. What is the mean absolute deviation of debt-to-equity ratios from the industry average?
* 13.3%.
* 6.67%.
* 20.0%.
* 0%.

Correct answer:
6.67%.
divided by n. Here, we have [|50% - 40%| + |40% - 40%| + |30% - 40%|]/3 = [10% + 0% + 10%] / 3 =
20%/3 = 6.67%.
------------------------------
If you buy a television for $650 and agree to pay for it with 24 monthly payments of $33, beginning
next month, what annual interest rate, compounded monthly, are you being charged?
* 15.93%
* 21.00%
* 5.08%
* 18.38%
* 19.74%

Correct answer:
19.74%
On the BAII Plus, press 24 N, 650 PV, 33 +/- PMT, 0 FV, CPT I/Y. Then press x 12 = to see the
answer. On the HP12C, press 24 n, 650 PV, 33 CHS PMT, 0 FV, i. Then press 12 x to see the
answer. The last multiplication by 12 is needed since the calculator returns the periodic interest rate.
------------------------------
Suppose we select every fifth invoice in a file. What type of sampling is this?
* Random
* Cluster
* Systematic
* Stratified

Correct answer:
Systematic
One of the ways to conduct systematic sampling is to have a rule for picking the sample in an
unbiased way. Selecting items at specified intervals can achieve this.
------------------------------
What single deposit could you make today in order to have $500,000 in 30 years, assuming it earns
* $19,423.23
* $215,024.60
* $23,682.82
* $33,943.00
* $53,512.59

Correct answer:
$33,943.00
On the BAII Plus, press 360 N, 9 divide 12 = I/Y, 0 PMT, 500000 FV, CPT PV. On the HP12C, press
360 n, 9 ENTER 12 divide i, 0 PMT, 500000 FV, PV. Note that the answer is displayed as a negative
------------------------------
* $204.45
* $15.80
* Can't be done
* $123.45
* $1.23

Correct answer:
$15.80
number. This is because it is a withdrawal from the account balance, just as the $5,000 is. It is a very
small value because most of the $4,000 is needed to ensure there is $5,000 in the account in 6 years!
------------------------------
The mean amount spent by a family of four on food per month is $500 with a standard deviation of
$75. Assuming that the food costs are normally distributed, what is the probability that a family spends
less than $410 per month?
* 0.1151
* 0.0362
* 0.2158
* 0.8750
z = (X - u)/sigma = (410 - 500)/75=-1.2. z = 1.2 is 0.3849. Since 410 is below the mean, 1.0 - 0.8849 =
0.1151.
------------------------------

intercept 3.6 2.1
slope 8.1 1.3
R square = 49%
The regression equation can be expressed as:
* Y = 3.6 + 8.1 X + error

* X = 8.1 + 3.6 Y + error
* Y = 8.1 + 3.6 X + error
* X = 3.6 + 8.1 Y + error
Note that Y is regressed against X, implying that Y is the dependent (left-hand side) variable and X is
the independent (right-hand side) variable. The intercept in a regression equals the constant term and
the slope coefficient is the multiplier on the independent variable.
------------------------------
Suppose we set the criterion for the rejection of the null that is extremely lax, assuring us that the null
will not be rejected. Then, which of the following is/are true?
I. The probability of a Type I error is zero.

II. The probability of Type II error is zero.
III. The significance level of the test is 1.
* I & III
* II only
* II & III
* I only
Correct answer:
I only
A Type I error refers to the event that we will reject the null when, in fact, it is true. If the criterion is so
loose that you never reject the null, then the probability of type I error is zero. A Type II error refers to
the event that we will fail to reject the null when, in fact, it is false. If you never reject the null, then the
probability of type II error is clearly non-zero. Finally, the significance level is the same as the
probability of making a Type I error.
------------------------------
A stock has the following returns over 3 years: -5%, +15%, -4%. The annual geometric rate of return
over the three years is ________.
* 9.36%
* 1.60%
* 7.42%
* 0.15%
* -2.21%
* 4.64%
* 3.31%
* -1.34%

Correct answer:
1.60%
The annual geometric rate of return equals [(1-5%)(1+15%)(1-4%)]^(1/3) - 1 = (0.95 * 1.15 * .96)^0.33
- 1 = 0.016 = 1.60%
------------------------------
Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5: $18,000? (Note that the <> are used
* 10.04%
* 15.29%
* 11.59%
* 8.61%
* 9.13%

Correct answer:
9.13%
DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the
BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow"
represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII
------------------------------
What is your monthly payment, beginning next month, on a $15,000 loan, if you pay it off over 48
months and the interest rate is 2.9% per year, compounded monthly?
* $582.76
* $3,772.68
* $331.35
* $324.51
* $306.88

Correct answer:
$331.35
On the BAII Plus, press 48 N, 2.9 divide 12 = I/Y, 15000 PV, 0 FV, CPT PMT. On the HP12c, press 48
n, 2.9 ENTER 12 divide i, 15000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative
------------------------------
Which of the following is/are true about the Central Limit Theorem?
I. It cannot be applied if the population distribution is non-normal.
II. It cannot be applied if the population distribution is highly skewed.
III. It implies that the mean of the population equals the mean of the means of all possible samples.
* II only
* I only
* I & III
* III only
* I & II.
* I, II, & III

Correct answer:
III only
The Central Limit Theorem states that for a population with mean M and variance S, a sample of large
size n has a sampling distribution of mean which is approximately normal with mean M and variance
S/n.
------------------------------
Which of the following is the formula for the covariance between X and Y?
* (X - E(X))*(Y - E(Y)).
* E[(X - E(X))*(Y - E(Y))].
* E[(X + E(X))*(Y + E(Y))].
* E[XY - E(XY)].

Correct answer:
E[(X - E(X))*(Y - E(Y))].
E[(X - E(X))*(Y - E(Y))] is the covariance between X and Y.
------------------------------
A sample of the amounts spent to heat all-electric homes of similar sizes in March revealed these
amounts (to the nearest dollar): $212, $191, $176, $129, $106, $92, $108, $109, $103, $121, $175
and $194. What is the range?
* $130
* $100
* $120
* $112

Correct answer:
$120
Range = 212 - 92 = 120
------------------------------
A dataset of 105 observations is organized in a relative frequency distribution into 9 classes. The sum
of the relative frequencies across all the classes equals ________.
*9
*1
* 105
* 100

Correct answer:
1
Relative class frequencies are percentages and across all classes, they must sum up to 100%, which
is the same as summing up to 1.00.
------------------------------
A portfolio manager has estimated the beta of a stock at 0.8, with a z-statistic of 1.7 in a sample size
of 300 observations. At 5% significance level in a two-sided test the critical value is 1.96, therefore, the
manager should conclude that:
* the null hypothesis of beta = 0 cannot be rejected.

* the null hypothesis of beta = 0 cannot be accepted.
* the alternative hypothesis that beta is nonzero should be rejected.
* the alternative hypothesis that beta is not zero should be accepted.
Since the z-statistic is less than the critical value of 1.96 in a two-sided test, the null hypothesis that
beta = 0 cannot be rejected. Note, however, that this does not imply that beta equals zero. It just says
that with the given observations, one cannot conclude that beta is statistically significantly different
from zero. This is always the interpretation of the null hypothesis (that's the reason statisticians
emphasize that "failing to reject the null hypothesis" is not the same as "accepting the null hypothesis."
You should always remember this.)
Also note that the nature of the alternative hypothesis is important. If the alternative had been one-
sided (beta > 0), then the null would be rejected in this case at the 5% level.
------------------------------
Which of the following is NOT a measure of dispersion?
* MAD
* variance
* mode
* range

Correct answer:
mode
The mode is a measure of central tendency.
------------------------------
How much would an original deposit of $1,500 grow to be after 8 and a half years, if the deposit earns
* $870,183.49
* $3,601.34
* $2,541.02
* $2,594.84
* $1,570.42

Correct answer:
$2,594.84
On the BAII Plus, press 1500 PV, 0 PMT, 34 N, 6.5 divide 4 = I/Y, then press CPT FV. On the HP12C,
press 1500 PV, 0 PMT, 34 n, 6.5 ENTER 4 divide i, then press FV. Note that N = 34 quarters and the
answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
What is the 95% confidence interval to estimate the true cost of the VCR?
* $328.40 to $421.60
* $323.40 to $426.60
* $335.80 to $414.20
* $335.00 to $415.00

Correct answer:
$335.80 to $414.20
Interval estimates can be found from the empirical rule where 95% will lie between plus and minus
1.96 standard deviations of the mean.
------------------------------
You are examining a group of 5 mutual funds. Their average annual returns have been 10%, 8%,
13%, 19%, and 15%. What is the range of annual returns?
* 12.0%.
* 10.0%.
* 11.0%.
* 13.0%.

Correct answer:
11.0%.
------------------------------
What is it called when all the items in the population have the same chance of being selected for the
sample?
* Cluster sampling
* Simple Random sampling
* Judgment sampling
* Nonprobability sampling

Correct answer:
Simple Random sampling
When every item in a population is selected at random, each have the same probability of being
selected.
------------------------------
If a distribution is heavily right or left skewed, which of the following statistics should not be used as a
measure of central tendency?
* skewness
* mean
* median
* mode
Correct answer:
mean
The mean is affected severely by outliers and hence, should not be used as a measure of central
tendency with skewed distributions.
------------------------------
What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$6,000>, Year
1: $4,000, Year 2: $3,000, Year 3: $2,000, Year 4: $1,000 (Note that the <> are used to indicate a
negative number).
* 25.55%
* 27.12%
* 24.61%
* 31.38%
* 33.74%

Correct answer:
31.38%
ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 6000
CHS BlueShift CFo 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj.
Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row
of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
John buys a house that costs $275,000 and agrees to pay for it with a 15 year mortgage at 6% per
year, compounded monthly. What is John's monthly payment on the loan?
* $2,250.06
* $2,320.61
* $1,552.12
* $1,972.22
* $2,218.50

Correct answer:
$2,320.61
180 n, 6 ENTER 12 divide i, 275000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to
1.
------------------------------
Assume you deposit $800 now into an account that had nothing in it previously, make an additional
deposit of $800 in 2 years, and a final deposit of $800 in 4 years. How much is in your account in 5
years, if the account earns interest at 8% per year, compounded annually?
* $3,047.23
* $2,708.29
* $4,331.88
* $3,120.04
* $2,905.51
to year 5. On the BAII Plus, press 5 N, 8 I/Y, 800 PV, 0 PMT, CPT FV, which yields $1,175.46. Then
press STO 1, 3 N, CPT FV, which yields $1,007.77. Then press + RCL 1 = STO 1. Then press 1 N,
CPT FV, which yields $864.00. Then press + RCL 1 = to see the answer. On the HP12C, press 5 n, 8
i, 800 PV, 0 PMT, FV. Then press STO 1, 3 n, FV. Then press RCL 1 + STO 1. Then press 1 n, FV.
Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number.
Also note that the value of "N" for each dollar amount is based on the distance from year 5. Make sure
that the BAII Plus has the P/Y value set to 1.
------------------------------
You can enter a derivative contract that will pay $100 at the end of a year if the price of corn exceeds
$3 per bushel, or $50 if it is equal to $3 per bushel or lower. The probability that corn will exceed $x by
the end of one year is 50%. The current price of the contract is $60, and interest is 5% per year. What
is the optimal strategy?
* Sell the derivative contract short if corn prices rise.

* Invest $60 at 5% until the end of the year.
* Buy $3 per bushel worth of corn futures.
* Enter into the derivative contract for a cost of $60.

Correct answer:
Enter into the derivative contract for a cost of $60.
Enter into the derivative contract for a cost of $60, for the expected payoff is 0.50 * $100 + 0.50 * $50
= $75. That is a 25% return on your investment in one year, greater than the 5% that could be made
by investing the $60 at interest. This is an example of the investment consequences of inconsistent
probabilities. The present value of the contract should be $75/1.05 = $71.43. Thus, an arbitrage
opportunity is present. On an expected value basis, you can buy an asset worth $71.43 for only $60.
------------------------------
An investment of $100 grows in four years to $345. The investor observes that the annual arithmetic
rate of return and the geometric rate of return were the same over this period. The annual arithmetic
rate of return must be ________.
* 40.33%
* 33.93%
* 34.32%
* 37.84%
* 36.29%

Correct answer:
36.29%
If the annual geometric rate of return is r, then 100 * (1 + r)^4 = 345. This gives r = 36.29%. Note that
the only way the mean will be equal to the geometric mean if every year, the stock experienced a
return of 36.29% per year.
------------------------------
A sample of the monthly amounts spent for food by families of four receiving food stamps
approximates asymmetrical distribution. The sample mean is $150 and the standard deviation is $20.
About 95 percent of the monthly food expenditures are between what two amounts?

* $110 and $190
* $205 and $220
* $85 and $105
* $100 and $200

Correct answer:
$110 and $190
About 95% of the observations lie between plus and minus two standard deviations from the mean.
------------------------------
A manufacturer of headache medicine claims it is 70 percent effective within a few minutes. That is,
out of every 100 users 70 get relief within a few minutes. A group of 12 patients are given the
medicine. If the claim is true, what is the probability that 8 have relief within a few minutes?

* 0.168
* 0.667
* 0.001
* 0.231

Correct answer:
0.231
= 0.231.
------------------------------
* $18,121,973.53
* $73,178.41
* $48,000.00
* $13,091.62
* $88,402.98

Correct answer:
$73,178.41
------------------------------
If you deposit $245 into an account paying 5.5% per year simple interest, how much interest will be
* $259.59
* $15.59
* $202.13
* $261.84
* $16.84

Correct answer:
$16.84
press 245 x 0.055 x 15 divide 12 = to see the answer. On the HP12C, press 245 ENTER 0.055 x 15 x
12 divide to see the answer.
------------------------------
A survey of top executives revealed that 35% of them regularly read Time magazine, 20% real
Newsweek and 40% read U.S. News & World Report. Ten percent read both Time and U.S. News &
World Report. What is the probability that a particular top executive reads either Time or U.S. News &
World Report regularly?
* 0.85
* 0.06
* 0.65
* 1.00

Correct answer:
0.65
35% + 40% - 10% = 65%
------------------------------
number).
* 31.45%
* 21.16%
* 34.45%
* 20.03%
* 28.89%
downward-pointing arrow on the top row of the BAII Plus keyboard.
------------------------------
If your estate were to receive $100 a year, beginning next year, for 100 years, what is the equivalent
single amount today that this series of cash flows is equal to, assuming interest is 5% per year,
compounded annually?
* $11,302.37
* $10,000.00
* $2,041.54
* $58.42
* $1,984.79

Correct answer:
$1,984.79
PMT, 0 FV, PV. Note that the answer will be displayed as a negative number. As a side note,
continuing the $100 payments for 10,000 years only increases the PV today by a little over $15. This is
because the $100 payments beyond 100 years from now would add very little to the PV today. Make
------------------------------
What monthly payment would repay a $28,500 car loan over 60 months, assuming your loan has an
interest rate of 3.9% per year, compounded monthly?
* $492.29
* $764.58
* $423.75
* $550.58
* $523.59

Correct answer:
$523.59
------------------------------
If you deposit $5,000 into an account paying 9% per year, compounded monthly, how much do you
have in the account in 10 years?
* $5,403.52
* $12,001.66
* $9,116.87
* $2,039.69
* $12,256.79

Correct answer:
$12,256.79
n, 9 ENTER 12 divide i, 5000 PV, 0 PMT, FV. Note that the answer will be displayed as a negative
------------------------------
Suppose you need $500 in 9 months. How much must you deposit today, if the deposit will earn
* $522.96
* $478.05
* $381.95
* $295.95
* $291.77

Correct answer:
$478.05
On the BAII Plus, press 9 N, 6 divide 12 = I/Y, 0 PMT, 500 FV, CPT PV. On the HP12C, press 9 n, 6
ENTER 12 divide i, 0 PMT, 500 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
What does the complement rule state?
* P(A) = 1 - P(not A)
* P(A) = P(A) - P(B)
* P(A) = P(A) x P(B)
* P(A) = P(A) + P(B)
The sum of probability must equal 1. So P(A) + P(not A) = 1.

------------------------------
Two events, A and B, are mutually exclusive if:
* P(A and B) = P(A) + P(B)

* P(A and B) = 0
* P(A and B) = P(A) P(B)
* P(A and B) = 1

Correct answer:
P(A and B) = 0
By definition, if A and B are mutually exclusive, they cannot occur simultaneously. Therefore, P(A and
B) = 0 for mutually exclusive events A and B. Note that P(A and B) = P(A).P(B) if and only if A and B
are independent.
Clearly, if A and B are mutually exclusive, they cannot be independent unless at least one of the two
has a zero probability of occurring (i.e. is an impossible event). Finally, the only way "P(A and B) =
P(A) + P(B)" will be true is if P(A) = P(B) = 0. To see this, recall that P(A or B) = P(A) + P(B) - P(A and
B). The only way for "P(A and B) = P(A) + P(B)" to hold would be to have P(A or B) = 0. This is
possible only when P(A) = P(B) = 0.
------------------------------
Affirmative action commitments by industrial organizations have led to an increase in the number of
women in executive positions. Satellite Office Systems has vacancies for two executives, which it will
fill from among four women and six men.
What is the probability that two woman are selected?
* 3/5
* 8/15
* 3/4
* 2/15

Correct answer:
2/15
Probability of both positions being filled by women = 4/10*3/9 = 12/90.
------------------------------
Which one of the following is referred to as the population mean?
* Sample
* X-Bar
* The Greek letter "Mu"
* Statistic

Correct answer:
The Greek letter "Mu"
The normal symbol for the population mean is the Greek letter "Mu."
------------------------------
Mileage tests were conducted on a randomly selected sample of 100 newly developed automobile
tires. The average tread wear was found to be 50,000 miles with a standard deviation of 3,500 miles.
What is the best estimate of the average tread life in miles for the entire population of these tires?

* (3,500/100)
* 3,500
* 50,000
* (50,000/100)

Correct answer:
50,000
The sample mean is a good estimate of the population mean.
------------------------------
You have a portfolio of two assets, X and Y. X has an expected return of 15% with a variance of
900%%, and Y has an expected return of 9% with a variance of 400%%. Assume the covariance
between X and Y is 225%%. For a portfolio composed of 50% X and 50% Y, find the expected return
and variance.
* 10%, 437.5%%.
* 12%, 437.5%%.
* 12%, 367.5%%.
* 14%, 512.5%%.

