Quantitative Methods Cfa Level - 1

QUANTITATIVE METHODS
Chartered Financial Analyst

Level 1
300 practice questions,
includes 130 Linear Regression
questions and updates
You will find the following exercises:
300 PRACTICE QUESTIONS includes:

130 LINEAR REGRESSION QUESTIONS
Exercises updated to CFA 2022 Curriculum
released for level 1
The difficulty level of this book is similar to the

CFA exam questions and mock exam questions.
It contains a wide variety of exercises, covering
100% of all the topics included in CFA 2023
Quantitative Methods Curriculum, level 1.
Index
300 practice questions, includes 130 Linear Regression questions
and updates
CHAPTER 1- THE TIME VALUE OF MONEY
CHAPTER 2 - ORGANIZING, VISUALIZING, AND DESCRIBING
DATA
CHAPTER 3 – PROBABILITY CONCEPTS
CHAPTER 4 – COMMON PROBABILITY DISTRIBUTIONS
CHAPTER 5 – SAMPLING AND ESTIMATION
CHAPTER 6 – HYPOTHESIS TESTING
CHAPTER 1- THE TIME VALUE OF MONEY (Answers)
CHAPTER 2 - ORGANIZING, VISUALIZING, AND DESCRIBING
DATA (Answers)
CHAPTER 3 – PROBABILITY CONCEPTS (Answers)
CHAPTER 4 – COMMON PROBABILITY DISTRIBUTIONS
(Answers)
CHAPTER 5 – SAMPLING AND ESTIMATION (Answers)
CHAPTER 6 – HYPOTHESIS TESTING (Answers)
CHAPTER 7 LINEAR REGRESSION (90 practice questions)
CHAPTER 7.- LINEAR REGRESSION (answers)
CHAPTER 7 LINEAR REGRESION (40 extra questions)
CHAPTER 7.- LINEAR REGRESSION ( solutions 40 extra questions
),
CHAPTER 1- THE TIME VALUE OF
MONEY
1.- Francesco just won the lottery. He has two options to take the
money. He can take the lump sum of $3,000,000 or he can take the
level payments of $500,000 over 6 years. If he takes the lump sum,
Francesco will deposit the money into an account earning i%
annually. If Francesco takes the payment plan, he will deposit the
payments at the end of each year at a compounded interest of 14%.
After 16 years, the accounts will be equal. Calculate i.
A. 10.95%
B. 5.63%
C. 10.65%
Use the following information to answer Questions 2 through 3.
2.- An annuity plan gives you two options: either the payment of a
lump sum of $ 120,000 on your 63rd birthday, or an annuity of C $
until your death. The annual effective interest rate is 12% and your
life expectancy is 75 years. What is the annuity that would make the
two options equivalents, assuming that the data provided (12% and
12 years of remaining life) are reliable?
A. $19,365
B. $19,372
C. $19,383
3.- If you had joined the pension plan at age 45, what annual end-of-
period contribution would have accumulated $ 120,000 at your 63rd
birthday, assuming the expected annual effective rates are 10% for
the first eight years and 12% thereafter?
A. $2,235
B. $2,248
C. $2,261
4.- You finish your university studies and you team up with two of
your study colleagues to open an administrative consulting office.
You will need an amount of $ 70,000 to get started. You think you
can borrow this amount from a financial institution at a rate of 15%
capitalized every month. You believe you can make the following
payments: $ 20,000 in 1 year, $ 30,000 in 2 years, $ 20,000 in 3
years and the final payment at the end of the 4th year. What will be
the value of this last payment?
A. $30,160
B. $32,160
C. $34,164
5. -For your studies, you borrowed $ 5,000 from one of your uncles
who asked you to repay him this amount in 16 equal quarterly
installments of $ 368.25. At what annual effective interest rate did
your uncle give you this loan?
A. 8.24%
B. 8.42%
C. 8.28%
6. -You are analyzing the last five years of earnings per share data
for a company. The figures are $4.00, $4.50, $5.00, $6.00, and
$7.00. At what compound annual rate did EPS grow during these
years?
A. 15.02%
B. 14.07%
C. 12.05%
7.- An analyst expects that a company's net sales will double and the
company's net income will triple over the next five-year period
starting now. Based on the analyst's expectations, which of the
following best describes the expected compound annual growth?
A. Net sales will grow 15% annually and net income will grow 25%
annually.
B. Net sales will grow 20% annually and net income will grow 35%
annually.
C. Net sales will grow 25% annually and net income will grow 50%
annual
8.- An investor invested $10,000 into an account five years ago.
Today, the account value is $18,682. What is the investor's annual
rate of return on a continuously compounded basis?
A. 13.31%.
B. 11.33%.
C. 12.50%.
9.- An investor wants to receive $1,000 at the beginning of each of

the next ten years with the first payment starting today. If the investor
can earn 10 percent interest, what must the investor put into the
account today in order to receive this $1,000 cash flow stream?
A. $7,145.
B. $6,759.
C. $6,145.
10. John and Elsa borrowed $15,000 to help finance their wedding
and reception. The annual payment loan carries a term of seven
years and an 11% interest rate. Respectively, the amount of the first
payment that is interest and the amount of the second payment that
is principal are approximately:
A. $1,650; $1,702.
B. $1,650; $1,468.
C. $1,468; $1,702.
11.- An investor deposits $1,000 into an account that pays 8% per
annum compounded continuously. The value of the account at the
end of four years is closest to:
A. $1,285.41.
B. $1,252.15.
C. $1,377.13.
12.- If the price of a stock goes from $15.00 to $16.20 in one year,
the continuously compounded rate of return is closest to:
A. 7.70%.
B. 8.33%.
C. 8.00%.
13.- Two years from now, a client will receive the first of three annual
payments of $20,000 from a small business project. If she can earn
9 percent annually on her investments and plans to retire in six
years, how much will the three business project payments be worth
at the time of her retirement?
A. 77,894
B. 75,562.
C. 78,981.
14.- A perpetual preferred stock position pays quarterly dividends of

$1,000 indefinitely (forever). If an investor has a required rate of
return of 12 percent per year on this type of investment, how much
should he be willing to pay for this dividend stream?
A. $32,678
B. $33,333
C. $34,251
15.- A client plans to send a child to college for 4 years starting 18

years from now. Having set aside money for tuition, she decides to
plan for room and board also. She estimates these costs at $20,000
per year, payable at the beginning of each year, by the time her child
goes to college. If she starts next year and makes 17 payments into
a savings account paying 5 percent annually, what annual payments
must she make?
A. $2,744
B. $3,177
C. $2,477
16.- You and two of your brothers are equal shareholders in a retail
business. You are thinking of modernizing trade accounting by
implementing a microcomputer system. The entire system turns out
to be quite expensive and each of you will have to invest $ 15,000
personally. You don't own this money, but you could borrow it from
your financial institution. However, you already have a mortgage
loan to repay. This loan was taken out 10 years ago at a rate of 8%,
for an initial maturity of 20 years. You still have to pay $ 30,000 on
the initial amount. You have two solutions to find the amount of $
15,000.
1) Take out a second mortgage on your house in the amount of
$ 15,000 at 12% capitalized semi-annually and repayable over
10 years.
2) Refinance in full the mortgage and personal loan balance ($
45,000) at a rate of 10% capitalized semi-annually, repayable
over 10 years. Which option will you choose?
A. First option
B. Second option
C. Both options
17.- John Smith borrows a sum of $ 5,000 from one of his