Correct answer:
12%, 437.5%%.
The expected return is 0.5*15% + 0.5*9% = 7.5% + 4.5% = 12%. The variance will be trickier. The
variance will be equal to (w_X)^2 * (sigma_X)^2 + (w_Y)^2 * (sigma_Y)^2 + 2 * w_X * w_Y * cov(X,Y)
= (0.5)^2 * 900%% + (0.5)^2 * 400%% + 2 * (0.5) * (0.5) * 225%% = 437.5%%.
------------------------------
* $2,000.00
* $9,104.36
* $8,448.22
* $7,236.99
* $7,103.49
Correct answer:
$8,448.22
PMT, 20000 FV, PV. Note that the answer is displayed as a negative number. Make sure that the BAII
------------------------------
What is another name for the alternate hypothesis?

* Rejected hypothesis
* Research hypothesis
* Null hypothesis

Correct answer:
Research hypothesis
The alternate is also referred to as the research hypothesis.
------------------------------
William Henry, a quantitative analyst with Smith, Kleen & Beetchnutty Brokerage, is examining a data
sample and has amassed the following information:

Degrees of freedom: 2
Sample mean: 11.03
Assume that Mr. Henry formulates a null hypothesis that states that the value of the population mean
is equal to zero. Additionally, assume that the population standard deviation is unknown. Given this
information, what is the standard error of the estimate? Further, what is the test statistic? Choose the
best answer.
* 0.0929; 10.90
* 0.0929; 118.73
* 0.0938; 117.59
* 0.1858; 59.36
* 0.1858; 11.41
* 0.0938; 58.80

Correct answer:
0.0929; 118.73
{Standard error = [0.97 / 10.44] = 0.0929}
found as follows:
{Test statistic = [11.03 - 0.00] / 0.0929 = 118.73}
This is a very large value for the test statistic. In this example, the null hypothesis would likely be
rejected unless a very low confidence level is assumed.
------------------------------
If a frequency distribution has open-ended intervals at the extremes, which measure of central
tendency is the most difficult to estimate?
* Mean
* Median
* Mode
This is so since in a frequency distribution we do not necessarily know what the extreme values are
especially in an open ended class. Therefore, the mean, which is very sensitive to extreme values will
be difficult to determine.
------------------------------
What is the following table called?
Number of Heads Probability of Outcome

0 1/8 = 0.125
1 3/8 = 0.375
2 3/8 = 0.375
3 1/8 = 0.125
Total 8/8 = 1.000
* Ogive
* Probability distribution
* Frequency table

Correct answer:
Probability distribution
The table gives both the outcomes and probability of each outcome. Therefore it is a probability
distribution table.
------------------------------
What is a disadvantage of the range as a measure of dispersion?
* It is not in the same units as the original data.

* It can be distorted by a large mean.
* It is based on only two observations.
* It has no disadvantage.

Correct answer:
It is based on only two observations.
The range uses only the highest and the lowest observations and ignores all the observations in the
middle. This may not be indicative of the dispersion if the two extreme observations are outliers.
------------------------------
The expected value of Y is 9 and the expected value of X is 3. If X and Y are uncorrelated and you run
a regression of Y against X, the intercept term will equal ________.
*9
*0
*3
Since the correlation is given to be zero, the slope will be zero and hence, R-square will be zero i.e.
the variance of the ranking of a trader in one year is not explained to any extent by his ranking in the
previous year. Thus, regardless of his ranking in previous year, he is likely to be either "Great" or "Not-
great" in this year. His expected score is then equal to 0.5*1 + 0.5*0 = 0.5. The expected value of the
dependent variable is equal to the intercept term when slope equals zero (remember this!!)
------------------------------
What is the Y intercept of the regression line?
* 1.0
* 1.5
* 0.7
* 0.0

X Y XY X^2 Y' Y-Y'

-2 0 0 4 -0.4 0.4
-1 0 0 1 0.3 -0.3
0 1 0 0 1 0
1 1 1 1 1.7 -0.7
2 3 6 4 2.4 0.6
Sum 0 5 7 10 0
N=5.
First, find the slope, which is b, use the formula
b = [n(SXY)-(SX)(SY)]/[n(SX^2)-(SX)^2] where S stands for "Sum of."
b = [5(0)-(0)(5)]/[5(10)-0]=0.7
The Y intercept is a.
a = [S(Y)/n]-b[SX/n]
a = 5/5 - 0.7[0/5] = 1.
------------------------------
What is the remaining balance on a $100,000 loan after making monthly payments of $733.76 for 10
years, if the interest rate is 8% per year, compounded monthly?
* $86,204.11
* $11,948.80
* $0
* $87,725.54
* $91,343.92

Correct answer:
$87,725.54
On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 100000 PV, 733.76 +/- PMT, CPT FV. On the
HP12C, press 120 n, 8 ENTER 12 divide i, 100000 PV, 733.76 CHS PMT, FV. The remaining balance
will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
What are the two rejection areas in using a two-tailed test and the 0.01 level of significance?

* Above 1.96 and below -1.96

Correct answer:
Above 2.58 and below -2.58
0.01 means that we are considering a 99% level of significance. For this, we can find the z-value to be
+/- 2.58.
------------------------------
If the critical value for a test statistic equals 2.45, what value of the test statistic would guarantee no
chance of making a Type I error?

* 3.74
* 2.14
* 4.56
* 2.46

Correct answer:
2.14
The type I error is rejecting the null hypothesis when it is actually true. So if we accept the null
hypothesis, there is no possibility of committing the type I error. Therefore, we can only accept the null
if our test statistic falls inside the acceptance region between -2.45 and +2.45.
------------------------------
John's great-grandfather left him $50 when he died 80 years ago in an account paying 8% per year,
compounded annually. How much would the account hold for John now?
* $407.76
* $24,229.78
* $24,113.90
* $22,504.51
* $23,597.74

Correct answer:
$23,597.74
On the BAII Plus, press 80 N, 8 I/Y, 50 PV, 0 PMT, CPT FV. On the HP12C, press 80 n, 8 i, 50 PV, 0
PMT, FV. Note that the answer will be displayed as a negative number. Make sure that the BAII Plus
has the P/Y value set to 1.
------------------------------
What quarterly payment is required beginning one period from today to pay off a $4,000 debt, if
interest accrues at 8% per year, compounded quarterly, and the debt is to be retired in 5 years?
* $1,001.83
* $244.63
* $848.63
* $407.41
* $214.29
Correct answer:
$244.63
------------------------------
What monthly payment, beginning next month, would repay a $17,500 car loan over 48 months,
assuming your loan has an interest rate of 4.9% per year, compounded monthly?
* $364.58
* $650.58
* $953.46
* $402.22
* $4,923.75

Correct answer:
$402.22
------------------------------
A random variable with a mean equal to 6.0 and a standard deviation of 1.5 has a coefficient of
variation equal to ________.
* 0.25
* zero
* 4.0
* 1.5
The coefficient of variation equals the ratio of the standard deviation to the mean.
------------------------------
A researcher has organized 310 observations into 9 classes. The frequency of the 50-75 frequency
class is 34. The relative frequency of the class equals ________.
* 0.14
* 34
* 0.11
* 0.27
Correct answer:
0.11
relative frequency = class frequency/total # of observations
= 34/310 = 0.11
Remember that relative frequency is always a number between zero and one.
------------------------------
Variable X is distributed normally and has a mean of 10. If the probability that an observation of X will
be negative is 0.16, what is the coefficient of variation of X?
* 10.0
* 1.0
* 0.1
* 0.32

Correct answer:
1.0
The probability that X lies a distance 10 below the mean is given to be 0.16. Since the normal
distribution is symmetric about the mean, this implies that the probability that X will be 10 greater than
the mean is also 0.16. Thus, the probability that X lies between 0 and 20 is 1-0.16-0.16 = 0.68. For a
normal distribution, 68% of the observations lie within one standard deviation of the mean. Hence, the
standard deviation of X equals 10. The coefficient of variation is then equal to standard
deviation/mean = 10/10 = 1.
------------------------------
You wish to determine the number of unique combinations that can result from a process that involves
n_1 options in one respect, n_2 in another respect, and so on. The counting method you should use
is:


Correct answer:
The multiplication rule.
The multiplication rule of counting states that the number of combinations available when there are
n_1 options in one aspect, n_2 in another, and so on, up to n_k, is n_1 * n_2 * ... * n_k.
------------------------------
A sample of assistant professors on the business faculty at state supported institutions in Ohio
revealed the mean income to be $32,000 for 9 months with a standard deviation of $3,000. Using
Chebyshev's Theorem, what is the proportion of faculty that earn more than $26,000 but less than
$38,000?
* At least 25%
* At least 75%
* At least 100%
* At least 50%

Correct answer:
At least 75%
26,000 and 38,000 are two standard deviations away from the mean. Using 1-(1/k^2) where k = 2, we
get 0.75
------------------------------
If you deposit $7,000 into an account paying 6% per year, compounded annually, how much do you
have in the account in 20 years?
* $15,938.48
* $23,403.52
* $20,800.00
* $22,470.62
* $22,449.95

Correct answer:
$22,449.95
On the BAII Plus, press 20 N, 6 I/Y, 7000 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 6 i, 7000
PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure that the BAII
------------------------------
With a discount rate of 12% per year, the value of a perpetuity that pays $500 every year is:
* $5,231
* $6,000
* $4,167
* $4,756

Correct answer:
$4,167
The value of the perpetuity = 500/0.12 = 4,167
------------------------------
credit card. Past evidence indicates that 40% of all customers pay in cash. During a one hour period
What is the probability that no more than twenty pay in cash?
* 0.1
* 0.9
* 0.0
* 1.0

Correct answer:
1.0
P(20) is almost zero. Probabilities of higher than 20 are also close to zero. So the probability of not
more than 20 is almost 1.
------------------------------
You have invested in a stock with a expected return of 14% and a standard deviation of 7%. Your
target rate of return is 7%. What is the probability that you will not meet your objective, assuming stock
returns are normally distributed?
* 32%
* 34%
* 16%
* 68%

Correct answer:
16%
There is a 68% chance that the stock returns will be within one standard deviation of the mean i.e. with
68% chance, the stock returns will be between 7% and 21%. Hence, the probability that stock returns
will lie outside this range is 100% - 68% = 32%. Since the normal distribution is symmetrically
distributed about the mean, the probability that the returns will be less than 7% equals 32/2 = 16%
Instead of the above, you could also solve the problem using the z-score and the normal probability
distribution table. You should, however, be aware of short-cuts like the above.
------------------------------
In a systematic random sampling method,
* a sample selected such that every member of the population has the same chance of being
selected.
* a sample is selected by randomly from within the first N members of the population and then
selecting every Nth member of the population.
* a sample is selected by drawing numbers from a normal probability distribution.
* a sample is selected by first dividing the population into groups and then selecting members from
each group.

Correct answer:
a sample is selected by randomly from within the first N members of the population and then selecting
every Nth member of the population.
The population members are arranges in a systematic way, such as alphabetically or by date received.
A random starting point is selected and then every Nth item is selected for inclusion in the random
sample.
------------------------------
The mean, as a measure of central tendency would be inappropriate for which one of the following?
* Incomes of lawyers
* Number of pages in textbooks on statistics
* Ages of adults at a senior citizen center
* Marital status of college students at a particular university

Correct answer:
Marital status of college students at a particular university
The answer to the question what is your marital status is usually yes or no, or some other status -
divorced, widow etc. So we cannot take an average of non-ordinal observations.
------------------------------
Which is true of positively skewed distributions?
I. They have a limited, but frequent, upside.

II. Their downside is less frequent but more unlimited.
III. They are attractive to investors because their mean is larger than their median.
* III
* I and II
* II
* I and III
* II and III
I and II are false. The correct statements for them would be: 1) positively skewed distributions have a
limited, but frequent, downside, and 2) they have a less frequent, but more unlimited, upside. III is true.
------------------------------
What annual interest rate, compounded annually, will cause a deposit of $850 to become $1,475 in 10
years?
* 5.67%
* 7.60%
* 7.88%
* 4.65%
* 5.50%
On the BAII Plus, press 10 N, 850 PV, 1475 +/- FV, 0 PMT, CPT I/Y. On the HP12C, press 10 n, 850
PV, 1475 CHS FV, 0 PMT, i. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
A researcher has decided to create a frequency distribution using the following classes:
30-45, 45-60, 60-75, 76 & over.
The selection of this set involves which of the following?
I. non-overlapping classes.
II. open-ended classes.
III. equal class intervals
* III only
* I only
* I & III only
* II & III only
* II only

Correct answer:
II only
Note that "76 & over" is an open-ended class. Also, the classes are overlapping (for e.g., the classes
"30-45" and "45-60" have the point "45" in common).
------------------------------
The mean of a normally distributed group of weekly incomes of a large group of executive is $1,000
and the standard deviation is $100. What is the z-score for an income of $1,100?
* -0.90
* 2.00
* 1.683
* 1.00

Correct answer:
1.00
z = (x-u)/sigma = 1100 - 1000/100 = 1.
------------------------------
A mining firm has purchased a derivative security to partially hedge itself against the losses caused by
fluctuations in a base metal price. The security pays a million dollars if the metal price falls below $2
per pound. Otherwise, it pays $100,000. If the expected rate of return on the security is 21% and the
security costs $400,000, what is the probability that the metal price will remain above $2 per pound?
* 42.66%
* 61.1%
* 57.33%
* 46.87%

Correct answer:
57.33%
If p is the probability of the metal price remaining above $2/pound, then the expected total return on
the derivative security is
(p * 100,000 + (1-p)*1,000,000)/400,000 = (10-9p)/4.
Since the expected return is given to be 21%, we get (10-9p)/4 = 1.21. Therefore, p = 57.33%.
------------------------------
Walter Jennings, a quantitative analyst with Smith, Kleen & Beetchnutty Brokerage, has just been
informed of an important error in one of his recent statistical endeavors. Specifically, in one hypothesis
test, Mr. Jennings failed to reject a null hypothesis that later was proven to be false. Which of the
following best describes this type of error in hypothesis testing? Further, if the confidence level of the
test were increased, would the probability of this error increase, decrease, or is this probability difficult
to determine?
* Type II error; difficult to determine

* Type I error; difficult to determine
* Type I error; decrease
* Type II error; decrease
* Type I error; increase
* Type II error; increase
In this example, Mr. Jennings has incorrectly failed to reject a null hypothesis. This type of error in
hypothesis testing is called a Type II error.
In hypothesis testing, the Type I error is given more attention than the Type II error. A Type I error is
defined as the act of incorrectly rejecting the null hypothesis. In most hypothesis tests, the probability
of a null hypothesis is equal to the significance level of the test. A significance level of 0.01, for
example, indicates that a 1% chance exists that the null hypothesis will be rejected when it is indeed
true. Another way to think of the probability of a Type I error is to observe the following relationship:
{Probability of a Type I error = (1 - confidence level)}.
For example, a confidence level of 95% leaves a 5% probability of a Type I error occurring. If this
confidence level were to increase to say, 98%, then the probability of a Type I error would reduce to
2%. While a relationship exists between the confidence level for a hypothesis test and the probability
of a Type I error, the relationship between confidence levels and Type II errors is not as explicit. The
probability of a Type II error is inherently difficult to quantify, and as such, few hypothesis tests call for
a determination of the probability of a Type II error. If the confidence level of a hypothesis test to be
increased, it would be difficult to determine what effect, if any, this would have on the probability of a
Type II error.
------------------------------
If you owe a debt of $1,000 today and also owe $500 in 24 months, what single payment could you
* $751.62
* $1,426.30
* $1,500.00
* $1,544.68
* $2,041.93

Correct answer:
$1,544.68
$1,000 from today over to month 12 and add it to the $500 brought back from month 24 to month 12.
On the BAII Plus, press 12 N, 8 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,083.00.
Then press STO 1. Then press 500 FV, CPT PV which yields $461.68. Finally press + RCL 1 = to see
the answer. On the HP12C, press 12 n, 8 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO
1. Then press 500 FV, PV. Finally press RCL 1 + to see the answer.
------------------------------
On a very hot summer day, 5 percent of the production employees at Midland States Steel are absent
from work. The production employees are to be selected at random for a special in depth study on
absenteeism. What is the probability of selecting 10 production employees at random on a hot
summer day and finding that none of them are absent?
* 0.599
* 0.100
* 0.002
* 0.344
10!(0.05^0)(0.95^10)/0!10! = 0.599.
------------------------------
If an analyst is trying to estimate the value of a stock, using the formula E(Y | E) = [y_1 * P(y_1 |E) +
y_2 * P(y_2|E) + ... y_n * P(y_n|E), the analyst is making use of:
* subjective probability.
* the multiplication rule for independent events.
* unconditional expectation.
* conditional expectation.

Correct answer:
conditional expectation.
Since the stock value is conditioned on an uncertain event and the likelihood of certain stock price
outcomes given the occurrence of that uncertain event, the analyst is using conditional expectation.
The expected value is conditioned upon the occurrence of the event.
------------------------------
* $2,408.90
* $48.49
* $2,536.41
* $3,500.00
* $2,348.53

Correct answer:
$2,536.41
small letters). Now press 10 N, 8 I/Y, 350 PMT, 0 FV, CPT PV. Place the calculator back into End
mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press
2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press
BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into
Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 8
i, 350 PMT, 0 FV, PV. To place the HP12C back into ordinary annuity mode (or END mode), press
BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is
displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
For which measure of central tendency will the sum of the deviations of each value from that average
always be zero?
* Median
* Geometric mean
* Mean
* Mode

Correct answer:
Mean
For the mean, the sum of the deviations from the average is always zero because the mean is the
average.
------------------------------
significance?
* As the confidence level increases, the area between the upper confidence limit and the lower
confidence limit increases.
* The significance level is denoted by the Greek letter alpha.
* The significance level is typically measured by (1 - the probability of a Type II error).
* As the confidence level increases, the power of the does not necessarily increase.
* Significance levels are typically set equal to 0.10, 0.05, and 0.01.

Correct answer:
The significance level is typically measured by (1 - the probability of a Type II error).
In most statistical tests, the significance level is equal to one minus the probability of a Type I error.
The Type I error is given much more attention in hypothesis testing than is the Type II error, and this is
partially because of the inherent difficulty in quantifying the probability of a Type II error. Remember
that a Type II error occurs when one incorrectly fails to reject the null hypothesis. Reliably predicting
this occurrence is difficult. Conversely, determining the probability of a Type I error requires much less
effort and is subject to much less estimation bias.
------------------------------
The mean gross annual income of certified tack welders are normally distributed with the mean of
$20,000 and a standard deviation of $2,000. The ship building association wishes to find out whether
their tack welders earn more or less than $20,000 annually. The alternate hypothesis is that the mean
is not $20,000. The 0.10 level of significance is to be used.
What is the decision rule?
* Do not reject the null hypothesis if computed z lies between -1.96; otherwise, reject it
* Reject the null hypothesis if computed z is below -1.96; otherwise, reject it
* Do not reject the null hypothesis if computed z lies greater than 1.645; otherwise, reject it
* Do no reject the null hypothesis if computed z lies between -1.645 and +1.645; otherwise, reject it

Correct answer:
Do no reject the null hypothesis if computed z lies between -1.645 and +1.645; otherwise, reject it
Since it is at the 10% significance level we must use z=+/-1.645. The null hypothesis Ho will not be
rejected if the z-value falls between the critical value. We reject Ho if it falls beyond the critical level.
------------------------------
What is the future value of $450 per year for 10 years, with the first cash flow occurring today, rather
* $6,652.62
* $6,217.40
* $3,381.85
* $3,160.61
* $4,951.85
small letters). Now press 10 N, 7 I/Y, 450 PMT, 0 PV, CPT FV. Place the calculator back into End
mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press
2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press
BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into
Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 7
i, 450 PMT, 0 PV, FV. To place the HP12C back into ordinary annuity mode (or END mode), press
BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is
------------------------------
* $15,403.52
* $21,911.23
* $24,800.00
* $22,667.70
* $25,938.48

Correct answer:
$21,911.23
------------------------------
How many deposits of $250 a month, beginning next month, are needed before an account has
$200,000 in it, assuming it had a balance of $0 at the beginning and that interest is 6% per year,
compounded monthly?
* 319.48
* No solution/Error
* 322.69
* 800.00
* 66.79

Correct answer:
322.69
One of the two dollar amounts must be entered as a negative number and the other as a positive
number or an error will result. On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 250 PMT, 200000 +/-
FV, CPT N. On the HP12C, press 6 ENTER 12 divide i, 0 PV, 250 PMT, 200000 CHS FV, n. Note that
the HP12C returns a result of 323. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
If you deposit $2,500 into an account paying 6% per year, simple interest, how much is in the account
in 18 months?
* $2,651.04
* $2,725.00
* $2,750.19
* $2,349.38
* $225.00

Correct answer:
$2,725.00
Since the question asks for how much is in the account, the simple interest earned should be added to
the original deposit to find the answer. On the BAII Plus, press 2500 x 0.06 x 18 divide 12 = + 2500 =.
On the HP12C, press 2500 ENTER 0.06 x 18 x 12 divide 2500 + to see the answer.
------------------------------
You are examining a special group of 5 stock market indices. Of these 5, the returns were 4%, 8%,
12%, 16%, and 10%. What is the population variance of this group of stock market indices?
* 10%.
* 16%%.
* 10%%.
* 16%.

Correct answer:
16%%.
The population variance is equal to the sum of the squared differences between each population
member and the population mean, divided by the number of items in the population. In this case, we
have a mean of 10%. The first squared difference will be (4% - 10%)^2 = 0.0036. The others will be
0.0004, 0.0004, 0.0036, and 0. The sum of these squared differences is 0.008, and divided by 5, we
get 0.0016 = 16%%.
------------------------------
An investment of $100 grows in three years to $221. The investor observes that the annual arithmetic
* 30.26%
* 23.93%
* 40.33%
* 24.32%
* 27.84%
------------------------------
If all the data points in a regression lie exactly on a straight line, which of the following is/are true?
I. The observed values of the dependent variable will equal the predicted values.
II. The R-square will equal 100%.
III. The slope coefficient will be 1.
IV. The residual error will be 100%.
* I & II
* III only
* II only
* IV only
* I only
* I & III
* I, II & III
* III & IV
Since there is no error in the regression, the R-square equals 1 (100%). The slope coefficient can be
any real number, not necessarily 1. The residual error will be zero.
------------------------------
Which of the following answers is false in reference to confidence levels and/or tests of significance?
Choose the best answer.
* All else equal, the confidence interval for a test with a 5% significance level is larger than the
confidence interval for a test with a 1% significance level.
* The Greek letter alpha is used to denote the probability of a Type I error.
* The significance level used in hypothesis testing is typically 0.10, 0.05, or 0.01.
* In most hypothesis testing, the power of a test is equal to (1 - the significance level).
* The confidence level can be found by (1 - alpha).
The confidence interval for a test with a 5% level of significance is smaller than the confidence interval
for a 1% significance level. Remember that the significance level is typically set equal to the probability
of a Type I error, which is defined as the act of incorrectly rejecting the null hypothesis. In hypothesis
testing, the significance level is denoted by the Greek letter alpha. As the level of confidence
increases, then the confidence interval will increase. This will be mirrored by a decrease in the alpha
coefficient (i.e. the probability of a Type I error) for the hypothesis test.

------------------------------
If 68% of the observations of a bell-shaped, symmetrical frequency distribution fall between -20 and +
60, the mean and the standard deviation of the distribution are:
* 40, 20
* 40, 40
* 20, 20
* 20, 40

Correct answer:
20, 40
Since the distribution is symmetrical about the mean, the mean is equal to
(-20 + 60)/2 = 20. According to the empirical/Normal rule, for a bell-shaped, symmetrical frequency
distribution, 68% of the observations lie within one standard deviation of the mean. Therefore, the
standard deviation equals 60-20 = 40.
------------------------------
What is the range of values for a coefficient of correlation?
* -1.0 to +1.0 inclusive

* Unlimited range
* 0 to +1.0
The closer the value to 1 or -1, the stronger the correlation. The sign +/- just shows the direction, not
the strength.
------------------------------
What is your monthly payment, beginning next month, on a $19,000 loan, if you pay it off over 48
months and the interest rate is 5.9% per year, compounded monthly?
* $398.68
* $1,411.86
* $448.60
* $397.26
* $445.34

Correct answer:
$445.34
On the BAII Plus, press 48 N, 5.9 divide 12 = I/Y, 19000 PV, 0 FV, CPT PMT. On the HP12c, press 48
n, 5.9 ENTER 12 divide i, 19000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative
------------------------------
pension plan. In depth interviews are to be conducted with each employee selected in the sample. The
employees are classified as follows.

Supervisors A 120
Maintenance B 50
Production C 1,460
Management D 302
Secretarial E 68
What is the probability that the first person selected is either in maintenance OR in secretarial?
* 0.001
* 0.015
* 0.200
* 0.059

Correct answer:
0.059
There are 2000 employees of which 50 are from maintenance and 68 in secretarial. Therefore (50 +
68)/2000 = 0.059.
------------------------------
A researcher has rejected the null hypothesis. The p-value in the test must be:
* less than the significance level.

* more than 1-significance level.
* less than 1-significance level.
* more than the significance level.
significance level. To fix this in your mind, think about the p-value as the maximum probability that the
null hypothesis is true despite observing the value of the test statistic that you have in the sample at
hand. For e.g., suppose the p-value for a given sample turns out to be 3%. Then, if you reject the null,
the probability that you have made an error in rejecting it is at most 3%. Clearly, if a critic asked you,
"Is the probability that you have made an error less than 5%?" your answer would be, "yes." The critic
will then conclude that your test is significant at the 5% level and perhaps even at a lower level.
------------------------------
* $2,000.00
* $1,290.81
* $584.57
* $1,638.14
* $1,934.02

Correct answer:
$1,638.14
------------------------------
An economic researcher estimates the following regression between the annual income, I, of a family
and the amount it spends on consumption goods, C:
C = 2,000 + 0.65 I + error term
If the R-square of the regression is just 0.3, estimate the amount that a family with an income of
50,000 will spend on consumption.
* 34,500
* 32,500
* 2,000
With the given regression, the amount that a family with an income of 50,000 will spend on
consumption equals 2,000 + 0.65*50,000 = 34,500.
------------------------------
I. For a given level of significance, it becomes harder to reject the null hypothesis as the sample size
decreases.
II. For a given sample size, it becomes harder to reject the null hypothesis as the significance level
decreases.
III. It is easier to reject the null hypothesis the lower the R-square.
* I only
* II only
* I, II & III
* III only
* I & III
* II & III
* I & II

Correct answer:
I & II
As the sample size increases, it becomes easier to test whether the null hypothesis can be rejected at
the specified significance level (Intuitively, it is harder for a false hypothesis to hide its falsity when
there are a larger number of observations testing its veracity). In fact, the critical t-statistic required to
reject the null decreases as the sample size increases for a given level of significance.
A higher significance level makes it easier to reject the null hypothesis. This is because you are
enforcing a looser standard on rejecting the null (recall that the significance level represents the
probability that you have rejected the null when, in fact, it is true). In fact, significance level and critical
t-statistic are inversely related.
R-square is not used in hypothesis testing but in regression analysis, though it does not measure the
significance of a regression. A regression with a very low R-square can be highly significant; the low
R-square only implies that the behavior of the dependent variable is governed largely by random
noise.
------------------------------
How much will $3,250 become after 6 years at 8% per year, compounded annually?
* $5,298.66
* $2,039.09
* $2,048.05
* $5,157.34
* $5,180.00

Correct answer:
$5,157.34
0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has
------------------------------
What is the standard error of estimate?
* Based on squared vertical deviations between Y and Y'

* Measure of the accuracy of the prediction
* Cannot be negative

Correct answer:
All the descriptions are correct for the standard error of estimate.
------------------------------
What does a coefficient of correlation of 0.70 mean?
* Coefficient of determination is 0.49

* Almost no correlation because 0.70 is close to 1.0
* 70% of the variation in one variable is explained by the other
* Coefficient of nondetermination is 0.30
The coefficient of correlation, r, is just the square root of the coefficient of determination r-squared.
------------------------------
A bell-shaped, symmetrical frequency distribution has a mean of 45. If 95% of the observations on the
variable fall between 30 and 60, the standard deviation of the variable is:
* 5.00
* 7.50
* Insufficient information
* 15.0

Correct answer:
7.50
95% of the observations in a bell-shaped, symmetrical frequency distribution lie within approximately 2
standard deviations of the mean. The standard deviation is then (45-30)/2 = 7.50.
------------------------------
What monthly payment, beginning next month, is required over the next 60 months to pay off a
$10,000 debt today, if interest is charged at 14% per year, compounded monthly?
* $116.02
* $166.67
* $2070.54
* $1,400.54
* $232.68

Correct answer:
$232.68
------------------------------
What value does the null hypothesis make a claim about?

* Population parameter
* Sample mean
* Type II error
* Sample statistic
Correct answer:
Population parameter
The null hypothesis makes claims regarding the values that the population parameter may take.
------------------------------
For a negatively skewed, unimodal distribution, which of the following relationships holds?
* mode < median

* mean > median
* mean < median
* mean > mode

Correct answer:
mean < median
In a negatively skewed distribution, very low values are more common than correspondingly large
values. This skews the distribution to the left, moving the mean to the left of the median.
------------------------------
The research analyst for a stock brokerage firm wants to compare the dispersion in the price-earnings
ratios for a group of common stock with their return on investment. For the price-earnings ratios, the
mean is 10.9 and the standard deviation is 1.8. The mean return on investment is 25 percent and the
standard deviation is 5.2 percent. What is the relative dispersion for the price earnings ratios and
return on investment?

* Ratios 50.0 percent, investment 10.0 percent

Correct answer:
Ratios 16.5 percent, investment 20.8 percent
The respective CVs are found from (s*100)/mean. Ratios: 1.8*100/10.9 = 16.5% and investment:
5.2*100/25 = 20.8%.
------------------------------
What semiannual deposit is needed to accumulate $5,000 in 5 years if the account pays 6% per year,
compounded semiannually, assuming that the first deposit is made in 6 months and also assuming
that the account already has $750 in it today?
* $277.44
* $436.15
* $359.52
* $348.23
* $778.01

Correct answer:
$348.23
number. This means that the $348.23 is a deposit in addition to the $750 original deposit. The $5,000
is entered as a negative number, because the $750 and the $348.23 are deposits and the $5,000 is a
withdrawal. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
A normal distribution has a mean of -10.8 and a variance of 723.6. The probability that a value from
this distribution will be between -25 and + 25 equals ________.
* 0.91
* 0.30
* 0.61
* 0.39

Correct answer:
0.61
The standard deviation of the distribution equals sqrt(723.6) = 26.9. The z-value of -25 equals (-25 +
10.8)/26.9 = -0.53. The z-value of + 25 equals (25 + 10.8)/26.9 = + 1.33. Therefore, the probability that
a number Y lies between -25 and + 25 is the same as the z-score lying between -0.53 and + 1.33.
Using the Normal probability tables, we get P(z < 1.33) = 0.9082.
Getting P(z < -0.53) can be tricky when the table given is only for positive values. To calculate the
probability, use the fact that the standard normal distribution is symmetrical about zero. Hence, P(z < -
0.53) = P(z > 0.53) = 1.0 - 0.7019 = 0.2981. The probability that a number Y lies between -25 and + 25
is then given by P(-0.53 < z < 1.33) = P(z < 1.33) - P(z < -0.53) = 0.9082 - 0.2981 = 0.61.
------------------------------
If you buy an item for $1,500 and agree to pay for it with 36 monthly payments of $55.50, beginning
next month, what annual interest rate, compounded monthly, are you being charged?
* 24.92%
* 16.53%
* 18.84%
* 11.15%
* 19.68%

Correct answer:
19.68%
value set to 1.
------------------------------
The mean weight of trucks traveling on a particular section of I-475 is not known. A state highway
inspector needs an estimate of the mean. He selects a random sample of 49 trucks passing the
weighing station and finds the mean is 15.8 tons, with a standard deviation of the sample of 3.8 tons.
What is the 95 percent interval for the population mean?
* 14.7 and 16.9

* 16.1 and 18.1
* 10.0 and 20.0
* 13.2 and 17.6
Interval estimate can be found from x_bar +/-z*s/(n^0.5). Here we have n = 49, x_bar = 15.8 and z =
1.96 (for 95%) and s = 3.8.
Therefore 15.8 +/- 1.96*3.8/7 and we get 14.76 and 16.84.
------------------------------
A sample of size 100 is drawn from a population. The sample mean equals 35.2 and the variance of
the sample equals 47.8. The 95% confidence interval for the population mean is given by:
* [33.13, 37.27]
* [35.13, 35.27]
* [35.06, 35.34]
* [33.85, 36.56]

Correct answer:
[33.85, 36.56]
z*D/sqrt(N)].
In the present case, for the 95% confidence interval, z = 1.96. The sample standard deviation equals
sqrt(47.8) = 6.91. Therefore, the confidence interval equals
[35.2 - 1.96*6.91/sqrt(100), 35.2 - 1.96*6.91/sqrt(100)] = [33.85, 36.56]
------------------------------
Which of the following is correct about a probability distribution?

* Sum of the probabilities of all possible outcomes must equal 1
* Probability of each outcome must be between 0 and 1 inclusive
* Outcomes must be mutually exclusive
Correct answer:
All describes properties of a probability distribution.
------------------------------
Suppose that events A, B, C, and D are independent, and have probabilities of 0.25, 0.50, 0.40, and
0.30, respectively. What is P(ABCD)?
* 1.0%.
* 15.0%.
* 1.5%.
* 0.15.

Correct answer:
1.5%.
individual probabilities. So P(ABCD) = 0.25 * 0.50 * 0.40 * 0.30 = 1.5%.
------------------------------
If r = .65, what does the coefficient of determination equal?
* 0.423
* 0.577
* 0.806
* 0.194
The coefficient of determination is r-squared.
------------------------------
A financial economist runs the following regression:
Demand for cars = alpha + beta*income level + error
In this regression, the demand for cars is ________ variable and the income level is ________
variable.
* dependent; dependent.
* dependent; independent.
* independent; independent.
* independent; dependent.
Correct answer:
dependent; independent.
The left-hand side variable is the dependent variable since its behavior in the equation is being
explained by the right-hand side variable, which is the independent variable. Note, however, that this
does not imply any kind of causal relationship in general.
------------------------------
What is the measure that indicates how precise a prediction of Y is based on X or, conversely, how
inaccurate the prediction might be?
* Least squares principle

* Slope of the line
* Y intercept
* Regression equation

Correct answer:
This refers to the standard error of estimates.
------------------------------
You are examining a portfolio composed of 1/3 money-market investments, 1/3 bonds, and 1/3 stocks.
Last year, the return on the money-market investments was 5%; the return on bonds was 15%, and
the return on stocks was -2%. What is the portfolio's weighted-average return?
* 6.66%.
* 6.33%.
* 7.00%.
* 6.00%.