associates. He agrees to repay it through 10 semi-annual end-of-
period payments. The borrowing rate used for borrowing purposes is
12% / year capitalized semi-annually. Immediately after making the
sixth installment, the borrower decides to pay off the balance of his
debt with a final payment. You are asked to calculate this final
amount.
A. $2,374
B. $2,573
C. $2,354
18. -A business owner is considering purchasing mechanical

equipment with a useful life of four years, with zero residual value
after four years. This equipment must provide additional net
revenues each year estimated at:
$ 20,000 for the first year
$ 15,000 for the second year
$ 10,000 for the third year
$ 7,000 for the fourth year
Assuming that the investment is made at the start of the first year
and the additional revenue is made at the end of each year,
calculate the maximum amount that this owner should invest for this
equipment, knowing that he wants to obtain a 12% effective rate of
return per year.
A. $45,480
B. $41,381
C. $37,284
19.-Mr. Rene Levesque has just obtained from his bank a personal
loan of $ 10,000 to repay over 3 years at the rate of $ 4,533.33 per
year, at year end. The interest rate posted by the bank was 12%.
However, the bank calculated the amount of annual repayments as
follows:
Loan amount $ 10,000

Annual interest (12% X $ 10,000 = $ 1,200)
Interest payable ($ 1,200 X 3) $ 3,600
Total reimbursements $ 13,600
Annual reimbursement to be done ($ 13,600 / 3) $ 4,533.33
What is the implicit rate that the bank actually charged him for this
loan?
A. 17.10%
B. 14.38%
C. 17.28%
20.- An amount of $ 1,000 is invested for 5 years at 12% capitalized

quarterly, then replaced with interest for 4 years at 10% capitalized
monthly and, finally, the whole is replaced for 3 years at 8%
capitalized annually. What amount will have been accumulated at
the end of 12 years?
A. $3,488
B. $3,287
C. $3,388
21.- The board of directors of Kappa & Gamma Inc. usually declares
the amount of the four quarterly dividends for the following year each
year. The next quarterly dividend for the common stock of Kappa &
Gamma Inc. has been set at $ 0.50 and will be paid in three months.
You anticipate that after the next four dividends of $ 0.50, the board
will have to decrease the four dividends by 4% for the following year.
Suppose this scenario will have to recur for the following years.
Thus, at the start of each year, the declared dividends should be 4%
lower than the dividends of the previous year. You also anticipate
that the financial difficulties of Kappa & Gamma Inc. will force the
board of directors to cease paying dividends altogether after nine
years. If you demand an effective rate of return of 10% on your
investments, how much do you value the common stock of Kappa &
Gamma Inc.?
A. 10
B. 11
C. 12
22.- John Hernandez pays a $700.00 monthly rent and is due on the
first day of every month. If the stated annual interest rate is 6
percent, the present value of a full year’s rent payments is closest to:
A. $8,135.
B. $8,174.
C. $8,866.
23.- Shelly Madore is choosing between two one-year investment

plans with a quoted rate of 8% and 12% respectively, each of which
are compounded continuously. Madore intends to invest $250,000
with the objective of generating a minimum amount of $270,000 for
his son's college education. She is not concerned with maximizing
his return. To achieve his objective, Shelly will opt for:
A. the savings plan with a quoted rate of 8%

B. the savings plan with a quoted rate of 12%
C. either of the two saving plans
24. A stock doubled in value last year. Its continuously compounded
return over the period was closest to:
A. 18.20%
B. 69.30%
C. 100.00%
25. A perpetuity paying 1 at the beginning of each 6-month period

has a present value of 20. A second perpetuity pays X at the
beginning of every 2 years. Assuming the same annual effective
interest rate, the two present values are equal. Determine X.
A. 3.5
B. 3.6
C. 3.7
CHAPTER 2 - ORGANIZING,
VISUALIZING, AND DESCRIBING DATA
26. Consider the investment in the following table:
Start of Year 1 One share purchased at $100

End of Year 1 $5.00 dividend/share paid and one additional share purchased at
$125
End of Year 2 $5.00 dividend/share paid and both shares sold for $140 per
Assuming dividends are not reinvested, compared with the time-

weighted return, the money-weighted return is:
A. lower.
B. the same.
C. higher.
27. An analyst gathers the following information about the performance

of a portfolio ($ millions):
Quarter Value at Cash Inflow Value at

Beginning of (Outflow) at End of
Quarter (Prior Beginning of Quarter
to Inflow or Quarter
Outflow)
1 2.0 0.2 2.4
2 2.4 0.4 2.6
3 2.6 (0.2) 3.2
4 3.2 1.0 4.1
The portfolio’s annual time-weighted rate of return is closest to:
A. 8%.
B. 32%.
C. 27%.
28.-The investment performance of Gamma Fund for the year 2019 is

as follows:
• On 1 January 2019, the fund had market value of $70 million.
• The holding period return for the fund from 1 January to 30 June was
18%.
• On 1 July 2019 the fund received an additional $35 million.
• On 31 December 2019 the fund received total dividends of $8 million.
• The fund’s market value on 31 December 2019 including $8 million
dividends was $134 million.
The time-weighted return computed by the manager is closest to:
A. 33.95%.
B. 32.22%.
C. 34.46%.
29.- Given below are the sample monthly returns for XZM stock:
January 18.5%
February 6.6%
March -3.5%
April -11.4%
May 5.4%
June -17%
With the target return of 6.0%, the target semi-variance is closest to:
A. 234.47.
B. 184.47.
C. 207.45.
30.- Henry wants to borrow $100,000 to finance his business. He is

offered a rate of 6% from a local bank, but is told that he would be
paying an effective interest rate of 6.09%. The frequency of
compounding on this loan is closest to:
A. Monthly.
B. Quarterly.
C. Semi‐annually.
31.- An analyst gathered the following information for Delta stock:
Year Return
1 7,50%
2 4,65%
3 -3,20%
4 5,50%
The mean absolute deviation of Delta stock’s return is closest to:
A. 3.53%
B. 3.41%
C. 3.75%
32. Calculate the first, second and third quartiles of the hypothetical
portfolio.
-11,89% -11,07% -8,69% -6,61% -5,52%

-3,59% -1,49% -0,17% 2,89% 3,21%
4,17% 4,53% 6,22% 6,74% 8,60%
A. Q25 =-6.10% Q50=2.89% Q75=6.74%

B. Q25 =-6.10% Q50=-0.17% Q75=6.74%
C. Q25 =-6.10% Q50=-0.17% Q75=4.53%
33.-Some statistics regarding the distribution of returns of two

hypothetical portfolios are shown in the table below. What portfolio
would an investor choose?
Mean Standard Skewness Excess

monthly Deviation Kurtosis
return
Portfolio Alpha 1.6792% 5.31% -0.1395 -0.0187
Portfolio Beta 1.8375% 5.90% 0.4934 -0.8525
A. Portfolio Alpha
B. Portfolio Beta
C. Neither Alpha nor Beta
34. The table above shows the annualized returns and standard
deviations annualized for different Canadian asset class between 2000
and 2018. The returns were obtained from Morningstar Direct.
Asset Class Returns Standard