Correct answer:
6.00%.
The portfolio weighted-average return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where
w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith
asset. Here, we get a weighted mean of 1/3 * 0.05 + 1/3 * 0.15 + 1/3 * -0.02 = 6.00%. Note that
because of the equal weighting, this is the same as the arithmetic return: (5% + 15% - 2%) / 3 = 18% /
3 = 6%.
------------------------------
Which of the following is true in a normal distribution?
* None of the answers

* Mean divides the distribution into two equal parts
* Mean equals the mode and the median
* Mode equals the median

Correct answer:
All of these answers are correct
All the above holds for a normal distribution.
------------------------------
Events X and Y are mutually exclusive. P(X) = 0.15, P(Y) = 0.32. The probability of either X or Y
occurring equals ________.
* 0.048
* 0.53
* 0.47
* 0.17

Correct answer:
0.47
Note the relationship,
P(X or Y) = P(X) + P(Y) - P(X and Y)
Also remember that for mutually exclusive events, by definition, P(X and Y) = 0. Therefore, P(X or Y) =
0.15 + 0.32 = 0.47.
------------------------------
What is the general form of the regression equation?
* Y' = a x bX
* Y' = a - bX
* Y' = a + bX
* Y' = ab

Correct answer:
Y' = a + bX
------------------------------
Which of the following is true regarding probability?
I. 0 < P(E) < 1: the probability of an event E is a number between 0 and 1, exclusive.
II. The sum of the probabilities of any group of mutually exclusive events equals 1.
III. 0 <= P(E) <= 1: the probability of an event E is a number between 0 and 1, inclusive.
* III only.
* I and II.
* II and III.
III only is true: 0 <= P(E) <= 1: the probability of an event E is a number between 0 and 1, inclusive. A
probability can equal 1 or 0; thus, statement I is false. Statement II would only be true if it read: The
sum of the probabilities of any group of mutually exclusive and exhaustive events equals 1. Throwing
a 6-sided die can lead to 6 different outcomes, each of which has probability of 1/6. However, If your
group of mutually exclusive outcomes only included results 1 and 2, then the sum of those
probabilities is not 1. Such a group would not be exhaustive because it excludes the outcomes 3, 4, 5,
6.
------------------------------
What annual interest rate, compounded quarterly, would cause a series of 30 quarterly deposits of
$500 to accumulate to $25,000, if the first deposit is made three months from today?
* 3.31%
* 12.78%
* 9.94%
* 13.22%
* 8.15%

Correct answer:
13.22%
The value returned by the calculator will be the periodic interest rate which must be multiplied by the
number of periods per year to have the correct answer. On the BAII Plus, press 30 N, 0 PV, 500 PMT,
25000 +/- FV, CPT I/Y. Then press x 4 = to see the answer. On the HP12C, press 30 n, 0 PV, 500
PMT, 25000 CHS FV, i. Then press 4 x to see the answer. Make sure the BAII Plus has the P/Y value
set to 1.
------------------------------
Production of passenger cars in Japan increased from 3.94 million in 1986 to 6.74 million in 1994.
What is the geometric mean annual percent increase?
* 16.6
* 1.9
* 4.0
* 47.3
* 6.9

Correct answer:
6.9
There are 9 years involved. The geometric mean = [(1 + 6.74/3.94)^1/8] - 1. In words, it is the 8th
square root of (1 + 6.74/3.94) minus 1. So we have GM = (1 + 1.7107)^(1/8) - 1 = 0.069 = 6.9%
------------------------------
A very small p-value calculated in a sample implies that:
* the null hypothesis should be rejected.

* the null hypothesis is very likely true.
* the alternate hypothesis is very likely false.
* the null hypothesis should be accepted.
significance level.
------------------------------

intercept 3.6 2.1
slope 8.1 1.3
R square = 49%
If an observation on X indicates X = 5 the estimated value of Y would be ________.
* 44.1
* 26.1
* 40.5
From the information given, the regression equation is Y = 3.6 + 8.1X + error term. The expected
value of the error is zero. Hence, when X = 5, the estimated value of Y equals 3.6 + 8.1*5 = 44.1.
------------------------------
* $2,500.00
* $160,356.77
* $12,299.08
* $16,604.73
* $15,590.24

Correct answer:
$15,590.24
PMT, 50000 FV, PV. Note that the answer is displayed as a negative number. Make sure the BAII Plus
------------------------------
You have just received a sales brochure from a reputable investment firm which describes a financial
investment vehicle which pays $300 at the end of year 1, $500 at the end of year 2 and $100 at the
end of year 3. If you are looking for an annual return of 6%, what's the maximum amount you should
be willing to purchase this investment certificate for?
* $797
* $827
* $900
* $812

Correct answer:
$812
The maximum amount you should pay equals the present value of the payments (you would like to
pay less!). This equals 300/1.06 + 500/(1.06^2) + 100/(1.06^3) = $812.
------------------------------
You are given a risk-free rate of 3% per year, a portfolio return of -11% per year, and a standard
deviation of portfolio return is 20% per year. What is the Sharpe measure of risk-adjusted
performance?
* -0.70.
* -0.15.
* -0.67.
* -0.55.
of portfolio return. In our case, we have (-11% - 3%) / 20% = -14/20 = -0.7.
------------------------------
If the underlying theory suggests that the value of an estimated variable is less than a particular
number, it is appropriate to use:
* a right-tailed test.
* a left-tailed test.
* a two-tailed test.
* either a right-tailed or left-tailed test.

Correct answer:
a left-tailed test.
When an observation is made and we see a value less than the threshold suggested by the theory, we
would like to known the probability of getting the smaller value due simply to chance rather than to the
event being driven by the theory. For this, we need to known the left-tail probabilities under the null
hypothesis.
------------------------------
If you owe 3 debts ($100 due 6 months from now, $500 due 8 months from now, and $1,000 due 11
months from now), what single payment can you make today to settle them, if interest is assessed at
10% per year, compounded monthly?
* $1,600.00
* $1,475.78
* $1,552.39
* $1,387.29
* $1,504.88

Correct answer:
$1,475.78
Find the answer to this question by solving 3 compound interest problems. On the BAII Plus, press 6
N, 10 divide 12 = I/Y, 0 PMT, 100 FV, CPT PV, which yields $95.14. Then press STO 1. Then press 8
N, 500 FV, CPT PV, which yields $467.88. Then press + RCL 1 = STO 1. Then press 11 N, 1000 FV,
CPT PV, which yields $912.76. Press + RCL 1 = to see the answer. On the HP12C, press 6 n, 10
ENTER 12 divide i, 0 PMT, 100 FV, PV. Then press STO 1. Then press 8 n, 500 FV, PV. Then press
RCL 1 + STO 1. Then press 11 n, 1000 FV, PV. Press RCL 1 + to see the answer. Make sure the BAII
------------------------------
What is the level of significance?

* Probability of a Type II error
* Beta error
* Z-vale of 1.96
* Probability of a Type I error

Correct answer:
Probability of a Type I error
The level of significance and the type I error are both the probability of rejecting the null hypothesis
when it is actually true.
------------------------------
What can we say if the coefficient of determination is 0.94?
* Direction of relationship is positive

* 94% of total variation in one variable is explained by variation in another variable
* Strength of relationship is 0.94
Correct answer:
94% of total variation in one variable is explained by variation in another variable
We cannot tell anything about the direction of the relationship from the coefficient of determination or r-
squared.
------------------------------
year: Year 0: <$25,000>, Year 1: $5,000, Year 2: $0, Year 3: $30,000? (Note that the <> are used to
indicate a negative number).
* $14.37
* <$926.69>
* $258.11
* <$291.21>
* <$204.58>

Correct answer:
<$926.69>
DownArrow 0 ENTER DownArrow DownArrow 30000 ENTER DownArrow DownArrow 2nd Quit. Then
press NPV 15 ENTER DownArrow CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo
5000 BlueShift CFj 0 BlueShift CFj 30000 BlueShift CFj Then press 15 i, YellowShift NPV. The answer
is negative, indicating that the PV of the cash flows to be received is less than the original cash
outflow. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus
keyboard. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
to be 51.44. The mean of the sample is calculated to be 3.6. The null hypothesis is stated as Ho:
mean > 8.4. The researcher should
* accept the null at 95% significance.

* reject the null at 99% significance.
* fail to reject the null at 95% significance.

Correct answer:
reject the null at 99% significance.
To test the hypothesis, you need to calculate the largest z-statistic since the null hypothesis is
unidirectional and to the right. This makes it the hardest to reject the null and you should always use
the most stringent criterion for rejecting the null. After all, the null is the hypothesis maintained to be
true by default and only a sufficient weight of evidence should be used to reject that view.
The largest z-statistic calculated under the null hypothesis is equal to (3.6 - 8.4)/2.1 = -2.4. Now, the
alternative hypothesis is H1: mean <= 8.4. Since the alternative is directional, we use a one-tailed test.
For this, the critical value at 95% level is -1.645 and for 99%, it is -2.32. -2.32 is the value below which
only 1% of the probability mass of the standard normal distribution lies. Similarly, only 5% of
probability lies below -1.645). Since even the calculated z-statistic that is most favorable to the null lies
in the rejection region, we can reject the null at the 99% level in a one-sided test.
------------------------------
If you make 22 deposits of $33 with the first deposit occurring next month, how much do you have
immediately after the last deposit, if the account earns 4.44% per year, compounded annually?
* $666.00
* $1,207.81
* $$457.44
* $1,313.51
* $1,189.62

Correct answer:
$1,189.62
On the BAII Plus, press 22 N, 4.44 I/Y, 0 PV, 33 PMT, CPT FV. On the HP12C, press 22 n, 4.44 i, 0
PV, 33 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII
------------------------------
As the alternative mean approaches the hypothesized mean, what can we say about the risk?
* Smaller risk of a Type II error

* Greater risk of a Type II error
* Smaller risk of a Type I error
* Greater risk of a Type I error

Correct answer:
Greater risk of a Type II error
When the alternative mean approaches the hypothesized mean, there is a greater possibility of
accepting the null when it is actually false since they are close together.
------------------------------
Chances are 50-50 that a newborn baby will be a girl. For families with five children, what is the
probability that all the children are girls?
* 0.100
* 0.250
* 0.001
* 0.031

Correct answer:
0.031
n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 5, r = 5,p = 0.5 and q = 0.5. Therefore we have 5!(0.5^5)(0.5^0)/5!0! =
0.03125.
------------------------------
performance?
* 0.625.
* 0.675.
* 0.500.
* 0.750.
of portfolio return. In our case, we have (15% - 5%) / 16% = 10/16 = 5/8 = 0.625.
------------------------------
An analysis of the grades on the first test in History 101 revealed that they approximate a normal curve
with a mean of 75 and a standard deviation of 8. The instructor wants to award the grade of A to the
upper 10 percent of the test grades. What is the dividing point between an A and a B grade?
* 80
* 90
* 85
* 95

Correct answer:
85
First we need to find the z value for an area under the curve representing 40%. (This is because we
are looking for the top 10%). From the table z = 1.282. Therefore using the z formula we have 1.282 =
X-75/8. We find that x = 85.25
------------------------------
If you owe $5,000 today and will repay it with 8 annual payments of $900 beginning next year, what is
the annual interest rate, compounded annually, that you are paying?
* 9.80%
* 9.98%
* 18%
* 8.90%
* 44%
Correct answer:
8.90%
On the BAII Plus, press 8 N, 5000 PV, 900 +/- PMT, 0 FV, CPT I/Y. On the HP12C, press 8 n, 5000
PV, 900 CHS PMT, 0 FV, i. Note that the PMT must be entered with a sign that is opposite that given
the PV.
------------------------------
Distributions X and Y have the same coefficients of variation. If the mean of X is twice the mean of Y
and the standard deviation of X is 5, the standard deviation of Y is ________.
*5
* 10
* 2.5
*2

Correct answer:
2.5
coefficient of variation = standard deviation/mean. If the mean of Y is M, then the coefficient of

variation of X is 5/(2M) and that of Y is (standard deviation of Y)/M. Given that these two are equal,
5/(2M) = (standard deviation of Y)/M. Therefore, standard deviation of Y = 5/2 = 2.5.
------------------------------
Consider the following list of numbers:
6, 4, 3, 8, 3, 3, 5, 9, 11, 4
For this list, the mean, the median and the mode are given respectively by:
* 5.6, 4.5, 3
* 5.6, 4, 3
* 5, 3, 5
* 5.6, 6, 3
The sum of the 10 numbers is 56. The mean is 56/10 = 5.6. The most common number is 3, which is
the mode. Since there is an even number (10) of numbers in the list, the median is the average of the
5th and 6th numbers when the list is arranged in an ascending order. The median is therefore equal to
(4 + 5)/2 = 4.5.
------------------------------
* $24.45
* $21.20
* $23.45
* Can't be done
* $11.23

Correct answer:
$21.20
number, indicating that this is a monthly withdrawal that can be made from the account in addition to
the $5,000 in 10 years. Make sure the BAII Plus has the value of P/Y set to 1.
------------------------------
I. Doubling every single value in a sample doubles the sample median.

II. Adding a constant to each value in a sample causes the median to increase by the same constant.
III. The median of a sample decreases as the number of observations increases.
* II only
* I only
* I only
* I & III
* II only
* III only
* I & II

Correct answer:
I & II
The median of a set with odd number of observations equals the "middle" observation. If the number
of observations is even, the median is the mean of the two middle observations. From this, I & II
follow. (III) is not necessarily true.
------------------------------
A discrete probability distribution is the same as:
* a collection of all possible outcomes of an experiment.

* an absolute frequency distribution.
* a relative frequency distribution.

Correct answer:
a relative frequency distribution.
The relative probability distribution of a set shows the relative frequency in each category in which the
observation set is subdivided i.e. it shows the percentage of the observation set lying in each class.
This also represents the probability distribution of the observation set.
------------------------------
In the regression equation, what does the letter "b" represent?
* Slope of the line

* Value of Y when X=0
* Any value of the independent variable that is selected
* Y concept
------------------------------
How many years will it take money to double at 7.25% per year, compounded annually?
* 7.15 years
* 12.14 years
* 7.29 years
* 8.03 years
* 9.90 years

Correct answer:
9.90 years
To solve this question, choose a future value that is twice the size of the present value. The actual
number will not matter. On the BAII Plus, press 7.25 I/Y, 1000 PV, 0 PMT, 2000 +/- FV, CPT N. On the
HP12C, press 7.25 i, 1000 PV, 0 PMT, 2000 CHS FV, n. Note that the HP12C will show 10 for the
answer. The answer will be the same as long as the FV is twice as large as the PV. Make sure that the
------------------------------
Which of the following is/are true about a normal distribution?
I. It has only one mode.

II. It has a positive third moment.
III. It is symmetrical about zero.
* III only
* I, II and III
* II only
* I & IV
* I only
* I & III

Correct answer:
I only
A normal distribution is symmetrical about the mean, which can be non-zero. It has a zero third
moment (zero skewness).
------------------------------
An automobile manufacturer makes 2 different chassis, each of which can have 3 different body types
and 8 colors. How many different looking cars can be made with these choices?
* 40.
* 24.
* 13.
* 48.

Correct answer:
48.
n_1 options in one aspect, n_2 in another, and so on, up to n_k, is n_1 * n_2 * ... * n_k. In this case,
the number of combinations is 2*3*8 = 48.
------------------------------
A linear regression is ________ relationship.
* a causal
* an acausal
* a functional

Correct answer:
a functional
It is important to remember that a regression equation does not imply a causal relationship between
the dependent and the independent variables. It simply postulates a functional i.e. an associative
relationship between them.
------------------------------
John was offered a salary of $25,000 when he graduated from school 15 years ago. He was
somewhat depressed to read that the average starting salary for someone with his degree today was
$45,000. He then decided to determine the annual, compound rate of increase implied in the increase
of the starting salary from $25,000 to $45,000 in 15 years. What is this annually compounded growth
rate?
* 4.00%
* 7.15%
* 1.03%
* 8.42%
* 12.00%
Essentially, this question is a compound interest problem with the interest rate as the unknown value.
On the BAII Plus, press 15 N, 25000 PV, 0 PMT, 45000 +/- FV, CPT I/Y. On the HP12C, press 15 n,
25000 PV, 0 PMT, 45000 CHS FV, i. John would seem to have no reason to be depressed, since the
starting salary today has increased by only 4% per year over the last 15 years, which might be
somewhat near the past rate of inflation. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
Which of the following is NOT a reason for sampling the population?
* Some tests are destructive in nature and hence, should be carried out only on small samples.
* Inferences from a sample are the same that would be obtained by studying the entire population.
* It is almost impossible to work with the entire population in most cases.
* Samples are far easier to work with than the entire population.

Correct answer:
Inferences from a sample are the same that would be obtained by studying the entire population.
Remember, the entire population contains more information than the sample. With the population, you
would get exact parameter values characterizing the population whereas with a sample, you only get
estimates.
------------------------------
Ho: mean >= 1 H1: mean < 1
For the given sample, he calculates the z-statistic. Then, the region of rejection at the 95% level is
given by:

* -1.96 < z-statistic < +1.96

Correct answer:
z-statistic < -1.645
Since the alternative hypothesis is directional and to the left, the rejection region for the null is also to
the left. Hence, you should use a one-tailed test. 5% of the probability mass in a Normal distribution
lies in the left tail with values which are less than -1.645. Therefore, the rejection region comprises of
z-values less than -1.645.
------------------------------
On a survey questionnaire, students were asked to indicate their class rank in college. If there were
only four choices from which to choose, which measure(s) of central tendency would be appropriate to
use for the data generated by that questionnaire item?
* Mean and mode
* Mode only
* Mode and median
* Median only
* Mean and median

Correct answer:
Mode and median
We can discard the mean since it is not appropriate here. If we want to find out which class has the
most students or where the students are most frequently ranked, then the mode and median should
be used.
------------------------------
What annual deposit would you need to make, beginning in one year, into an account paying 7% per
year, compounded annually, in order to have $50,000 in it after 20 years, assuming that the account
has nothing in it today?
* $1,129.56
* $1,219.65
* $4,719.65
* $1,291.56
* $2,191.65

Correct answer:
$1,219.65
On the BAII Plus, press 20 N, 7 I/Y, 0 PV, 50000 FV, CPT PMT. On the HP12C, press 20 n, 7 i, 0 PV,
50000 FV, PMT. Note that the answer will be displayed as a negative number.
------------------------------
An investment of $100 grows in five years to $205. The investor observes that the annual arithmetic
* 4.32%
* 15.44%
* 17.84%
* 13.93%
* 8.33%

Correct answer:
15.44%
------------------------------
What is the present value today of these annual cash flows: $1,000, $2,000, $3,000? Assume the first
* $2,304.67
* $2,754.32
* $4,815.93
* $4,000.00
* $4,104.98

Correct answer:
$4,815.93
HP12C, press these keys: 0 BlueShift CFo 1000 BlueShift CFj 2000 BlueShift CFj 3000 BlueShift CFj.
Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the
top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
performance?
* 1.111.
* 0.583.
* 1.000.
* 1.583.

Correct answer:
1.000.
of portfolio return. In our case, we have (19% - 7%) / 12% = 12/12 = 1.000.
------------------------------
A normal distribution has a mean of 4.1 and a standard deviation of 2.3. The probability that a value
from this distribution will be negative equals ________.
* 0.0206
* 0.0375
* 0.0121
* 0.4625

Correct answer:
0.0375
deviation S equals z = (X-M)/S. in the present case, the z-value of X = 0 equals -4.1/2.3 = -1.78. Then,
the probability that a number Y is negative is the same as the probability of a z-value less than -1.78.
Using the Normal probability tables to get P(z < -1.78) is tricky because the table given in the assigned
text is only for positive values. To calculate the probability, use the fact that the standard normal
distribution is symmetrical about zero. Hence,
P(z < -1.78) = P(z > + 1.78) = 1.0 - 0.9625 = 0.0375.
------------------------------
A study of the opinion of designers with respect to the primary color most desirable for use in
executive offices showed that:

Red 92
Orange 86
Yellow 46
Green 91
Blue 37
Indigo 46
Violet 2
What is the probability that a designer does not prefer blue?

* 0.9075
* 1.0000
* 0.8850
* 0.7725

Correct answer:
0.9075
P(Blue) = 37/400. P(not blue) = 1 - 37/400 = 0.9075.
------------------------------
If you deposit $2,345 into an account paying 6.5% per year simple interest, how much interest will be
* $101.62
* $14.09
* $309.68
* $94.64
* $122.65
press 2345 x 0.065 x 8 divide 12 = to see the answer. On the HP12C, press 2345 ENTER 0.065 x 8 x
12 divide to see the answer.
------------------------------
* $2,072.34
* $1,587.85
* $2,487.15
* $1,330.55
* $1,857.58
------------------------------
The sum of the squares of 65 observations equals 862. The sum of the observations equals 93. The
sample standard deviation of the observations equals ________.
* 11.21
* 1.43
* 3.37
* 4.96

Correct answer:
3.37
For N observations, it is easy to show that
sample variance*(N-1) = (sum of squares) - N*(mean^2)
Hence, in this case, sample variance = (862 - 65*(93/65)^2)/64 = 11.39. The standard deviation then
equals sqrt(11.39) = 3.37
Note: You should be careful about the difference between population variance and sample variance.
The formula for population variance is:
population variance*N = (sum of squares) - N*(mean^2)
You can expect an exam question which asks for population variance, with the choices given
containing both the population and the sample variances or vice versa.
------------------------------
Which of the is/are true?
I. The probability of type II error equals 1 - significance level.
II. A higher significance level is makes it easier to reject a null hypothesis.

III. Minimizing the chance of a Type I error minimizes the probability of Type II error.
IV. The higher the probability of Type II error, the higher is the chance that the alternative will be
accepted when it is true.
* II & IV
* IV only
* I & IV
* III & IV
* II only
* I only
* I, II & IV
* III only
The probability of Type I (not type II) error equals 1 - the significance level.
The significance level represents an upper bound on the probability that the null hypothesis is true
given the observed sample. The higher this level is set, the easier it is to say that the null is false
(though the probability that you are making a mistake in rejecting the null also becomes higher!).
Type I and Type II errors represent two different types of errors and are not directly related. A
relationship like (III) appears tempting but is not true.
For the purposes of CFA Level I exam, (IV) can be taken to be true, though technically, it is not entirely
accurate. It holds only if the alternative hypothesis is exactly complementary to the null hypothesis i.e.
the null hypothesis and the alternative hypothesis span the entire range of values that the variable
being tested can take. If you set up the alternative hypothesis incorrectly, then rejection of the null
does not necessarily imply that the alternative is true; it could also imply that you have not taken all the
possibilities into consideration. For e.g., suppose a theory does not rule out the possibility that a
variable X can be negative but you mistakenly set up the hypotheses as Ho: X = 0, H1: X > 0. Then
clearly, even if you reject the null hypothesis, it does not imply that X can take only positive values.
Recognizing such mistakes in setting up a hypothesis test is crucial.
------------------------------
What single deposit could you make today in order to have $1,000,000 in 30 years, assuming it earns
* $403,512.59
* $115,024.60
* $9,523.23
* $43,682.82
* $37,441.83

Correct answer:
$37,441.83
On the BAII Plus, press 360 N, 11 divide 12 = I/Y, 0 PMT, 1000000 FV, CPT PV. On the HP12C,
press 360 n, 11 ENTER 12 divide i, 0 PMT, 1000000 FV, PV. Note that the answer is displayed as a
------------------------------
The probabilities and the number of automobiles lined up at a Lakeside Olds at opening time (7:30
a.m.) for service are:
Number Probability
1 0.05
2 0.30
3 0.40
4 0.25
On average, how many automobiles should Lakeside Olds expect to be lined up at opening?

* 1.
* 1.96
* 10.
* 2.85

Correct answer:
2.85
1*0.05 + 2*0.30 + 3*0.40 + 4*0.25 = 2.85.
------------------------------
A 95% confidence interval for a population parameter signifies which of the following?
I. 95% of similarly constructed intervals will contain the population parameter.
II. For a given sample size, 95% of the samples will have the sample statistic for the population
parameter lie within the specified confidence interval around the actual population parameter.
III. The confidence interval will correctly estimate the population parameter with a probability of 95%
* III only
* I, II & III
* I only
* II only
* I & II

Correct answer:
I & II
Note that III is incorrect since the confidence interval is a range estimate and hence, cannot represent
a point estimate of the population parameter itself.
------------------------------
The probability that a mutual fund will generate a positive return in the next 12 months is called:
* a fantasy.
Correct answer:
an unconditional probability.
An unconditional probability takes the form of P(A), the probability that an event (A) will happen. It is
unconditional because it is not conditioned on any other event.
------------------------------
For a positively skewed, unimodal distribution, which of the following relationships holds?
* mean < mode

* mode < median
* mean > median
* mean < median

Correct answer:
mean > median
In a positively skewed distribution, very large values are more common than correspondingly small
values. This skews the distribution to the right, moving the mean to the right of the median.
------------------------------
If alpha = .05 for a two-tailed test, how large is the acceptance area?
* .975
* .950
* .025
* .050

Correct answer:
.950
The acceptance region is the area in between the two critical values. In this case it is 1 - 0.05 = 0.95.
------------------------------
Which of the is/are false?
I. A high p-value is necessary to reject a null hypothesis.
II The higher the significance level, the greater is the chance that the null will be rejected when it is
false.
III. The higher the probability of Type II error, the higher is the chance of rejecting the null when it is
false.
* II & III
* I, II & III
* I only
* II only
* III only
* I & II

Correct answer:
I, II & III
You can think of the p-value as the maximum probability that the null hypothesis is true despite
observing the value of the test statistic that you have in the sample at hand. Thus, the lower the p-
value, the greater is your confidence in rejecting the null hypothesis.
The significance level represents an upper bound on the probability that the null hypothesis is true
given the observed sample and the testing procedure. Hence, if you reject the null at the 5%
significance level, for e.g., then the probability that the null is true despite your statistical evidence to
the contrary could be as high as 5% (but no more, under the assumptions of the test).
A Type II error refers to the event that we will fail to reject the null when it is false. The higher the
probability of a Type II error, the lower the chance of rejecting the null when it is false.
------------------------------
Mr. and Mrs. Jones live in a neighborhood where the mean family income is $45,000 with a standard
deviation of $9,000. Mr. and Mrs. Smith live in a neighborhood where the mean is $100,000 and the
standard deviation is $30,000. What is the relative dispersion of the family incomes in the two
neighborhoods?
* Jones 20%, Smith 30%

The coefficient of variation = (s*100)/mean. Jones: 9000*100/45,000 = 20%. Smith:

30,000*100/100,000 = 30%.
------------------------------
You have a portfolio of two assets, X and Y. The returns of X and Y follow a joint probability function
as follows: There is a 25% chance that X will return 16% and Y will return 10%; there is a 60% chance
that X will return 9% and Y will return 7%; and there is a 15% chance that Y will return 15% and X will
return 5%. Find the covariance of X and Y.
* 3.46%%
* 1.79%%
* -3.46%%
* -1.79%%

Correct answer:
-1.79%%
For a joint probability function, the covariance of X and Y is given by the formula: double summation
(over all X, and over all Y) of P(X,Y)*[X - E(X)]*[Y - E(Y)]. E(X) will be 25% * 16% + 60% * 9% + 15% *
5% = 4% + 5.4% + 0.75% = 10.15%. Similarly, we will find that E(Y) = 8.95%. Next, we plug these
values into our formula and obtain 25% * (16% - 10.15%) *(10% - 8.95%) + 60% (9% - 10.15%) * (7%
- 8.95%) + 15% (5% - 10.15%) * (15% - 8.95%) = -1.79%%.
------------------------------
Which is true of positively skewed distributions?
I. They are not symmetrical.

II. Their mean is larger than their median.
III. They are characterized by many small values and a few extreme values.
* I and II
* I and III
* II and III

Correct answer:
All are true of positively skewed distributions, so the answer is I, II, and III: None of the above is the
correct choice.
------------------------------
If you want $1,000,000 when you retire in 25 years, how much must you deposit each month,
beginning one month from today, if your funds will earn 9% per year, compounded monthly?
* $7,336.35
* $903.59
* $$29,848.16
* $891.96
* $29,848.16

Correct answer:
$891.96
Note that since the deposits are made monthly, there are 300 of them (25 x 12 = 300). On the BAII
Plus, press 300 N, 9 divide 12 = I/Y, 0 PV, 1000000 FV, CPT PMT. On the HP12C, press 300 n, 9
ENTER 12 divide i, 0 PV, 1000000 FV, PMT. Note that the answer will be displayed as a negative
------------------------------
If alpha equals 0.05 for a two-tailed hypothesis test, how large is the area of rejection in the upper or
right tail?
* 0.975
* 0.025
* 0.05
* 0.95

Correct answer:
0.025
If it is a two tailed test, then there is a similar size region in each tail. So 0.05/2 = 0.025.
------------------------------
Two sets of observations, A and B, each contain 160 observations. The variance of data in A equals
198.4 and that of the data in B equals 231.9. The two sets have the same mean. Then, A has a
________ dispersion and a ________ coefficient of variation.
* higher; higher
* lower; higher
* lower; lower
* higher; lower

Correct answer:
lower; lower
B has a higher variance and hence, a higher dispersion.
The coefficient of variation equals the standard deviation divided by the mean. Since A and B have the
same mean, B has a higher coefficient of variation.
------------------------------
If the null hypothesis that two means are equal is in fact true, where will 97% of the computed z-value
lie between?
* +/- 2.07
* +/- 2.33
* +/- 2.17
* +/- 2.58

Correct answer:
+/- 2.17
From the z tables, we can find 0.97/2 = 0.485, which corresponds to a z-value of +/-2.17.
------------------------------
The distribution of the annual incomes of a group of middle management employees approximated a
normal distribution with a mean of $37,200 and a standard deviation of $800. About 68 percent of the
incomes lie between what two incomes?
* $36,400 and $38,000
* $34,800 and $39,600
* $35,600 and $38,800
* $30,000 and $40,000
.68/2 = 0.34. The z value for 0.34 is 1. x = u +/- z*sigma. So x = 37200 +/- 1*800. e get x = 38,000 and
36,400.
------------------------------
What is the future value of $750 per year for 6 years, with the first cash flow occurring today, rather
* $5,364.97
* $4,500.00
* $5,740.52
* $6,209.48
* $5,293.55

Correct answer:
$5,740.52
small letters). Now press 6 N, 7 I/Y, 0 PV, 750 PMT, CPT FV. Place the calculator back into End mode
(the HP12C shows the word BEGIN in the display when in this mode). Then press 6 n, 7 i, 0 PV, 750
PMT, FV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG
------------------------------
In computing kurtosis, which of the following is true?
I. It raises the deviation from the mean to the fourth power.

II. The formula preserves the direction of the deviation.
III. Kurtosis measures how clustered the values in a distribution are to the mean.
* I, II, and III

* II and III
* I and III
Correct answer:
I and III
I is true. II is false because the fourth power of a negative number is not a negative number: -2 * -2 * -2
* -2 = +16. III is true.
------------------------------
An investor has a required rate of return of 5% per year. How much will he pay for a seven-year
ordinary annuity that pays $200 per year?
* $1,093
* $1,157
* $1,215
* $1,213

Correct answer:
$1,157
The value of the annuity = (200/0.05)*(1- 1/(1.05^7)) = 1,157
------------------------------
If the underlying theory does not suggest a particular direction for the value of an estimated variable, it
is appropriate to use a:

Correct answer:
a two-tailed test.
If there is no suggested directionality to the underlying variable, then you are interested in finding the
probability under the null hypothesis that you will find a value beyond a given distance from the null
value. For this, you need to use a two-tailed test.
------------------------------
In a binomial probability distribution,
* there are 2 distinct modes.

* the probability graph is bell-shaped and symmetrical.
* each trial can only take values between 0 and 1.
* each trial can take only two values.

Correct answer:
each trial can take only two values.
A binomial distribution with "N trials" arises when the same experiment is repeated N times. Each of
the trails is known as a "Bernoulli" trial. It is the Bernoulli trial which can only take two distinct values,
"success" and "failure." Each outcome of a binomial distribution with N trials is the string of N values
generated by the individual Bernoulli trials. Clearly, the binomial distribution with N trials can take 2^N
values, even though each individual trial can have only two outcomes.
It is important that you understand the difference between the binomial distribution and the underlying
Bernoulli trials themselves.
------------------------------
Which of the following are notations for the covariance between X and Y?
I. Cov(X,Y).
II. sigma_(X,Y)
III. [sigma_(X,Y)]^2.
* I only.
* II only.
* I and II.
* I and III.

Correct answer:
I and II.
I and II are both notations for covariance between X and Y.
------------------------------
A sample of size 225 is drawn from a population. The sample mean equals 876 and the variance of
the sample equals 5,924. The 85% confidence interval for the population mean is given by:
* [866.2; 884.6]
* [870.1; 882.2]
* [868.6; 883.4]
* [869.3; 882.7]

Correct answer:
[868.6; 883.4]
z*D/sqrt(N)].
In the present case, for the 85% confidence interval, the normal probability table gives z = 1.44. The
sample standard deviation equals sqrt(5924) = 76.97. Therefore, the confidence interval equals
[876 - 1.44*76.97/sqrt(225), 876 + 1.44*76.97/sqrt(225)] = [868.6, 883.4]
------------------------------
The seasonal output of a new experimental strain of pepper plants was carefully weighed. The mean
weight per plant is 15.0 pounds, and the standard deviation of the normally distributed weights is 1.75
pounds. Of the 200 plants in the experiment, how many produced peppers weighing between 13 and
16 pounds?
* 100
* 118
* 53
* 197

Correct answer:
118
z = (x-u)/sigma. z1 = 13 - 15/1.75 = -1.1429 and z2 = 16 - 15/1.75 = 0.5714. The respective areas for
those z-values are 0.3729 and 0.2157. Since they are on opposite sides of the mean, we add them up
to find the area in between which is 0.5886. Therefore, 0.5886*200 = 118.
------------------------------
If you deposit $1,500 into an account paying 6% per year, compounded quarterly, how much is in the
account after 60 months?
* $2,224.46
* $2,117.54
* $2,020.28
* $1,702.48
* $1,751.59

Correct answer:
$2,020.28
There are 20 quarters in 60 months (60 divide 3 =). On the BAII Plus, press 20 N, 6 divide 4 = I/Y,
1500 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 6 ENTER 4 divide i, 1500 PV, 0 PMT, FV. Note
that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y
set to 1.
------------------------------
BeigeBox, a computer manufacturer, can construct computer systems with any one of 4 processors, 2
memory configurations, 3 hard drives, 2 monitors, 2 keyboards, and 2 CD drives. How many unique
configurations of computer systems can BeigeBox construct?
* 192.
* 96.
* 384.
* 64.
n_1 options in one aspect, n_2 in another, and so on, up to n_k, is n_1 * n_2 * ... * n_k. In this case,
the number of combinations is 4*2*3*2*2*2 = 192.
------------------------------
In a beer taste study involving the ExtraFerm lager beer, the following responses were recorded:
Response Frequency
Great taste 103
Okay taste 46
Bad taste 64
The probability that a randomly selected beer drinker will NOT find ExtraFerm to be bad tasting is
calculated from these data to be:
* 0.22
* 0.30
* 0.70
* 0.78

Correct answer:
0.70
The probability that a randomly selected beer drinker will find ExtraFerm to be bad tasting is estimated
from the above data as 64/(64 + 46 + 103) = 0.3. Therefore, the probability that a randomly selected
beer drinker will NOT find ExtraFerm to be bad tasting equals 1 - 0.3 = 0.7. We could also have
calculated this probability as (103 + 46)/(64 + 46 + 103) = 0.7
Note that given a frequency distribution, the estimated probability of a particular class/event occurring
equals the relative frequency of that class.
------------------------------
A derivative security pays $100 if the Dow Jones Industrial Average shows a 15% return over the next
year and does not pay anything of the return is lower. If the security costs $45 and its expected return
is 30%, what's the probability that the Dow Jones return will exceed 15%?
* 39.87%
* 58.51%
* 41.49%
* 61.22%

Correct answer:
58.51%
If p is the probability of the Dow Jones return exceeding 15%, then the expected total return on the
derivative security is (p * 100 + (1-p)*0)/45 = 2.222p. Since the expected return is given to be 30%, we
get 2.22p = 1.3. Therefore, p = 1.3/2.222 = 58.51%
------------------------------
A bottling company offers three kinds of delivery services-instant, same day and within five days. The
profit per delivery varies according to the kind of delivery. The profit for an instant delivery is less than
the other kinds because the driver has to go directly to a grocery store with a small load and return to
the bottling plan. To find out what effect each type of delivery has on the profit picture, the company
has made the following tabulation based on deliveries for the previous quarter.
Type of Number of Deliveries Profit per Delivery

Delivery During the Quarter
Instant 100 $70

Same day 60 $100
Within five days 40 $160
What is the weighted mean profit per delivery?
* $97
* $72
* $142
* $100
(100*70)+(60*100)+(40*160) = 1940. Mean is 1940/200 = 97
------------------------------
How much must you deposit today in order to withdraw $1,500 in 1 year, $400 in 2 years and $1,500
in 4 years, assuming your money earns 6% per year, compounded annually?
* $2,771.03
* $2,821.95
* $2,959.23
* $3,029.49
* $404.92

Correct answer:
$2,959.23
Solve this question by working 3 compound interest problems. On the BAII Plus, press 1 N, 6 I/Y, 0
PMT, 1500 FV, CPT PV, which yields $1,415.09. Then press STO 1. Then press 2 N, 400 FV, CPT
PV, which yields $356.00. Then press + RCL 1 = STO 1. Then press 4 N, 1500 FV, CPT PV, which
yields $1,188.14. Then press + RCL 1 = to see the answer. On the HP12C, press 1 n, 6 i, 0 PMT,
1500 FV, PV. Then press STO 1. Then press 2 N, 400 FV, PV. Then press RCL 1 + STO 1. Then
press 4 n, 1500 FV, PV. Then press RCL 1 + to see the answer. Note that the answer will be
------------------------------
A normally distributed variable has a mean of 45. If 95% of the observations on the variable fall
between 30 and 60, the standard deviation of the variable is approximately ________.
* 7.50
* 30.3
* insufficient information
* 15.0

95% of the observations on a normally distributed variable lie within about two standard deviations of
the mean. The standard deviation is then (45-30)/2 = 7.5.
------------------------------
Given the following distribution regarding the cost of textbooks:
Cost of Textbooks Number
$25 - $34 2
$35 - $44 5
$45 - $54 7
$55 - $64 20
$65 - $74 16
What is the relative class frequency for the $25 - $34 class?
* 10%
* 2%
* 5%
* 4%

Correct answer:
4%
The relative frequency is given by 2/50 = 0.04 = 4%
------------------------------
If the underlying theory suggests that the value of an estimated variable is greater than a particular
number, it is appropriate to use:


Correct answer:
a right-tailed test.
When an observation is made and we see a value greater than the threshold suggested by the theory,
we would like to known the probability of getting the larger value due simply to chance rather than to
the event being driven by the theory. For this, we need to known the right-tail probabilities under the
null hypothesis.
------------------------------
What monthly payment, beginning next month, is required over the next 48 months to pay off a
$10,000 debt today, if interest is charged at 10% per year, compounded monthly?
* $253.63
* $266.67
* $216.02
* $270.54
* $400.54
------------------------------
I. Doubling every single value in a sample doubles the sample mean.
II. Adding a constant to each value in a sample leaves the mean unchanged.
III. The mean of a sample decreases as the number of observations increases.
* I only
* I & III
* I, II & III
* II only
* III only
* II & III
Adding a constant to each value in a sample increases the mean by the same constant. III is incorrect.
As the number of observations increases, it is the expected difference between the sample mean and
the population mean that decreases.
------------------------------
weight.
Weight % of Total
Underweight 2.5
Satisfactory 90.0
Overweight 7.5
What is the probability of selecting and finding that all three of them are underweight?