Arithmetic Deviation of
Mean Return
S&P/TSX Composite TR 6.41% 15.75%
S&P/TSX Small Cap TR 7.15% 19.18%
DEX All Corporate Universe TR 7.01% 3.34%
DEX Government Bond 6.71% 3.81%
DEX Canadian Treasury Bill 30 2.63% 0.44%
day
Determine the asset class with the highest levels of risk in utilizing the
coefficient of variation (CV) as a measure of relative dispersion.
A. Small Cap, Composite, Government Bond, Corporate Universe,

Treasury 30 day
B. Small Cap, Composite, Government Bond, Treasury 30-day,
Corporate Universe
C. Small Cap, Composite, Corporate Universe, Government Bond,
Treasury 30 day
35. An analyst gathers the following information about the price-
earnings (P/E) ratios for the common stocks held in a portfolio:
P/E
Interval Range Frequency
I 5-15 20
II 15-25 55
III 25-35 32
IV 35-45 18
The relative frequency for Interval III is closest to:
A. 27.27%.
B. 32.15%.
C. 25.60%.
36. An equity analyst is using the P/E ratio to rank the component firms
of a broad-based equity market index. The exhibit below is an excerpt
from the information that the analyst gathered about the 35 companies
included in the index.
P/E
N0 Company ratio
1 Alpha 0,55
2 Beta 0,67
3 Delta 1,1
4 Gamma 1,47
5 Zetha 2,89
The estimate for the 10th percentile for the P/E ratio is closest to:
A. 1.362.
B. 1.322.
C. 1.391.
Use the following information to answer Questions 37 through 38
Portfolio Alpha Beta Gamma Zetha

E(Rp) 5% 11% 14% 18%
VARP 8% 21% 34% 40%
37. Given a threshold level of return of 4%, use Roy’ safety first criterion
to choose the optimal portfolio:
A. Alpha
B. Gamma
C. Zetha
38. Given a threshold level of return of 0.00%, use Roy’ safety first
criterion to choose the optimal portfolio:
A. Alpha
B. Beta
C. Zetha
CHAPTER 3 – PROBABILITY
CONCEPTS
39. The following information applies to a portfolio composed of Fund
Alpha and Fund Beta:
Funds Funds Beta

Alpha
Portfolio Weights (%) 70 30
Expected Returns (%) 10 16
Standard Deviations (%) 7 10
Correlation Fund Alpha and 0.80
Beta
The portfolio's standard deviation of return is closest to:
A. 7.38%.
B. 7.52%.
C. 8.35%.
40. An analyst has established the following prior probabilities

regarding a company's next quarter's earnings per share (EPS)
exceeding, equaling, or being below the consensus estimate.
Prior Probabilities
EPS exceed consensus 30%
EPS equal consensus 45%
EPS are less than 25%
consensus
Several days before releasing its earnings statement, the company

announces a cut in its dividend. Given this new information, the
analyst revises his opinion regarding the likelihood that the company
will have EPS below the consensus estimate. He estimates the
likelihood the company will cut the dividend, given that EPS
exceeds/meets/falls below consensus, as reported below.
Probabilities the Company Cuts Dividends,

Conditional on EPS Exceeding/Equaling/Falling
below Consensus
P(Cut div│EPS exceed) 10%
P(Cut div│EPS equal) 20%
P(Cut div│EPS below) 70%
The analyst thus determines that the unconditional probability for a

cut in the dividend, P(Cut div), is equal to 29.50. Using Bayes’
formula, the updated (posterior) probability that the company’s EPS
are below the consensus is closest to:
A. 85%.
B. 59%.
C. 20%.
41. An economist states that the probability of having the gross

domestic product (GDP) of a country higher than 3% is 0.20. What
are the odds against a GDP higher than 3%?
A. 5 to 1
B. 6 to 1
C. 4 to 1
42. The joint probability of returns for securities Alpha and Beta are
as follows:
Return Return
Joint on on Return
Beta Beta on Beta
Probabilities 30% 10% 0%
Return on Alpha 20% 0,3
The covariance of the returns between Securities Alpha and Bet is

closest to:
A. 58.
B. 44.
C. 53.
43. The variance of returns of Asset Alpha is 525. The variance of
returns of Asset Beta is 1,250. The covariance of returns between
Asset Alpha and Asset Beta is 500. The correlation of returns
between Asset Alpha and Asset Beta is closest to:
A. 0.62.
B. 0.69.
C. 0.47.
44.- A group of fund analysts have to select the first, second, and
third best fund manager of the year for 2020 based on their subjective
judgment. If 10 fund managers are candidates for the three awards,
the number of ways in which each analyst can make his ranking is
closest to:
A. 630.
B. 720.
C. 520.
45. If the probability for an event Z is 21%, the odds for Z are closest
to:
A. 0.2658
B. 0.0715
C. 0.1237
46. An analyst applies four valuation screens to a set of potential
investments. The screens are independent of each other.
Valuation Probability
Screen of Passing
1 0.55
2 0.40
3 0.35
4 0.25
If there are 1,200 potential investments, the number expected to

simultaneously pass all four screens is closest to:
A. 32.
B. 66.
C. 42.
to:
A. 0.2658
B. 0.0715
C. 0.1237
48. An analyst calculated the expected value of Delta Inc.’s EPS as

$5.825 based on the probability distribution of Delta’s EPS for the
current fiscal year
Probability
Distribution
EPS
Probability ($)
12% 7.25
38% 6.15
40% 5.75
10% 4.15
The standard deviation of the Delta’s EPS for the current fiscal year is
closest to:
A. 0.9662.
B. 0.9829.
C. 2.8816.
49. A portfolio is invested in stocks Alpha and Beta with 30% of the
portfolio invested in Alpha. The exhibit below illustrates the
covariance matrix and expected returns with respect to the portfolio.
Stock Alpha Beta

E(R)=12% E(R)=8%
Covariance
matrix
Stock Alpha Beta
Alpha 450 225
Beta 225 180
The correlation between Alpha and Beta is closed to
A. 0.12
B. 0.63
C. 0.79
50. Compute the standard deviation of a two-stock portfolio if stock A

(40% weight) has a variance of 0.0015, stock B (60% weight) has a
variance of 0.0021, and the correlation coefficient for the two stocks
is -0.35?
A. 1.39%.
B. 0.07%.
C. 2.64%.
Use the following information to answer Questions 51 through

53
51. In how many ways can 3 boys and 3 girls sit in a row?
A. 520
B. 720
C. 650
52. In how many ways can 3 boys and 3 girls sit in a row if the boys
and the girls are each to sit together?
A. 60
B. 84
C. 72
53. In how many ways if only the boys must sit together?
A. 144
B. 121
C. 136

55
54. In how many ways can 3 novels, 2 mathematics books, and 1

chemistry book be arranged on a bookshelf if the books can be
arranged in any order?
A. 720
B. 520
C. 650

chemistry book be arranged on a bookshelf if the mathematics books
must be together and the novels must be together?
A. 52
B. 72
C. 65
56. A dance class consists of 22 students, of which 10 are women

and 12 are men. If 5 men and 5 women are to be chosen and then
paired off, how many results are possible?
A. 52,950,070
B. 23,950,080
C. 72,080,950
57. A committee of 7, consisting of 2 Republicans, 2 Democrats, and

3 Independents, is to be chosen from a group of 5 Republicans, 6
Democrats, and 4 Independents. How many committees are
possible?
A. 600
B. 520
C. 612
58. If 8 new teachers are to be divided among 4 schools, how many

divisions are possible if each school must receive 2 teachers?
A. 2,600
B. 2,520
C. 2,612
59. A retail establishment accepts either the American Express or the

VISA credit card. A total of 24 percent of its customers carry an
American Express card, 61 percent carry a VISA card, and 11 percent
carry both cards. What percentage of its customers carries a credit
card that the establishment will accept?
A. 77%
B. 67%
C. 55%

61
60. An urn contains 5 red, 6 blue, and 8 green balls. If a set of 3 balls
is randomly selected, what is the probability that each of the balls will
be of the same color?
A. 8.75%
B. 8.88%
C. 8.57%
be of different colors?
A. 24.77%
B. 28.88%
C. 24.70%
62. If a die is rolled 4 times, what is the probability that 6 comes up at

least once?
A. 51.77%
B. 48.55%
C. 55.36%
63. A group of 6 men and 6 women is randomly divided into 2 groups

of size 6 each. What is the probability that both groups will have the
same number of men?
A. 50.77%
B. 48.55%
C. 43.29%
64. Suppose that a laboratory test to detect a certain disease has the
following statistics. Let A = event that the tested person has the
disease and B = event that the test result is positive. It is known that
P(B I A) = 0.99 and P(B I Ac) = 0.005 and 0.1 percent of the
population actually has the disease. What is the probability that a
person has the disease given that the test result is positive?
A. 50.50%
B. 16.50%
C. 43.29%
65. An entrepreneur has two businesses in operation N1 and N2. The

first shows losses in 20% in the income statement and the second
only in 4%. Assuming that the business volume is the same for N1
and N2 and analyzing a balance at random, this one got losses. What
is the probability that it is from the first business?
A. 4/7
B. 5/6
C. 3/5

67
A committee of 5 persons is to be selected randomly from a group of

5 men and 10 women. Find
66. The probability that the committee consists of 2 men and 3
women.
A. 0.30%
B. 0.40%
C. 0.50%
67. Find the probability that the committee consists of all women.
A. 0.080%
B. 0.082%
C. 0.084%

69.
Either the following events:

A = P (Google stock increases 15% during the year) = 0.4
B = P (Apple shares increased by 15% during the year) = 0.3
C = P (Google and Apple shares increased by 15% during the year) =
0.2
68. What is the probability that Google will not increase by 15%?
A. 50%
B. 60%
C. 70%
69. Determine the probability that the stock of Google or Apple will
increase by 15%.
A. 30%
B. 40%
C. 50%
Use the following information to answer Questions from 70

through 71
A specialist noted that the return on Microsoft's stock was likely to

increase or decrease depending on certain macroeconomic
conditions. Here is the analysis:
Probability
State of Conditional/Prob.
of the Stock
the of stock
Economic Performance
Economy Performance
State
Increases 65%
Good 60%
Decreases 35%
Increases 45%
Poor 40%
Decreases 55%
70. Calculate the probability that the stock will decrease.

A. 33%
B. 43%
C. 53%
71. Calculate the probability that the Economy is good given the stock
will increase.
A. 63,5%
B. 65,4%
C. 68,4%

through 74
A finance student has three types of books on their shelf. He has 3

CFA books, 1 portfolio management book, and 2 statistics books. For
questions (A) and (B), books of the same theme are considered to be
different from each other.
72. How many arrangements are possible if he can put them in any
order?
A. 680
B. 720
C. 840
73. How many arrangements are possible if all the books on the
same topic have to be together?
A. 72
B. 78
C. 64
74. How many arrangements are possible if books on the same

subject are the same?
A. 67
B. 57
C. 60
75. As an investor, you have just placed 2 limit orders, respectively on

the shares of Alpha and Beta. There is a 60% chance that the limit
order placed on Alpha will be executed by the end of the day. The
probability that the limit order placed on Beta shares will be executed
by the end of the day is 35%. The probability that both limit orders will
be executed by the end of the day is 15%. What is the probability that
one of the two limit orders will be executed by the end of the day?
A. 60%
B. 70%
C. 80%
76. You are a portfolio manager and have just compiled the name of
all the stocks that meet your investment criteria.
• Among this compilation, 10% of the shares are in the energy sector.
• Of this compilation, 2% of the shares are in the energy sector and
pay dividends.
What is the probability that a stock will pay a dividend knowing that it
is one of the companies operating in the energy field that met your
investment criteria?
A. 10%
B. 20%
C. 30%
77. You are a portfolio manager who mainly uses 3 criteria to select
the stocks that will be part of his portfolio:
1) Company size (market capitalization> $ 800 million)

2) The price-earnings ratio (8 <Price per share / Earnings per share
<12)
3) Payment of dividends (Quarterly dividends per share> $ 0)
Among all the securities listed on the Toronto Stock Exchange, there
is a probability of:
• 12% that a share meets the size criterion
• 20% that a share meets the price-earnings ratio criterion
• 45% that a share meets the dividend criterion
If all criteria are independent, how many companies will be selected?
A. 1.08%
B. 2.03%
C. 1.15%

<12)
A stock chosen at random from among all the securities listed on the
Toronto Stock Exchange has a 30% chance of satisfying price-
earnings ratio criterion. A stock chosen at random from among all the
securities listed on the Toronto Stock Exchange has a 50% chance of
satisfying the dividend payment criterion. A share that meets the
price-earnings ratio criterion has a 60% chance also meeting the
dividend payment criterion.
What is the probability that a stock chosen at random from among all
the securities listed on the Toronto Stock Exchange will meet both
selection criteria?
A. 15%
B. 18%
C. 30%
through 80
You should forecast the level of annual sales for Delta Inc. from the
following probabilities:
Probability Sells (M$)

20% 500
35% 550
23% 600
15% 650
7% 700
79.-Calculate the expected value of Delta's sales for next year.
A. $555 million
B. $525 million
C. $577 million
80. Calculate the variance and standard deviation of Delta’s expected

sales.
A. $55.67 million
B. $57.56 million
C. $58.49 million
81. If odds in favor of X solving a problem are 4 to 3 and odds against
Y solving the same problem are 2 to 6. Find probability for:
(i) X solving the problem
(ii) Y solving the problem
P(X) P(Y)
A. 4/7 3/4
B. 3/4 1/3
C. 4/7 1/3
82. If X represents the possible values obtained by rolling an

unbiased die. Calculate E[Y], where: Y = 2X2-5
A. 24.68
B. 25.33
C. 21.55
83. An analyst is calculating the times series mean return for a

portfolio allocated 30% to U.S. equities and 70% to U.S. bonds. He
has collected annual return data for years 2014-2018
Stock and Bond Return Data 2014-