* 0.0004218
* 0.075
* 0.0000156
* 0.0000001
Correct answer:
0.0000156
P(all three underweight) = 0.025*0.025*0.025 = 0.0000156.
------------------------------
Jack wants to retire a millionaire. If he is 30 years old today and already has $30,000 in the bank, what
monthly payment would he need to make beginning one month from today and continuing until he
* $222.86
* $139.04
* $503.26
* $470.98
* $238.95
------------------------------
A national manufacturer of unattached garages discovered that the distribution of the lengths of time it
takes two construction workers to erect the Red Barn model is approximately normally distributed with
a mean of 32 hours and a standard deviation of 2 hours. What percent of the garages take between
32 and 34 hours to erect?
* 76.71%
* 16.29%
* 34.13%
* 3.14%

Correct answer:
34.13%
z = (x-u)/sigma. z1 = 32 - 32/2 = 0 and z2 = 34 - 32/2 = 1. From the z tables, z = 0 and z = 1 are 0 and
0.3413 respectively. Therefore the area under the curve is 0.3413.
------------------------------
An investor faces the following investment scenarios:
Scenario Probability Return

Bull market 60% 30%
Neutral market 30% 7%
Market crash 10% -25%
The investor's expected rate of return is ________.
* 12.45%
* 17.6%
* 16.2%
* 19.3%

Correct answer:
17.6%
The expected return equals 0.6 * 30% + 0.3 * 7% + 0.1 * (-25%) = 17.6%.
------------------------------
"Statistical inference" refers to the process of:
* drawing conclusions about the entire population based on the statistical characteristics of a sample.
* drawing inferences about the characteristics of a distribution based on population data.
* predicting the statistical characteristics of a randomly drawn sample based on the knowledge about
the entire population.
* selecting a probability sample and the statistical method used to analyze it.
Note that statistical inference is always carried out with sample data, since you never have access to
the entire population (if you did, you would no longer call it "inference"!).
------------------------------
A study of the scores on an in-plant course in management principles and the years of service of the
employees enrolled in the course resulted in these statistics:
Mean test score was 200 with a standard deviation of 40

Mean number of years of service was 20 years with a standard deviation of 2 years
In comparing the relative dispersion of the two distributions, what are the coefficients of variation
(CV)?
* Test 50%, service 60%


Correct answer:
Test 20%, service 10%
The respective CVs are found from (s*100)/mean. Test: 40*100/200 = 20% and Service: 2*100/20 =
10%.
------------------------------
How long will it take money to double at 9.5% per year, compounded annually?
* 28.03 years
* 1.29 years
* 10.14 years
* 7.64 years
* 4.1 years

Correct answer:
7.64 years
To solve this question, choose a future value that is twice the size of the present value. The actual
number will not matter. On the BAII Plus, press 9.5 I/Y, 1000 PV, 0 PMT, 2000 +/- FV, CPT N. On the
HP12C, press 9.5 i, 1000 PV, 0 PMT, 2000 CHS FV, n. Note that the HP12C will show 8 for the
answer. The answer will be the same as long as the FV is twice as large as the PV.
------------------------------
Which measures of central tendency are not affected by extremely low or extremely high values?

* Geometric mean and mean
* Mean and mode
* Mode and median
* Mean and median

Correct answer:
Mode and median
Both are concepts which are based on the position of the observations when ordered (median) and
the number of most frequent occurrences (mode). They are measures which are not affected by
extreme values.
------------------------------
In a distribution that is right skewed:
* the median is larger than the mean.

* large negative deviations dominate large positive deviations.
* the mean is positive.
* large positive deviations dominate large negative deviations.

Correct answer:
large positive deviations dominate large negative deviations.
------------------------------
The mean of a normal probability distribution is 500 and the standard deviation is 10. About 95 percent
of the observations lie between what two values?

* 475 and 525
* 480 and 520
* 350 and 650
* 400 and 600

Correct answer:
480 and 520
95% lie between plus and minus two standard deviations of the mean.
------------------------------
I. If P(A or B) = P(A) + P(B), A and B are independent

II. If P(A and B) = P(A).P(B), A and B are mutually exclusive
III. If P(A and B) = P(A) + P(B), P(A) = P(B) = 0
* III only
* II & III
* I only
* II only
* I & II
If A and B are independent, P(A and B) = P(A).P(B) and vice versa. If A and B are mutually exclusive,
P(A and B) = 0.
Note that P(A or B) = P(A) + P(B) - P(A and B). Hence, if P(A and B) = P(A) + P(B), the P(A or B) = 0.
This implies that neither A nor B can occur, giving P(A) = P(B) = 0.
------------------------------
Manufacturers were subdivided into groups by volume of sales. Those with more than $100 million in
sales were classified as Class A large; those from $50 to $100 million as Class A medium size; and
those between $25 and $50 million, and so on. Samples were then selected from each of these
groups. What is this type of sampling called?
* Stratified random
* Simple random
* Convenience
* Panel
This is stratified random sampling. It is a method of selecting a random item from each section of the
population. The randomness comes from the random selection from a particular section. Stratified
refers to the division of the sections.
------------------------------
A study of 200 stamping firms revealed these incomes after taxes:
Income After Taxes Number of Firms

Under $1 million 102
$1 million up to $20 million 61
$20 million and more 37
What is the probability that a particular firm selected has $1 million or more in income after taxes?
* 0.25
* 0.49
* 0.00
* 0.51

Correct answer:
0.49
There are 200 firms altogether. 98 firms have more than a million in income. So 98/200 = 0.49
------------------------------
Fifteen accounting majors had an average grade of 90 on a finance exam. Seven marketing majors
averaged 85, while ten finance majors averaged 93 on the same exam. What is the weighted mean for
the 32 students taking the exam?

* 89.33
* 89.48
* Impossible to determine without more information
* 89.84

Correct answer:
89.84
(15*90)+(7*85)+(10*93) = 2875. Therefore, the weighted mean will be 2875/32 = 89.84.
------------------------------
The probability that a value from a normal distribution will be less than 4 equals 83%. If the distribution
has a mean of 2.2, the standard deviation of the distribution must be:
* 2.21
* 0.96
* 1.89
* 3.77
Correct answer:
1.89
Using the Normal probability tables, the z-value of the observation, X, which can be exceeded with a
probability of 17% equals 0.955. We are given that X = 4. Now, the z-value of a selected observation,
X, from a normal distribution with mean M and standard deviation S equals z = (X-M)/S. Therefore,
0.955 = (4 - 2.2)/S. This gives S = 1.885.
------------------------------
The significance level in hypothesis testing refers to the probability that we will:

* Accept the alternative when it is true.

Correct answer:
Reject the null when it is true.
Note that the significance level is the same as the probability of making a Type I error. A Type I error
refers to the event that we will reject the null when, in fact, it is true. Clearly, lower significance levels
are better, all else equal.
------------------------------
What annual simple interest rate would cause a $105 deposit to grow to $125 in 15 months?
* 7.89%
* 15.24%
* 20%
* 13.14%
* 14.17%

Correct answer:
15.24%
itself. Note that the I (interest) is equal to 20 (125 - 105). Note also that the time component T of the
formula is 15/12. On the BAII Plus, press 20 divide 105 divide 15 x 12 = to see the answer. On the
HP12C, press 20 ENTER 105 divide 15 divide 12 x to see the answer.
------------------------------
How many monthly payments of $50, beginning next month, are needed to pay off a debt of $700, if
interest accrues at 8% per year, compounded monthly?
* 18.60
* No solution/Error
* 11.48
* 12.80
* 14.75

Correct answer:
14.75
On the BAII Plus, press 8 divide 12 = I/Y, 700 PV, 50 +/- PMT, 0 FV, CPT N. On the HP12C, press 8
ENTER 12 divide i, 700 PV, 50 CHS PMT, 0 FV, n. Note that the HP12C will display 15 as the answer.
------------------------------
What quarterly deposit do you need to make each quarter, starting next quarter, over the next 10
years in order to have a balance of $15,000 in your account, assuming the account starts with $1,000
in it and that the interest rate is 6% per year, compounded quarterly?
* $242.98
* $1.23
* $1,293.08
* $203.41
* $30.46
There are 40 quarters in 10 years (10 x 4 =). The payment to be solved for as well as the original
$1,000 balance can be viewed as deposits into the account and hence given the same sign. The
$15,000 amount at the end of the timeframe should be of the opposite sign. On the BAII Plus, press
40 N, 6 divide 4 = I/Y, 1000 PV, 15000 +/- FV, CPT PMT. On the HP12C, press 40 n, 6 ENTER 4
divide i, 1000 PV, 15000 CHS FV, PMT. Note that the answer will be displayed as a negative number.
------------------------------
Year 0: <$15,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5 $18,000? (Note
that the <> are used to indicate a negative number).
* $2,947.49>
* $2,581.02
* <$77.41>
* $2,442.21
* $2,414.37

Correct answer:
$2,581.02
DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 20 ENTER
DownArrow CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 2000 BlueShift CFj 0
------------------------------
For the normal distribution, the mean plus and minus 1.96 standard deviations will include about what
percent of the observations?

* 50%
* 68%
* 95%
* 99.7%

Correct answer:
95%
95% of the are under the curve will lie within plus and minus 2 standard deviations of the mean.
------------------------------
Assume you buy a car for $18,000 today and agree to pay $250 a month, beginning next month, for 5
years with a final payment also due 5 years from today to pay off any remaining balance. How large
will that final payment be, if interest accrues at 2.9% per year, compounded monthly?
* $3,000.00
* $4,683.97
* $4,280.77
* $9,690.32
* $1,204.41

Correct answer:
$4,683.97
There are 60 months in 5 years. This is a problem known as a balloon payment. On the BAII Plus,
press 60 N, 2.9 divide 12 = I/Y, 18000 PV, 250 +/- PMT, CPT FV. On the HP12C, press 60 n, 2.9
ENTER 12 divide i, 18000 PV, 250 CHS PMT, FV. Note that the answer will be displayed as a
------------------------------
An investment of $1,000 grows to $1,974 in six years at a 12% per year annually compounded rate.
What's the total interest on interest earned over this period?
* $324
* $194
* $254
* $974

Correct answer:
$254
If the interest were a simple interest rate (not compounded), the amount at the end of 6 years would
be 1,000*(1+0.12*6) = 1,720. Thus, the difference, 1,974 - 1,720 = 254 is the interest on interest
component.
------------------------------
After a sterling year, your boss has decided to reward you. She has offered you three alternatives:
Take $28,000 right now.

Take $2,500 bonus per month for the next 12 months, starting next month.
Take $16,000 at the end of six months and another $15,000 at the end of the year.
If your discount rate is 6% per year on a monthly compounded basis, how much is the present value of
your bonus?
* $29,656
* $29,047
* $28,000
* $30,176
The discount rate per period (1 month) = 6%/12 = 0.5%. The present value of alternative B is (using
the annuity formula) 2,500/0.005*[1 - 1/1.005^12] = $29,047. The present value of alternative C is
trickier, since the rate you have been given is compounded monthly. Therefore, the PV of C is
16,000/1.005^6 + 15,000/1.005^12 = $29,656. So you should take alternative C and your bonus is
worth $29,656.
------------------------------
Excess kurtosis is a problem for investment researchers using normal distributions because:
* The likelihood of extreme outcomes will be overestimated.

* Historical returns are better modeled with platykurtic distributions.
* It is difficult to calculate.
* The likelihood of extreme outcomes will be underestimated.

Correct answer:
The likelihood of extreme outcomes will be underestimated.
Historical returns are better modeled with fat-tailed (or leptokurtic) distributions, not platykurtic ones. If
a researcher uses a normal distribution to model a fat-tailed distribution, the estimated probability of an
extreme outcome will be underestimated. Thus, the frequency of market crashes will be
underestimated, an underestimation of the volatility risk.
------------------------------
Which of the following best describes a type II error?
* The probability of incorrectly failing to reject the null hypothesis.

* (1 - the significance level).
* The probability of incorrectly rejecting the null hypothesis.
* The power of a test.
A type II error occurs when one incorrectly fails to reject the null hypothesis. In most cases, the
probability of a type II error is not expressly stated because the determination of this probability is
inherently difficult. A type II error is contrasted by a type I error, which is defined as the act of
incorrectly rejecting the null hypothesis.
------------------------------
I. The mean deviation can never be negative.

II. The range of a data set can never be negative.
III. The mean deviation is always less than the mean absolute deviation (MAD).
* I only
* I & II
* I, II & III
* III only
* II & III
* II only

Correct answer:
I & II
Range of a dataset = maximum value - minimum value. Therefore, the range can never be negative.
Also, since the mean deviation is the average of the absolute deviations from the mean, the MD can
never be negative, either. Finally, Mean deviation and mean absolute deviation are one and the same
thing.
------------------------------
What is the following table called?
Ages Number of Ages
20 - 29 16
30 - 39 25
40 - 49 51
50 - 59 80
60 - 69 20
70 - 79 8

* Ogive
* Histogram
* Frequency polygon

Correct answer:
Frequency distribution
The table above tallies the number of people within each age group. The tallies are then reported in
the second column and form the frequency of occurrences in each group. By doing so for every age
group, we have a distribution of the frequencies.
------------------------------
Which of the following is/are assumptions of a linear regression?
I. For every given value of the independent variable, the dependent variable is normally distributed.
II. The error terms are normally distributed with mean zero.
III. The error terms are statistically uncorrelated.
* I & III
* II & III
* III only
* I & II
* II only
* I only
* I, II & III

Correct answer:
I, II & III
For every given value of the independent variable, the dependent variable is normally distributed, the
error terms are normally distributed with mean zero, and the error terms are statistically uncorrelated.
------------------------------
Which value of r indicates the strongest correlation than 0.40?
* +0.48
* -0.50
*0
* -0.30

Correct answer:
-0.50
The bigger the absolute value of r, the stronger the correlation. The sign +/- just shows the direction,
not the strength.
------------------------------
If you deposit $202.50 today into an account paying 6% per year simple interest, how much interest
will you have earned in 2 years?
* $2.50
* $20.50
* $24.30
* $24.00
* 226.80

Correct answer:
$24.30
Since this is a simple interest question, the formula is I=PRT, with T here being 2, since the timeframe
is 2 years. On the BAII Plus, press 202.50 x 0.06 x 2 = to see the answer. On the HP12C, press
202.50 ENTER 0.06 x 2 x to see the answer. Since the question asks for the amount of interest
earned, the original deposit should not be added to this value.
------------------------------
If 68% of the observations on a normal distribution fall between -20 and + 60, the mean and the
standard deviation of the distribution are:
* 20,40
* 40,20
* 40,40
* 20,20
Since the normal distribution is symmetrical about the mean, the mean is equal to
(-20 + 60)/2 = 20.
Further, for a normal distribution, 68% of the observations lie within one standard deviation of the
mean. Therefore, the standard deviation equals 60-20 = 40.
------------------------------
If you owe a debt of $3,000 today and also owe $5,000 in 24 months, what single payment could you
* $8,024.17
* $7,751.62
* $7,980.86
* $8,000.00
* $9,041.93
$3,000 from today over to month 15 and add it to the $5,000 brought back from month 24 to month 15.
On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 3000 PV, 0 PMT, CPT FV, which yields $3,314.41.
Then press STO 1. Then press 9 N, 5000 FV, CPT PV, which yields $4,709.76. Finally press + RCL 1
= to see the answer. On the HP12C, press 15 n, 8 ENTER 12 divide i, 3000 PV, 0 PMT, FV. Then
press STO 1. Then press 9 n, 5000 FV, PV. Finally press RCL 1 + to see the answer. Make sure the
BAII Plus has the value of P/Y set to 1.
------------------------------
What monthly payment is required over the next 60 months to pay off a $12,500 debt today, if interest
is charged at 12% per year, compounded monthly?
* $316.02
* $270.54
* $296.67
* $3,467.62
* $278.06

Correct answer:
$278.06
Note that the answer will be displayed as a negative number.
------------------------------
year: Year 0: <$15,000>, Year 1: $8,000, Year 2: $8,000, Year 3: $1,000, Year 4: $4,000? (Note that
the <> are used to indicate a negative number).
* $2,077.49
* $1,589.11
* $1,774.26
* $1,981.21
* $1,104.37

Correct answer:
$1,774.26
P/Y value set to 1.
------------------------------
The wildlife department has been feeding a special food to rainbow trout fingerlings in a pond. A
sample of the weights of 40 trout revealed that the mean weight is 402.7 grams and the standard
deviation 8.8 grams. What is the point estimate?