2018
Year Stock(%) Bond(%)
2014 7,4 10,1
2015 -5,6 3,4
2016 3,7 -1,1
2017 9,3 7,9
2018 14,7 12,8
The time series mean return for the portfolio is closest to:
A. 9.50%
B. 6.40%
C. 10.30%
84. Joseph Kelvin is an equity analyst at Delta Associates. Joseph is

following the stock of a pharmaceutical. He is attempting to analyze
whether the upcoming launch of a Type-I diabetic drug will be
successful and increase the market price of the pharmaceutical's
share. The probability that the stock price will increase given a
successful drug launch P(A/S) is 0,35. Joseph has summarized
important forecast probabilities in the exhibit below:
Probability
Probability stock price increases 0,4
Probability stock price is unchanged 0,6
Probability drug launch is successful 0,45
Probability drug launch is
unsuccessful 0,55
The probability that the stock price increases given that the drug
launch is unsuccessful is closest to:
A. 52.50%
B. 44.00%
C. 50.30%
85. The table below illustrates the covariance matrix for global
equities, global bonds and real estate held in the proportions 40%,
25% and 35% respectively, held in Sarah Keller’s portfolio.
Covariance Matrix
Global Global Real
Equities Bonds Estate
Global
Equities 125 150 80
Global Bonds 150 45 90
Real Estate 80 90 62
Based on the information, the standard deviation of Sarah’s portfolio

return is
closest to:
A. 9.93%.
B. 8.33%.
C. 5.93%.
86. Selena Gomez manages an equity fund allocated to U.S. and

Canadian equities in the proportions 45% and 55% respectively. The
expected returns and covariance between the two equities are
illustrated in the exhibit below:
Covariance Matrix
U.S. Canada
U.S. 200 125
Canada 125 350
U.S. Canada
Equity E(R)=15% E(R)=25%
The correlation between the two stocks is closest to:
A. 0.47.
B. 0.05.
C. 0.27.

91
Joint Probabilities
Return Rb=0,5 Rb=0,0 Rb=0,0
Ra=-0,10 0,40 0,00 0,00

Ra= 0,10 0,00 0,30 0,00
Ra= 0,30 0,00 0,00 0,30
87.-Given the joint probability table, the expected return on stock A is

closet to:
A. 0.12
B. 0.08
C. 0.20
88. Given the joint probability table, the standard deviation of stock B
is closet to:
A. 0.060
B. 0.212
C. 0.2449
89. Given the joint probability table, the Variance of A is closet to:
A. 0.0276
B. 0.1661
C. 0.0450
90. Given the joint probability table, the covariance between stock A
and stock B is closet to:
A. 0.03690
B. 0.00129
C. -0.03690
91. Given the joint probability table, the correlation between Ra and Rb
is closet to:
A. -0.88
B. -0.33
C. +0.33

95
Probability
State of of the Conditional/Prob.
the Economic Stock of stock
Economy State Performance Performance
Good 60%
Good 30% Neutral 30%
Poor 10%
Good 30%
Neutral 50% Neutral 40%
Poor 30%
Good 10%
Poor 20% Neutral 60%
Poor 30%
92. What is the conditional probability of having good stock

performance in a poor economic environment?
A. 0.02
B. 0.03
C. 0.10
93. What is the joint probability of having a good economy and a

neutral stock performance?
A. 0.09
B. 0.20
C. 0.30
94. What is the total probability of having a good performance in the

stock?
A. 0.20
B. 0.35
C. 0.65
95. Given that the stock had a good performance, the probability the
state of the economy was good is closet to:
A. 0.31
B. 0.46
C. 0.51
96. Given the conditional probabilities in the table below un the
unconditional probabilities (Y=1)=0.3 and P(Y=2)=0.7, what is the
expected value of X :
Xi P(Xi/Y=1) P(Xi/Y=2)
0 20% 10%
5 40% 80%
10 40% 10%
A. 4.31
B. 5.46
C. 5.30
97. Compare the standard deviation of Delta's stock price given a

good, a neutral and poor economy state:
Prob. of
the Conditional/
State of the Economy Price Stock Prob. of
Price Economy State variation stock Price Price
Increasing 60% 250 $
Good 30% Stable 30% 235 $
Declining 10% 200 $
212 $ Neutral 50% Stable 40% 210 $
Declining 30% 195 $
Poor 20% Stable 60% 185 $
Declining 30% 150 $
A.
B.
C.
98. Let X be a Normal random variable N (1, 2) and Y a random

variable Y = a + b * X, with a constant and b> 0. What is the
distribution of Y?
A. N(a + b, 2)
B. N(a + b, 2b2)
C. N(1 + a, 2 * b)
99.- Let the random variable X, whose mean is 5 and the variance is
3. We apply the following transformation: Y = 20X + 8. What will be
the mean and the variance of the variable Y?
A. 100 1500
B. 108 1200
C. 108 1500
100. A jewelry box contains 5 white pearl, 2 gold rings and 6 silver
rings. What are the odds of drawing a white pearl from the jewelry
box?
A. 8:5
B. 5:13
C. 5:8
CHAPTER 4 – COMMON
PROBABILITY DISTRIBUTIONS
101. A discrete uniform distribution consists of the following 10

values:
-2,8 6,3 7,2 -5,1 8,9

2,5 7,7 1,8 0,5 -6,3
On a single draw from the distribution, the probability of drawing a

value between -3,0 and 3,0 from the distribution is closet to:
A. 40.00%.
B. 27.59%.
C. 33.33%.
102. The following table shows the discrete uniform probability

distribution of gross profits from the purchase of an option:
Cumulative
Profit Distribution
Function
$0 0.2
$1 0.4
$2 0.6
$3 0.8
$4 1.0
The probability of a profit greater than or equal to $1 and less than or

equal to $4 is closest to:
A. 0.4.
B. 0.6.
C. 0.8.
103. A normally distributed random variable has a mean of 100 and

a standard deviation of 12. The probability of observing a value
greater than 82 is the cumulative distribution function (cdf) of the
standard normal variable:
A. N(1.5).
B. N(–1.5).
C. 1 – N(1.5).
104. A company has an unsecured line of credit and needs to

maintain its EBIT-to-interest coverage ratio greater than 2.0. Its EBIT
is estimated to be between $36 million and $48 million, with all
values equally likely. If the forecasted interest charge for the year is
$20 million, the probability that EBIT/interest will be more than 2.0 is
closest to:
A. 61.5%.
B. 33.3%.
C. 66.7%.
105. The following table shows the forecasted price movements of a

stock that is currently priced at 40 and does not pay a dividend.
Movement Probability of Period Return

Movement if Movement
Up 65% +10%
Down 35% –10%
Using the binomial model, the probability that the stock’s price will be
$39.60 at the end of two periods is closest to:
A. 45.50%.
B. 42.25%.
C. 22.75%.
106. A noisy transmission channel has a per-digit

error probability p = 0.01. Calculate the probability of
more than one error in 10 received digits.
A. 0.42%
B. 0.43%
C. 0.44%
107. A discrete distribution (each event has an equal probability of

occurrence) has the following possible outcomes for X .
The variance of this distribution is closest to:
A. 0.00
B. 1.00
C. 1.25
108. Which of the following s NOT a probability distribution?
A.
B.
C.
109. In a Random experiment, event A occurs with probability 0.2.