* 10.0675
* 8.8
* 40
* 402.7

Correct answer:
402.7
------------------------------
Given the following points: (-2, 0), (-1,0), (1, 1) and (2, 3)
If the regression equation is Y' = 2 - .4X, what is the value of Y when X = -3?

* 3.2
* -10.0
* 0.8
* 14.0

Correct answer:
3.2
Y' = 2 - 0.4*(-3) = 2 + 1.2 = 3.2
------------------------------
What must you know to develop a binomial probability distribution?
* Probability of success
* Probability of success and number of trials
* Probability of success and number of successes
* Number of trials
* Number of successes

Correct answer:
Probability of success and number of trials
Binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. We need to know n and p. q = 1-p. r is the number of

successes which we determine ourselves.
------------------------------
The weights of a sample of crates ready for shipment to Laos are (in kilograms): 103, 97, 101, 106 and
103. What is the mean deviation?
* 2.4 kg
* 102.0 kg
* 0 kg
* 6.9 kg

The mean is 102. The mean deviation is the absolute values of the deviation from the mean. (1 + 5 + 1
+ 4 + 1)/5 = 12/5 = 2.4
------------------------------
What is the distribution with a mean of 0 and a standard deviation of 1 called?
* Binomial probability distribution

* Z-score
* Standard normal distribution

Correct answer:
Standard normal distribution
These values describe the standard normal distribution.
------------------------------
Suppose we set the criterion for the rejection of the null that is extremely stringent, assuring us that the
null will be definitely rejected. Then, which of the following is/are true?
I. The probability of a Type I error is zero.

II. The probability of Type II error is zero.
III. The significance level of the test is 1.
* II only
* I only
* II & III
* I & III

Correct answer:
II & III
A Type I error refers to the event that we will reject the null when, in fact, it is true. If the criterion is so
stringent that you always reject the null, then the probability of type I error is one. A Type II error refers
to the event that we will fail to reject the null when, in fact, it is false. If you always reject the null, then
the probability of type II error is clearly zero. Also remember that the significance level is the same as
the probability of making a Type I error. Hence, in this case, the significance level equals 100%.
------------------------------
Which of the following is/are true about a normal distribution?
I. It is a bimodal distribution.
II. It can be characterized completely by a single parameter.
III. It ranges from negative infinity to positive infinity.
IV. It is positively skewed.
* I only
* III only
* III only
* IV only
* II only
* II, III and IV
* II and III
* III and IV

Correct answer:
III only
A normal distribution is completely characterized by 2 parameters, mean and variance. It ranges from
negative infinity to positive infinity, has a single mode or peak (occurring at the mean), is symmetrical
about the mean and has zero skewness.
------------------------------
Assume a student received the following grades for the semester: History, B; Statistics, A; Spanish, C;
and English, C. History and English are 5 credit hour courses, Statistics a 4 credit hour course and
Spanish a 3 credit hour course. If 4 grade points are assigned for an A, 3 for a B and 2 for a C, what is
the weighted mean for the semester grade?
* 1.96
* 2.88
* 4.00
* 2.76
* 3.01

Correct answer:
2.76
The student has taken 17 credit hours. The weighted grades for each are: History:5*3 = 15. English:
5*2 = 10. Statistics: 4*4 = 16. Spanish: 3*2 = 6. Adding we have 15 + 10 + 16 + 6 = 47. Mean = 47/17
= 2.76
------------------------------
Suppose that you write an investment newsletter. You track 12 stocks, and you classify these stocks
into equal-sized categories of buy, sell, and hold. How many different ways can you classify these
stocks into those categories?
* 34,860.
* 36,540.
* 34,680.
* 34,650.

Correct answer:
34,650.
To answer this question, we need the formula for permutations that takes into account different ways
to label things. The number of ways that you can arrange n objects so that there are n_1 of one kind,
n_2 of another kind, and so on, up to n_k of a kth kind, is found by using the multinomial formula: n! /
[(n_1)! * (n_2)! * ... * (n_k)!]. In this case, your equally-sized categories will be 4 of each kind, 12 in all.
12! / (4!*4!*4!) = 34,650.
------------------------------
A random variable with a mean equal to 2.5 and a standard deviation of 2.0 has a coefficient of
variation equal to ________.
* zero
* -2.0
* 1.25
* 0.8

Correct answer:
0.8
The coefficient of variation equals the ratio of the standard deviation to the mean.
------------------------------
* $46,204.09
* $1,973,585,957
* $24,000.00
* $2,097.91
* $3,678.56
------------------------------
How many annual deposits of $1,000, beginning next year, would you need to make before you had
accumulated $30,000, if the money earns 8% per year, compounded annually? Assume the account
begins with a $0 balance.
* 15.90
* 25.51
* 5.58
* 5.19
* 21.41
On the BAII Plus, press 8 I/Y, 0 PV, 1000 PMT, 30000 +/- FV, CPT N. On the HP12C, press 8 i, 0 PV,
1000 PMT, 30000 CHS FV, n. Note that the HP12C will display 16 as the answer.
------------------------------
You are examining a portfolio composed of 10% money-market investments, 30% bonds, and 60%
and the return on stocks was -11%. What is the portfolio weighted average return?
* -3.00%.
* -4.50%.
* -3.25%.

Correct answer:
the ith asset. Here, we get a weighted mean of 0.10 * 0.04 + 0.30 * 0.09 + 0.60 * -0.11 = -3.50%. None
of these answers is correct.
------------------------------
Which of the following statements regarding hypothesis testing is false?
* The F-statistic is used in multivariate quantitative analysis.

* If the null hypothesis is rejected, then it is said the result is "not statistically significant."
* If the population standard deviation is unknown, then the standard error of the estimate is found by
dividing the sample standard deviation by the square root of "n."
* The power of a test is usually equal to (1 - the probability of a Type II error).
* In quantitative analysis, the Type I error is defined as the act of incorrectly rejecting the null
hypothesis.

Correct answer:
If the null hypothesis is rejected, then it is said the result is "not statistically significant."
Remember that when the null hypothesis is rejected, the results of the regression are said to be
"statistically significant." In other words, the analyst has enough reason to assume that the results of
the analysis are valid at the given level of significance. When the analyst fails to reject the null
hypothesis, then the result is said to "not be statistically significant." While this specification may seem
excessive, it is nevertheless important. The remaining answers are all correct.
------------------------------
What annual interest rate, compounded annually, would cause a series of 20 deposits of $1,000 to
* 6.77%
* 8.03%
* 7.23%
* 5.09%
* 14.98%
PV, 1000 PMT, 40000 CHS FV, i. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
In a statistical regression estimation, the R-square is found to be 63% and the slope coefficient is 0.6.
The correlation coefficient between the dependent and the independent variables is ________.
* 0.60
* 0.63
* 0.24
* 0.79

Correct answer:
0.79
In a univariate regression, the correlation coefficient is the square root of the R-square. Hence,
correlation coefficient = sqrt(0.63) = 0.79
------------------------------
Which approach to probability is exemplified by the following formula?
Prob. of Event happening = No. of times event occurred in the past/Total no. of observations.
* A priori approach
* Relative frequency approach
* Subjective approach

Correct answer:
Relative frequency approach
When we based the probability on the number of times the events has occurred in the past over the
total number of observations, we are using the relative frequency approach.
------------------------------
Richard Eisenberg, a quantitative analyst with Middle Road Brokerage, has been instructed to perform
a statistical analysis to determine the relationship between the volatility of smaller-cap stocks and the
quarterly performance of a series of smaller-cap mutual funds. Mr. Eisenberg begins his assignment
by formulating and stating a hypothesis. Next, he identifies the appropriate test statistic and the
probability distribution for the series. Mr. Eisenberg then progresses to specifying the significance level
for the hypothesis test. Now that the first three steps of a hypothesis test have been completed, Mr.
Eisenberg should proceed to which of the following? Choose the best answer.

* Testing for multicolinearity

Correct answer:
Stating the decision rule

------------------------------
If you owe $2,000 today and pay for it by making 20 monthly payments with the first payment made
immediately (today), what is the size of this monthly payment, if interest accrues at 7% per year,
compounded monthly?
* $193.55
* $191.63
* $209.48
* $105.62
* $106.24

Correct answer:
$105.62
small letters). Now press 20 N, 7 divide 12 = I/Y, 2000 PV, 0 FV, CPT PMT. Place the calculator back
into End mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying
BGN, press 2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the
HP12C, press BlueShift END, which is the blue function on the front of the 8 digit key. This places the
HP12C into Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then
press 20 n, 7 ENTER 12 divide i, 2000 PV, 0 FV, PMT. To place the HP12C back into ordinary annuity
mode (or END mode), press BlueShift BEG (the blue function written on the front of the 7 digit key).
Note that the answer is displayed as a negative number. Make sure the BAII Plus has the value of P/Y
set to 1.
------------------------------
How much would you have in a savings account 12 months from now if you start with a balance of
$1,000 today, make a deposit of $2,000 in 6 months and make another deposit 6 months after that of
$3,000? Assume that interest accrues at 6% per year, compounded monthly.
* $6,000.00
* $5,500.00
* $6,122.43
* $7,684.42
* $5,777.55

Correct answer:
$6,122.43
Find the answer to this question by solving a couple of compound interest problems. Move the $1,000
to month 12, then move the $2,000 forward 6 months to month 12, then add $3,000. On the BAII Plus,
press 12 N, 6 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,061.68. Then press STO 1.
Then press 6 N, 2000 PV, CPT FV, which yields $2,060.76. Then press + RCL 1 =. Make this number
positive by pressing +/- and then press + 3000 = to see the answer. On the HP12C, press 12 N, 6
ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO 1. Then press 6 N, 2000 PV, FV. Then
press RCL 1 +. Make this number positive by pressing CHS and then press 3000 + to see the answer.
------------------------------
A portfolio consists of a six-year annuity paying $250 a year and a perpetuity that pays $300 a year.
The payments start at the end of the year. With a discount rate of 9% per year, the portfolio is worth:
* $5,210
* $3,333
* $4,454
* $4,768

Correct answer:
$4,454
The value of the perpetuity is 300/0.09 = 3,333.

The annuity is worth (250/0.09)*(1-1/(1.09^6)) = 1,121
The portfolio is thus worth 1,121 + 3,333 = 4,454
------------------------------
If all the plots on a scatter diagram lie on a straight line, what is the standard error of estimate?
* Infinity
*0
* +1
* -1

Correct answer:
0
The standard error of estimate basically measures the difference between the points and the straight
line.
------------------------------
You wish to rank n different securities according to the deviation of the market price from your
estimate of their intrinsic value. You are curious how many different ways this can come out. The
counting method you should use is:


Correct answer:
The factorial method allows you to determine the number of ways of arranging n things. Initially, there
are n choices for the first item, then n-1 for the second, and so on. The number of combinations is
therefore n! = n * (n-1) * (n-2) * (n-3) * ... * (1).
------------------------------
semiannually?
* 6.87%
* 7.05%
* 7.12%
* 7.02%
* 7%

Correct answer:
7.12%
------------------------------
A random variable, X, has a mean of 12 and a standard deviation of 14. If another variable, Y, is
defined by Y = 2X - 3, the coefficient of variation of Y is ________.
* 0.75
* 1.33
* 1.19
* 1.17
Correct answer:
1.33
You should remember two important points:
1. Multiplying a random variable by a constant multiplies its mean and standard deviation by the same
constant.
2. Adding a constant to a random variable increases the mean by the same constant but leaves the
standard deviation unchanged.
Using these two rules, the mean of Y equals 2 * 12 - 3 = 21. The standard deviation of Y equals 2 * 14
= 28. The coefficient of variation equals the ratio of the standard deviation to the mean. Thus, the
coefficient of variation of Y equals 28 / 21 = 1.33.
------------------------------
What annual interest rate, compounded annually, will cause a deposit of $550 to become $1,475 in 15
years?
* 0.55%
* 5.50%
* 8.60%
* 17.88%
* 6.80%

Correct answer:
6.80%
On the BAII Plus, press 15 N, 550 PV, 1475 +/- FV, 0 PMT, CPT I/Y. On the HP12C, press 15 n, 550
PV, 1475 CHS FV, 0 PMT, i.
------------------------------
A trial generates only two results, "success" and "failure." The variance of the number of failures in 20
trials equals 2.35. The probability of success on a given trial equals ________.
* 0.66
* 0.136
* 0.231
* 0.452

Correct answer:
0.136
For a binomial distribution with N trials, with the probability of success = p in each trial, the variance
equals Np(1-p). Hence, 20*p*(1-p) = 2.35. Solving this gives quadratic equation gives p = 0.136.
------------------------------
* $607.27
* $700.45
* $1,330.48
* $949.93
* $571.06

Correct answer:
$700.45
------------------------------
A statistician is working with the following dataset:
129, 162, 159, 192, 142, 195, 203, 177, 138, 187, 149, 123, 146, 169, 162, 191, 155, 146, 176, 182,
174, 190, 168.
The relative frequency in the frequency class 150-175 equals ________.
* 0.30
* 0.29
* 7.00
* 0.34
There are 23 observations. Of these, 7 lie in the 150-175 class.
relative frequency = class frequency/total # of observations
= 7/23 = 0.30
Remember that relative frequency is always a number between zero and one.
------------------------------
An investment of $275 grows to $400 in 3 years. The holding period return is:
* 1.13
* 0.6875
* 1.455
* 1.455

Correct answer:
1.455
The holding period return (HPR) is 400 / 275 = 1.455

------------------------------
If the variance of a probability distribution was computed to be 3.6, what is the standard deviation?
* 6.0
* 1.9
* 0.6
* 12.96

Correct answer:
1.9
Standard deviation is the square root of the variance.
------------------------------
A price-linked derivative security pays $300 if the oil price over the next year increases by more than
5%, an event that can happen with a 60% probability. Otherwise, it pays $50. If the expected return on
the security is 15%, how much does the security cost?
* $174
* $180
* $168
* $191
The expected payoff on the security equals 0.6 * 300 + 0.4 * 50 = 200. Since the expected return is
15%, the security must cost 200/1.15 = $173.9
------------------------------
* 27.84%
* 24.92%
* 41.15%
* 33.58%
* 26.43%

Correct answer:
33.58%
value set to 1.
------------------------------
The formula for joint probability is given by:
* P(AB) = P(A | B) * P(A)

* P(AB) = P(A | B) / P(B)
* P(AB) = P(A | B) * P(B)
* P(AB) = P(A | B) / [P(B) * P(A)]

Correct answer:
P(AB) = P(A | B) * P(B)
A joint probability takes the form of P(AB) = P(A | B) * P(B). Note that this is just a rearranged form of
the formula for conditional probability.
------------------------------
What does the coefficient of determination equal if r = 0.89?
* 0.94
* 0.89
* 0.06
* 0.79

Correct answer:
0.79
The coefficient of determination is the r-squared.
------------------------------
The semi-logarithmic scale is so named because:
* Values on the x-axis are equally spaced if their logarithms are the same.
* Values on the y-axis are equally spaced if their logarithms are the same.
* Values on the x-axis are equally spaced if there are equal differences in their logarithms.
* Values on the y-axis are equally spaced if there are equal differences in their logarithms.

Correct answer:
Values on the y-axis are equally spaced if there are equal differences in their logarithms.
Values on the y-axis are equally spaced if there are equal differences in their logarithms. Thus, 100 is
as close to 10, as 10 is to 1. (In base 10, log 100 - log 10 = 1, log 10 - log 1 = 1; in base e, the
differences are also the same, each equal to 2.302.)
------------------------------
The annual commissions per salesperson employed by a manufacturer of light machinery averaged
$40,000 with a standard deviation of $5,000. What percent of the sales persons earn between
$32,000 and $42,000?
* 60.06%
* 34.13%
* 39.94%
* 81.66%
z = (x - u)/sigma. z1 = (32000 - 40000)/5000 = -1.6. z2 = (42000 - 40000)/5000 = 0.4. The area under
the curve for the respective z values are 0.4452 and 0.1554. Since the earnings are on the opposite
sides of the mean, we add them up 0.4452 + 0.1554 = 0.6006.
------------------------------
The weights of cans of fruit are normally distributed with a mean of 1,000 grams and a standard
deviation of 50 grams. What portion of the cans weigh 860 grams or less?

* 0.8400
* 0.0001
* 0.0100
* 0.0026

Correct answer:
0.0026
z = (x-u)/sigma = 860 - 1000/50 = -2.8. For z = 2.8, the area is 0.4974. So 1.0 - 0.9974 = 0.0026.
------------------------------
You are examining the return on equity ratios of the nation's commercial airlines. You have calculated
the mean ROE to be 8%, and the sum of the squared ROEs is 0.27. Assuming there are 30
commercial airlines, what is the population standard deviation of ROEs in this industry?
* 5.1%.
* 7.9%.
* 8.0%.
* 5.0%.
The population standard deviation is the positive square root of the population variance. The
population variance is equal to the sum of the squared differences between each population member
and the population mean, divided by the number of items in the population. There is, however, an
equivalent alternate formula that is more often used for large amounts of calculation. It is equal to the
average squared observation less the squared mean. In this case, we have the average squared
observation will be 0.27 / 30 = 0.009, less the squared mean of 8%. We have 0.009 - 0.0064 = 0.0026
= 26%%. The square root of this number, 5.1%, will be the population standard deviation.
------------------------------
The U.S. Department of Education reported that for the past seven years 4,033, 5,652, 6,407, 7,201,
8,719, 11,154, and 15,121 people received bachelor's degrees in computer and information sciences.
What is the mean annual number receiving this degree?