The experiment is carried out three times and the random variable X
is defined by the number of times that A has occurred in the three
tests that are supposed to be independent. Calculate E[X] and
E
A. 0.50 0.48
B. 0.60 0.48
C. 0.48 0.60
110. Given the variable X with normal distribution, N (0,1). A sample

of four values of X is chosen at random, what is the probability that
at least two of them belong to the interval (-1.96; 1.96)?
A. 99.95%
B. 95.99%
C. 99.90%

through to 114
Let X being a discrete random variable which can take the following
values:
111. Calculate the expectation of X: E[X]

A. 8,90
B. 9,90
C. 10,9
112. Calculate the expectation of 1/X: E[1/X]
A. 0.1085
B. 0.1025
C. 0.1185
113. Calculate E[X2]
A. 103
B. 104
C. 105
114. Calculate
A. 6.99
B. 7.15
C. 8.99
115. Let F (X) being a cumulative distribution function of any
continuous distribution. What is F (0.5)?
A. F(0.5)=Impossible to determine
B. F(0.5)=0
C. F(0.5)=1/2
116. -The exams leading to the CFA designation are recognized for
their difficulty. To this end, the annual passing rate for the first exam
is regularly under 40%. A few years ago, candidates had to choose
between 4 answer choices for each of the 120 questions on the first
exam. As of June 2009, this exam has only presented 3 answer
options to each of the 120 questions. If an exam candidate answers
each of the questions at random, now that 3 answer choices are
provided, what is the probability that this candidate obtains exactly
45 correct answers?
A. 4.57%
B. 4.74%
C. 3.69%
117. A mortgage broker needs to meet 10 potential clients today.

Each time, he estimates that he has a one in five chance of
convincing his interlocutor to do business with the financial institution
he works for. The financial institution will pay a performance bonus to
the broker if he succeeds in convincing at least 6 clients. What is the
probability that the broker will receive a performance bonus?
A. 63.69%
B. 64.74%
C. 63.29%
118. The monthly stock performance of a large American corporation

that does not pay dividends is characterized by
- A mean of 2.50%;
- A standard deviation of 2%;
- An asymmetry coefficient of 0;
- A kurtosis coefficient of 3 (excess kurtosis of 0).
Based on this information, calculate the probability that an investor
will realize a negative monthly return on the company’s shares.
A. 0.10565
B. 0.11552
C. 0.13255
119. Calculate the proportion of employees with income above $

18,000 per year for an economic sector whose salary distribution
measured in thousands of dollars follows a lognormal distribution
model with parameter µ= 2 and 1.2
A. 23.56%
B. 22.96%
C. 31.25%
120. If X is a random variable with probability distribution:
X 0 1 2 3
P(X) 1/8 3/8 3/8 1/8
Calculate E[4X2+X+3]
A. 16,50
B. 14.35
C. 20.55
X 0 1 2 3 4
P(X) 0,20 0,40 0,30 0,08 0,02
Calculate:
A. 5.39
B. 3.45
C. 4.59
124
Probability distribution of discrete random variable X

X 0 1 2 3 4 5 6 7
P(X) 4% 11% 18% 24% 14% 17% 9% 3%
122. The cdf of 5 or F(5) is
A. 0.14
B. 0.88
C. 0.71
123. The probability that X is greater than 3 is:
A. 0.24
B. 0.43
C. 57
124.- What is P( 2
A. 0.73
B. 0.17
C. 0.38
125. The table below lists closing prices for Alpha Stock over the
course of 5 days.
Alpha Stock Closing Price

Date Closing Price
07-sept-20 49,40
08-sept-20 49,95
09-sept-20 50,64
10-sept-20 51,14
11-sept-20 50,60
Estimate the volatility of Alpha shares. (Annualize volatility based on

250 days in a year).
A. 0.1770
B. 0.1950
C. 0.1675
CHAPTER 5 – SAMPLING AND
ESTIMATION
126. Consider a two-tailed test of the hypothesis that the population mean is
zero. The sample has 50 observations. The population is normally distributed
with a known variance.
t-Test rejection level

Degrees of freedom p = 0.10 p = 0.05 p = 0.025
49 1.299 1.677 2.010
50 1.299 1.676 2.009
z-Test Rejection α = 0.10 α = 0.05 α = 0.025
level
1.645 1.960 2.330
At a 0.05 significance level, the rejection points are most likely at:
A. –2.009 and 2.009.

B. –2.010 and 2.010.
C. –1.960 and 1.960.
127.- A sample of 100 observations drawn from a normally distributed

population has a sample mean of 12 and a sample standard deviation of 4.
Cumulative Probabilities for a Standard Normal Distribution P(Z ≤ x) = N(x) for x ≥ 0 or

P(Z ≤ z) = N(z) for z ≥ 0
x 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
or
z
1.5 0.9332 0.9345 0.9357 0.9370 0.9382 0.9394 0.9406 0.9418 0.9429 0.9441
1.6 0.9452 0.9463 0.9474 0.9484 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545
1.7 0.9554 0.9564 0.9573 0.9582 0.9591 0.9599 0.9608 0.9616 0.9625 0.9633
1.8 0.9641 0.9649 0.9656 0.9664 0.9671 0.9678 0.9686 0.9693 0.9699 0.9706
1.9 0.9713 0.9719 0.9726 0.9732 0.9738 0.9744 0.9750 0.9756 0.9761 0.9767
2.0 0.9772 0.9778 0.9783 0.9788 0.9793 0.9798 0.9803 0.9808 0.9812 0.9817
Using the excerpt from the z-distribution given above, the 95% confidence
interval for the Population mean is closest to:
A. 11.340 to 12.660.
B. 11.216 to 12.784.
C. 4.160 to 19.840.
128.- An analyst determines that approximately 99% of the observations of

daily sales for a company are within the interval from $230,000 to $480,000
and that daily sales for the company are normally distributed. If approximately
99% of all the observations fall in the interval μ ± 3σ, then using the
approximate z-value rather than the precise table, the standard deviation of
daily sales for the company is closest to:
A. $41,667.
B. $62,500.
C. $83,333.
129. An analyst calculated the average return of a hedge fund by taking a

random sample of 6 years’ return. The hedge fund has been in existence for
last 20 years. Assume the hedge fund return is normally distributed with a
population mean and standard deviation of 34% and 42% respectively. The
99% confidence interval around the population mean for the analyst’s sample
of hedge fund return is closest to:
A. -9.88%; 60.58%
B. -10.24%; 78.24%
C. -8.59%; 54.25%
130. Assume that monthly returns are normally distributed with a mean of 1
percent and a sample standard deviation of 4 percent. The population
standard deviation is unknown. Construct a 95 percent confidence interval for
the sample mean of monthly returns if the sample size is 24.
A. -0.39%; 2.69%
B. -0.69%; 2.69%
C. -0.69%; 2.39%
131. The average salary for a sample of 61 CFA Charterholders with 10 years
experience is $200,000, and the sample standard deviation is $80,000.
Assume the population is normally distributed. Which of the following is a 99%
confidence interval for the population mean salary of CFA Charterholders with
10 years of experience?
Student's t-Distribution
Level of Significance for One-Tailed Test
df 0,100 0,050 0,025 0,010 0,005 0,0005
Level of Significance for Two-Tailed Test
df 0,20 0,10 0,05 0,02 0,01 0,001
40 1,303 1,684 2,021 2,423 2,704 3,551
60 1,296 1,671 2,000 2,390 2,660 3,460
120 1,289 1,658 1,980 2,358 2,617 3,373
A. $172,514 to $227,486.
B. $160,000 to $240,000.
C. $172,754 to $227,246.
132.- Let X be a random variable with mean 33 and variance 16. Find
a lower bound for P [23 <X <43].
A. 21/25
B. 22/25
C. 23/25
133. The number of people who attend a meeting room daily is a random
variable with unknown distribution whose mean is 300 people with a variance
of 81 people. How many chairs must be available in the room to be able to
attend these people with probability not less than 90?
A. 327
B. 328
C. 329
134. A sample of size n = 10 is selected from a normal population with

unknown mean µ resulting in: 40,45,39,46,58,52,50,45,57,49
Construct a 95% confidence interval for the parameter µ, assuming that the
population variance is 49.
A. 43,77; 52.43
B. 45,77; 54,43
C. 47,77; 56,43
135. Variable X follows a normal distribution N ( , 4), calculate the minimum

sample size, with 99% confidence, that the interval
contains the parameter .
A. 46
B .47
C .48
136.- A random sample of 25 with a mean 80 is taken from a population of

1000 that is normally distributed with a standard deviation of 30. Find the 95%
confidence intervals for the unknown population mean.
A. 68,24; 91.76
B. 69,24; 92,76
C. 70,24; 93,76
137. A researcher wishes to estimate the mean weekly wage of the several
thousands of workers employed in a plant within plus or minus $20 and with a
99% degree of confidence. From past experience, the researcher knows that
the weekly wages of these workers are normally distributed with a standard
deviation of $40. What is the minimum sample size required?
A. 26
B. 27
C. 28
138.- A random sample of n=25 with =80 is taken from a population of 1000
with =30.Suppose that we know that the population from which the sample is
taken is not normally distributed. Find the 95% confidence interval for the
unknown population mean.
A. 52; 106
B. 53; 107
C. 54; 108
139.- The size of the equity-risk premium is a source of considerable

controversy, as it is used in the CAPM to obtain a required rate of return from
the investor. The results published by Dimson, Marsh and Staunton (2006)
mention that the annual market risk premium in Canada over the period 1900-
2005 is: 7.60% based on an arithmetic mean with a standard deviation of
16.80%. Assuming that the market risk premium behaves like a normal
distribution with a known variance (the one published), construct a 95%
confidence interval of the average Canadian market risk premium.
A. 4.40%; 10.80%
B. 4.40%; 8.80%
C. 4.50%; 10.90%
140.- Ten analysts disclose their forecast for the company's expected profit
over the next fiscal year. Here's the breakdown of analyst forecasts:
Forecasts (Xi) # Analysts

2.15 1
2.18 1
2.19 3
2.21 2
2.24 1
2.27 1
2.30 1
The sample is a small proportion of the total of analysts who cover the
company, and assume that earnings follow a normal distribution. Assuming
you don't know the variance of the forecasts, calculate an interval at 95% of
the mean of the analysts' forecasts.
A. 2,18 ; 2.24
B. 2,24 ; 2.30
C. 2,12 ; 2.18
141. Using a two-tailed test of the hypothesis that the population

mean is zero, the calculated test statistic is 2.51. The sample has 23
observations. The population is normally distributed with an unknown
variance.
Degrees
of p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005
freedom
21 1.323 1.721 2.080 2.518 2.831
22 1.321 1.717 2.074 2.508 2.819
23 1.319 1.714 2.069 2.500 2.807
24 1.318 1.711 2.064 2.492 2.797
An analyst will most likely reject the null hypothesis at significance
levels of:
A. 0.10 only.
B. 0.10, 0.05, and 0.01.
C. 0.10 and 0.05.
142. -When an investigator wants to test whether a particular

parameter is greater than a specific value, the null and alternative
hypothesis are best defined as:
A. H0: θ ≥ θ0 versus Ha: θ < θ0.

B. H0: θ = θ0 versus Ha: θ ≠ θ0
C. H0: θ ≤ θ0 versus Ha: θ > θ0.
143. For a two-tailed hypothesis test, the p-value is given as 0.05. At

the 10% of significance, the null hypothesis wills most like be:
A. Rejected
B. Not rejected
C. Accepted
144.- John Smith is evaluating the effects of the 2008 market decline
on the volume of trading. Specifically, he wants to test whether the
decline affected trading volume. He selected a sample of 500
companies and collected data on the total annual volume for one
year prior to the decline and for one year following the decline. What
is the set of hypotheses that Smith is testing?
A. H0: μd = μd0 versus Ha: μd ≠ μd0.

B. H0: μd = μd0 versus Ha: μd > μd0.
C. H0: μd ≠ μd0 versus Ha: μd = μd0.
145. Knowing that the two graphs come from the same law for a
hypothesis test. One of them represents a critical threshold of 0.05
and the other represents the "p-value" which has a value of 0.013.
Identify which graph represents each measure.
(1)
(2)
A. Graph 1 represents the critical threshold (5%) and graph 2

represents the “p-value”
B. Graph 2 represents the critical threshold (5%) and graph 1
C. Neither 1 nor 2
146. Omicron Company is a manufacturing company. During the last

business cycle (6-year cycle) Omicron's average net profit was $ 30
million per year with a standard deviation of $ 10 million. In previous
business cycles, Omicron's average net income was $ 24 million per
year.
Omicron managers say that Omicron's recent good performance is

driven by a new business model and cannot be compared to the
average performance achieved in previous business cycles. Identify
the appropriate statistic and determine the acceptance or rejection of
the null hypothesis with a significance level of 0.05.
A. the statistic is 1,4697 and we cannot reject

B. the statistic is 1,4697 and we can reject
C. the statistic is 2,015 and we cannot reject
147.- An analyst wants to test the hypothesis that the standard

deviation of American stocks in 2018 is less than 4.0% (one-sided
test). To achieve this, he recovered a standard deviation of 3.6% for
stock market data from 24 companies based across the country.
Identify the appropriate statistic and determine the acceptance or
rejection of the null hypothesis with a significance level of 0.05.
A. The statistic is 18,63 and we can reject

B. The statistic is 18,63 and we cannot reject
C. The statistic is 13,091 and we can reject
148.- You are analyzing an equity fund that has been in existence for
3 years (36 months). During this period, the fund recorded an
average performance of 2.10% per month with a sample standard
deviation of 3.10%. Given its level of systematic risk, this investment
fund should have earned 1.20% return per month during the period.
Assuming a normal distribution, are the results obtained consistent
with the assumption of an average monthly return of 1.20%.
Identifies the appropriate statistical test and identifies if you can
reject the null hypothesis at 10% threshold. Is this also the case at
1% threshold?
A. Reject at threshold = 10%. Do not reject at threshold

= 1%,
B. Do not reject at threshold = 10%. Do not reject at

threshold = 1%,
C. Do not reject at threshold = 10%. Reject at threshold
= 1%,
149. During the 2000s, the standard deviation of annual returns for
XYZ stock was 10.426%. You want to test whether this sample is
sufficient to demonstrate your conclusion that the variance of the titre
is different from 0.5% at the 5% threshold.