* About 6,217
* About 8,327
* About 15,962
* About 12,240

Correct answer:
About 8,327
(4033 + 5652 + 6407 + 7201 + 8719 + 11154 + 15121)/7 = 8327
------------------------------
What do we call the conditions under which the null hypothesis is not rejected?
* Critical value
* Decision rule
* Alternate hypothesis
* Test statistic

Correct answer:
Decision rule
The decision rule lays out the conditions under which we may compare the z values and decide
whether or not to reject the hypothesis.
------------------------------
If the alternative hypothesis states that u(Mu) > 6,700, what is the rejection region for the hypothesis
test?
* Center
* Lower tails
* Upper tail
* Both tails

Correct answer:
Upper tail
Since the alternative is that Mu is bigger than the mean, then it will be located at the upper tail.
------------------------------
A light bulb manufacturer would like to supply only those bulbs which have a life of 2,000 hours or
more. Otherwise, it wants the bulbs to be rejected at the assembly line. The statistician hired by the
bulb manufacturer is trying to frame the situation as a hypothesis testing problem. He should specify
the null and alternate hypothesis as:
* Ho: average life < 2,000; H1: average life > 2,000
* Ho: average life = 2,000; H1: average life > 2,000
* Ho: average life = 2,000; H1: average life < 2,000
* Ho: average life >= 2,000; H1: average life < 2,000

Correct answer:
Ho: average life >= 2,000; H1: average life < 2,000
In any experiment, you have a natural candidate for a default hypothesis that is maintained to be true
until there is sufficient evidence to reject it. This is the hypothesis that must be selected as the null. In
the present example, the manufacturer is in the business of supplying bulbs which have an average
life of more than 2000 hours. So it is logical to assume that the processes usually produce such bulbs
and occasionally produce faulty bulbs which have a shorter average life. Hence, the null hypothesis
must be that any given bulb has an average life of more than 2000 hours and the alternative
hypothesis must be the complement (i.e. average life is less than 2000 hours).
------------------------------
The larger the critical value on the z-statistic,
* all of these answers can happen, depending on the R-square.

* the harder it is to reject the null hypothesis.
* the easier it is to accept the null hypothesis.
* the easier it is to reject the null hypothesis.

Correct answer:
the harder it is to reject the null hypothesis.
To reject a null hypothesis, the z-statistic must be larger in magnitude than the critical value for a given
level of significance.
------------------------------
If a distribution is right skewed, which of the following is/are true?
I. It cannot be normally distributed.

II. Its skewness is negative.
III. It has a positive mean.
IV. Large positive deviations dominate large negative deviations.
* I only
* I & IV
* II only
* I & III
* III only
* I, II, III & IV

Correct answer:
I & IV
A normal distribution is symmetrical and hence, has zero skewness i.e. it is neither positively nor
negatively skewed.
If the distribution is right skewed, its skewness is positive but it does not necessarily have a positive
mean.
------------------------------
significance? Choose the best answer.

* The specification of a confidence level is the third step in the hypothesis testing process.
* Determining the significance level of a hypothesis test after calculating the test statistic can lead to
an erosion of objectivity.
* The significance level is denoted by the Greek letter theta.
* The confidence level can be found by (1 - the probability of a Type I error).
* The significance level is equal to the probability of a Type I error.

Correct answer:
The significance level is denoted by the Greek letter theta.
The significance level is denoted by the Greek letter alpha. The significance level is equal to the
probability of a Type I error, and can be found by subtracting the confidence level from the letter one.
The relationship between the confidence level and the significance level is illustrated as follows:
Confidence level = (1 - significance level)
which can also be expressed as:
Confidence level = (1 - probability of a Type I error).
The Greek letter theta is used to represent the population parameter in the null and alternate
hypotheses.
The remaining answers are all correct. It is important to remember that the level of significance should
be determined prior to the calculation of the test statistic. Specifying the significance level after the
calculation of the test statistic can detract from the objectivity of the test.
------------------------------
* 0.018
* 0.441
* 0.039
* 0.459

Correct answer:
0.039
We have P(def) = 0.02. P(not def) = 0.98. P(two late payments/def) = 0.90. P(two late payments/not
p(def/two late payments) = (0.02*0.9)/(0.02*0.9 + 0.98*0.45) = 0.039.
------------------------------
How many monthly payments of $40 are needed to pay off a debt of $1,000, if interest accrues at 10%
* No solution/Error
* 28.15
* 31.48
* 17.60
* 22.80

Correct answer:
28.15
On the BAII Plus, press 10 divide 12 = I/Y, 1000 PV, 40 +/- PMT, 0 FV, CPT N. On the HP12C, press
10 ENTER 12 divide i, 1000 PV, 40 CHS PMT, 0 FV, n. Note that the HP12C will display 29 as the
------------------------------
What is the present value today of these annual cash flows: $2,500, $1,200, $300? Assume the first
* $3,535.25
* $4,000.00
* $3,976.69
* $3,608.82
* $3,114.09
DownArrow DownArrow 2nd Quit. Then press NPV 9 ENTER DownArrow CPT. On the HP12C, press
these keys: 0 BlueShift CFo 2500 BlueShift CFj 1200 BlueShift CFj 300 BlueShift CFj. Then press 9 i,
YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the
BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
------------------------------
How much is in your account in 5 years, if you start with a balance of $1,000 and add $3,500 in 18
months and add an additional $1,000 in 48 months, if the money earns interest at 6% per year,
compounded monthly?
* $5,500.00
* $6,514.27
* $7,131.50
* $6,726.14
* $6,892.81

Correct answer:
$6,726.14
Solve this question by working three compound interest problems. On the BAII Plus, press 60 N, 6
divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,348.85. Then press STO 1. Then press 42
N, 3500 PV, CPT FV, which yields $4,315.61. Then press + RCL 1 = STO 1. Then press 12 N, 1000
PV, CPT FV, which yields $1,061.68. Then press + RCL 1 = for the final answer. On the HP12C, press
60 n, 6 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO 1. Then press 42 n, 3500 PV, FV.
The press RCL 1 + STO 1. Then press 12 n, 1000 PV, FV. Then press RCL 1 + for the final answer.
Note that the answer will be a negative number. Make sure the BAII Plus has the value of P/Y set to 1.
Note that the $3,500 deposit is 42 months away from the end of the 60-month time period.
------------------------------
The z-value of a selected observation, X, from a normal distribution, also known as the normal deviate
or the z-score of X, represents:
* the probability that another observation from the distribution will be less than or equal to X.
* the probability that another observation from the distribution will be more than or equal to X.
* the distance of X from the mean, in terms of standard deviation.
* the distance of X from zero.

Correct answer:
the distance of X from the mean, in terms of standard deviation.
deviation S equals z = (X-M)/S. The z-value thus represents the distance of X from the mean, in terms
of standard deviation. Note that the z-value is a distance measure. It does not measure probabilities
directly.
------------------------------
How much will $1,250 become after 7 years at 10% per year, compounded annually?
* $2,298.66
* $1,324.77
* $2,435.90
* $2,500.00
* $2,388.14

Correct answer:
$2,435.90
PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus
------------------------------
Melinda May, a quantitative analyst with Smith, Kleen, & Beetchnutty Brokerage, has been instructed
to perform a statistical analysis to test whether the earnings of biotechnology companies are
negatively related to the growth of generic drug consumption. Ms. May begins her analysis by
formulating and stating a hypothesis. Next, Melinda proceeds with an identification of the appropriate
test statistic and its probability distribution. Now that the first two steps in the hypothesis testing
process have been completed, Ms. May should proceed with which of the following? Choose the best
answer.

* Specifying the significance level

Correct answer:
Specifying the significance level

In this example, Melinda May, a quantitative analyst, has begun her analysis by completing the first
two steps in the hypothesis testing process. Now that the hypothesis has been stated and the
appropriate test statistic has been calculated, Ms. May should proceed with a determination of the
significance level, which is denoted by the Greek letter alpha. Remember that the significance level is
equal to the probability of a Type I error, which is defined as incorrectly rejecting the null hypothesis.
Subtracting the significance level from the number one will yield the confidence interval.
------------------------------
A stockbroker placed the following order:
50 shares of Kaiser Aluminum preferred at $104 a share

100 shares of GTE preferred at $25 1/4 a share
20 shares of Boston Edison preferred at $9 1/8 a share
What is the weighted mean price per share?
* $79.75
* $25.25
* $103.5
* $42.75

Correct answer:
(50*104)+(100*25.25)+(20*9.125) = 7907.5. Weighted mean is 7907.5/170 = 46.51
------------------------------
Which one of the following is NOT a condition of the binomial distribution?
* Independent trials
* Only two outcomes
* Probability of success remains constant from trial to trial
* At least 10 observations

Correct answer:
At least 10 observations
There no requirement regarding the number of observations.
------------------------------
* $2,330.48
* $437.78
* $571.06
* $249.93
* $107.27

Correct answer:
$437.78
------------------------------
A study of the opinion of designers with respect to the primary color most desirable for us in executive
offices showed that:

Red 92
Orange 86
Yellow 46
Green 91
Blue 37
Indigo 46
Violet 2
What is the probability that a designer does not prefer red?
* 0.73
* 1.00
* 0.77
* 0.23

Correct answer:
0.77
There are 400 opinions of which 92 prefer red. The other 308 do not prefer red. Therefore the
probability of not preferring red is 308/400 = 0.77.
------------------------------
Events A and B are mutually exclusive. P(A) = 0.45, P(B) = 0.27. The probability of neither A nor B
occurring equals ________.
* 0.28
* 0.88
* 0.72
* 0.12
The probability of neither A nor B occurring equals one minus the probability of either A or B occurring
i.e. P(neither A nor B) = 1 - P(A or B). Now,
P(A or B) = P(A) + P(B) - P(A and B).
Also, for mutually exclusive events, P(A and B) = 0 by definition. Therefore,
P(A or B) = 0.45 + 0.27 = 0.72. Finally, P(neither A nor B) = 1 - P(A or B) = 1 - 0.72 = 0.28.
------------------------------
pension plan. In depth interviews are to be conducted with each employee selected in the sample. The
employees are classified as follows.

Supervisors A 120
Maintenance B 50
Production C 1,460
Management D 302
Secretarial E 68
What is the probability that the first person selected is in management AND in supervision?
* 0.00
* 0.15
* 0.21
* 0.06
There are 2000 employees of which 302 are in management and 120 in supervision. However, there
are no employees who are in both management and supervision. Therefore the probability is 0.
------------------------------
Year 1: $5,000, Year 2: $0, Year 3: $30,000? (Note that the <> are used to indicate a negative
number).
* 6.21%
* 15.15%
* 14.34%
* 13.37%
* 12.12%

Correct answer:
13.37%
DownArrow 0 ENTER DownArrow DownArrow 30000 ENTER DownArrow DownArrow 2nd Quit. Then
press Irr CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo 5000 BlueShift CFj 0
BlueShift CFj 30000 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the
P/Y value set to 1.
------------------------------
When a researcher uses the classes 129-147, 147-165, 165-183 to create a distribution, he is violating
which of the following suggested practices?
* Avoid a use of non-standard class marks.

* Avoid a use of open-ended classes.
* Avoid a use of uneven classes.
* Avoid a use of overlapping classes.

Correct answer:
Avoid a use of overlapping classes.
The classes are overlapping (for e.g., the classes "147-165" and "165-183" have the point "165" in
common). There are no open-ended classes and the classes have the same class interval. Note that
"Avoid a use of non-standard class marks" is a bogus choice; there is no such suggested practice.
------------------------------
Your distant uncle's will specifies that you will receive a 20-year annuity of $10,000 a year, the
payments starting seven years from now. How much is the annuity worth to you today if your discount
rate is 4% per year?
* $107,406
* $135,903
* $122,321
* $110,911
The payments start at the end of 7 years. Thus, at the end of year 6, the annuity will be worth
10,000/0.04*(1-1/(1.04^20)) = 135,903. The present value of this amount is 135,903/(1.04^6) =
107,406.
------------------------------
What do we call the value called z that is computed using sample data?
* Decision rule
* Test statistic
* Parameter

Correct answer:
Test statistic
The z-values are statistics generated to provide a measure of testing the hypothesis.
------------------------------
Carlson Jewelers permits the return of their diamond wedding rings, provided the return occurs within
two weeks of the purchase date. Their records reveal that 10 percent of the diamond wedding rinds
are returned. Five rings are bought by five different customers. What is the probability that none will be
returned?
* 0.372
* 0.590
* 0.500
* 0.073
* 0.250

Correct answer:
0.590
= 0.590.
------------------------------
What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$4,000>, Year
1: $2,000, Year 2: $0, Year 3: $0, Year 4 $4,000? (Note that the <> are used to indicate a negative
number).
* 14.04%
* 15.28%
* 11.61%
* 25.29%
* 12.59%

Correct answer:
15.28%
DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 4000 CHS
BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 0 BlueShift CFj 4000 BlueShift CFj. Then press
YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII
Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.
------------------------------
I. Multiplying every value in a distribution by 2 will double the sample variance.
II. Multiplying every value in a distribution by 2 will double the sample mean.
III. Adding a constant to every value in a distribution increase the sample variance by the square of the
constant.
* I, II & III
* I only
* II only
* III only
* I & III

Correct answer:
II only
Multiplying every value in a distribution by 2 will double the sample mean and standard deviation and
quadruples the variance. Adding a constant to every value in a distribution leaves the sample variance
unchanged.
------------------------------
If one or more numbers in a dataset are negative, which of the following is not always defined?
* mean
* median
* geometric mean
* mode
Correct answer:
geometric mean
The geometric mean involves taking mathematical roots. These operations are not always defined to
give real numbers when you are dealing with negative numbers.
------------------------------
What is the 99% confidence interval to estimate the true cost of the VCR?
* $328.40 to $421.60
* $323.40 to $426.60
* $335.80 to $414.20
#AI None of these answers
* $335.80 to $415.20

Correct answer:
$323.40 to $426.60
For 99%, the z value will be 2.575. Therefore we have 375 +/- 2.575*20.
------------------------------
What monthly deposit would you need to make, beginning one month from today, into an account
paying 11% per year, compounded monthly, in order to have $500,000 in 30 years?
* $14,555.70
* $178.28
* $218.67
* $129.83
* $314.48

Correct answer:
$178.28
360 n, 11 ENTER 12 divide i, 0 PV, 500000 FV, PMT. Note that the answer will be displayed as a
negative number. Make sure that the BAII Plus has the value of P/Y set to 1.
------------------------------
for advancement either fair, good, or excellent. These traits are the 500 salespeople were cross
Fair Good Excellent

Average 45 60 45
What is the probability that a sales person selected at random will have below average sales ability
and fair potential for advancement?
* 0.32
* 0.10
* 0.16
* 0.032That answer is incorrect.
Correct answer:
0.032
prob. of selecting a below average person: (16 + 12 + 22)/500 = 1/10. Prob. of selecting fair potential
amongst those in the below average group: 16/50 = 8/25. Therefore 1/10*8/25 = 4/125.
------------------------------
A distribution has a mean equal to 12 and a standard deviation of 36. It has a coefficient of variation
equal to:
* zero
* 0.335
* 3.00

Correct answer:
3.00
The coefficient of variation equals the standard deviation divided by mean.
------------------------------
John's great-grandfather left him $100 when he died 100 years ago in an account paying 5% per year,
compounded annually. How much would the account hold for John now?
* $12,504.51
* $13,150.13
* $14,229.78
* $8,407.76
* $14,113.90

Correct answer:
$13,150.13
PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus
------------------------------
If we reject the null hypothesis what can we conclude subject to the alpha risk?
* Alternative hypothesis is false

* Null hypothesis is false
* Null hypothesis is true
* Both the null hypothesis and the alternative hypothesis are false
* Both the null hypothesis and the alternative hypothesis are true

Correct answer:
Null hypothesis is false
The alpha risk is the probability of rejecting the null when it is actually true. So if we had rejected the
null, we can conclude, given what we know of the alpha, that the null is false.
------------------------------
Which is true of all skewed distributions?
I. They are is not symmetrical.

II. Their mean and median are not equal.
III. They are characterized by many small values and a few extreme values.
* I and III
* I and II
* II and III

Correct answer:
I and II
A skewed distribution is not symmetrical and its mean and median are not equal. While a positively
skewed distribution is characterized by many small values and a few extreme values, the opposite is
true of negatively skewed distributions. So III is false as far as "all skewed distributions" are
concerned.
------------------------------
A stock had the following percentage increases in its value over the last 5 years: 7%, 4%, 12%, 10%,
15%. The geometric rate of return on the stock equals ________.
* 8.72%
* 9.22%
* 9.60%
* 9.53%

Correct answer:
9.53%
The geometric rate of change equals (1.04*1.07*1.1*1.15*1.12)^(1/5) - 1 = 9.53%. Note this is different
from the straight geometric mean, which in this case would be (0.04*0.07*0.1*0.15*0.12)^(1/5) =
8.72%. You should be very careful about this point since the Mason & Lind textbook is quite
ambiguous on this point.
------------------------------
Year 0: <$25,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5 $18,000? (Note
that the <> are used to indicate a negative number).
* <$735.51>
* $314.37
* <$279.41>
* $42.21
* <$967.49>
DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 10 ENTER
DownArrow CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo 2000 BlueShift CFj 0
------------------------------

Quantitative Methods 1 2

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www.cfa-aficionado.cjb.

In order to understand why the questions are commented by “answer is

That answer is incorrect.

That answer is incorrect.

That answer is incorrect.

A coefficient of skewness of +2.48 indicates:

* all of these answers are correct

That answer is correct!

That answer is incorrect.

That answer is incorrect.

That answer is incorrect.

That answer is incorrect.

That answer is incorrect.

That answer is incorrect.

* a mean of 0 and any standard deviation

That answer is incorrect.

A statistician has framed his hypothesis testing problem as:

Ho: mean = 100 H1: mean < 100

* z-statistic < -0.84

That answer is correct!

That answer is incorrect.

* 0.250 and 0.350

That answer is incorrect.

Therefore 0.3 +/- 2.58*0.01225 and we get 0.268 and 0.332.

That answer is correct!

That answer is correct!

That answer is incorrect.

The friend's account has 5,000*(1+0425/2)^40 = 11,595 at the end of 20 years.

That answer is incorrect.

* none of these answers.

That answer is incorrect.

What sample statistic is used to estimate a population value?

* None of these answers

That answer is incorrect.

The point estimate is the estimate of a particular value in the population.

* None of these answers

That answer is incorrect.

What does it mean if r = -1.00?

That answer is incorrect.

Type I error refers to the event that we will:

* Accept the alternative when it is true.

That answer is incorrect.

* None of these answers is correct.

That answer is incorrect.

That answer is incorrect.

That answer is correct!

That answer is correct!

That answer is incorrect.

That answer is correct!

That answer is correct!

In hypotheses testing, what is the level of significance?

* Symbolized by the Greek letter "alpha"

That answer is incorrect.

All the above a correct descriptions of the level of significance.

That answer is incorrect.

That answer is incorrect.

A cumulative frequency distribution on days absent during a calendar year by employees of a

How many employees were absent more than five days?

That answer is correct!

* Type I error; decrease

That answer is correct!

{Probability of a Type I error = (1 - confidence level)}.

* Sell both short

P(all three overweight)=0.0750.0750.075 = 0.0004218.