150. We want to test the hypothesis whether the average of the

returns on a stock index in the 1990s is substantially different from
the 2000s. Suppose the variance between the two decades is
equivalent. Is the difference statistically significant? Here is a table
showing the data:
Average Standard
Period N monthly deviations of
returns (%) returns
Years 1990 100 0.612 4.896
Years 2000 100 1.525 5.235
Identify the right statistical test. Determine whether or not you should
reject the null hypothesis at the 10% thresholds.
A. The statistic is -1,27 and we can reject

C. The statistic is -1,27 and we cannot reject
151. We want to test the hypothesis whether the average bond

recovery rate on a $ 100 basis is similar between utility bonds to
non-utility bonds. Is the difference statistically significant? Here is a
table showing the data.
Sample of utilities bonds Sample of non-utilities bonds

Number of Average Standard Number of Average Standard
observation recovery deviation observation recovery deviation
rate ($) ($) rate ($) ($)
65 62,51 12,56 48 50,48 29,21
Determine the number of degrees of freedom for the statistical test.

Should you reject the null hypothesis at the 10% threshold or not?
A. 62 degrees of freedom and we can reject

B. 65 degrees of freedom and we can reject
C. 62 degrees of freedom and we cannot reject
152. Kappa Consulting examined the investment strategy of

investing in the 10 stocks with the highest dividends (by rebalancing
the portfolio on an annual basis) compared to a buy-and-hold
investment in the Dow Jones Industrial Index Average across the 30
index companies. The study period is the 50-year period from 1950
to 2000. Is the observed difference in yield statistically significant?
Here is a table showing the results:
Average Standard
Strategy
Return deviation
Dow-10 15.81% 20.15%
Dow-30 12.45% 17.29%
Difference 3.85% 7.22%*
* Sample standard deviation of return differences
Formulate a null hypothesis and a consequent alternative hypothesis

if the difference in average return between the two strategies is
equal to 0. Determine whether or not you should reject the null
hypothesis at the 1% threshold.
A. The statistic is 3.77 and we can reject

B. The statistic is 3.77, we cannot reject
C. The statistic is 2.68, we can reject
153. You need to analyze whether the population variance of the S &
P 500 Growth Index returns was affected by the October 2008 stock
market crash to a significance level of 0.05. To do this, you retrieved
data on the monthly returns for the 120 months preceding the crash
and the 120 months following the 2008 crash.
Average Variance
Period n monthly of
return (%) returns
Before October
121 1,521 25,43
2008
After October
121 1,556 22,47
2008

with what you need to analyze. Identify the right statistical test.
Determine whether or not you should reject the null hypothesis at the
5% threshold.
B. The statistic is 1.132 and we cannot reject
C. The statistic is 1.235 and we cannot reject
154. We have retrieved the monthly returns of 5 financial indices and

want to test the correlation. For each market index, we collected 348
monthly data, which allowed us to calculate 347 monthly returns.
Correlation
S&P
500 MSCI 1 MSCI 2 MSCI 3
S&P/TSX
Composite 0,7588 0,0445 0,1251 0,0951
For each foreign index, test the hypothesis that the correlation with
the TSX Composite is 0. Use a significance level of 10% and point of
rejection equal 1.65. Identify the right statistical test. Determine
whether or not you should reject the null hypothesis.
A. reject absence of correlation between TSX and S&P500, MCI

2, MCI 3; but do not reject absence of correlation between TSX
and MCI 1.
B. reject absence of correlation between TSX and S&P500, MCI
3; but do not reject absence of correlation between TSX and
MCI 1, MCI 2.
C. reject absence of correlation between TSX and S&P500; but
do not reject absence of correlation between TSX and MCI 1,
MCI 2, MCI 3.
155. The exhibit provides information concerning quarterly returns on

two otherwise identically managed equity funds, Alpha and Beta, as
well as statistical estimates concerning their mean return differences
over the past fifty quarters.
Fund
Beta
Fund Alpha Return Differences
Measure Return (%) (%) (Fund A - Fund B)
Mean 2 780 3 756 -0,976
Standad
Deviation 4 672 5 468 -0,796
Using a critical value of 1.671, which of the following conclusions is

most likely valid concerning differences between the mean returns
on Fund Alpha and Beta?
A. The difference is significant.

B. The difference is not significant as the null hypothesis is rejected.
C. The difference is not significant as the null hypothesis is not
rejected.
156. Donald Smith, a portfolio manager, is comparing the
performance of a client’s portfolio before and after the inclusion of
energy stocks. He has complied relevant data in a table. He aims to
analyze whether quarterly returns have changed significantly
between the two periods. He collects returns data five years prior to
and five years after the inclusion.
Mean Variance
Quarterly of
N Returns(%) Returns
Before 2
inclusion 20 584 225
1
After inclusion 20 821 151
Using a 2.1555 rejection point, the manager will most likely conclude
that the inclusion of real estate:
A. significantly alters portfolio performance.

B. has an indeterminate effect on portfolio performance.
C. does not significantly alter portfolio performance

161
Two samples were drawn form a normally distributed population. For

the first sample, the mean was $50 and the standard deviation was
$5. For the second sample the mean was $55 and the standard
deviation as $6. The first sample consist of 25 observations and the
second sample of 36 observations. (Note: In the questions below the
subscripts 1 and 2 indicate the first and second sample respectively).
157. Consider the hypotheses structured as

. At a 1% level of significance, the
null hypotheses:
A.- Cannot be rejected
B.- Should be rejected
C.- Should neither be rejected nor failed t be rejected
158. Using a 5% percent level of significance and a hypothesis test
structured of vs , the null hypothesis:
A. cannot be rejected
B. should be rejected
C. should neither be rejected nor failed t be rejected
159. Consider the hypothesis structured as:

null hypothesis:
structured of vs , the null hyphotesis:
161.- If the level of significance of a test is 0.05 and the probability of

Type II error is 0.15, what is the power of the test?
A. 0.850
B. 0.950
C. 0.975
162. All of the following are true about F- distribution and Chi-square
distribution EXCEPT They:
A.- are both asymmetrical

B.- are both bound by zero on the left
C.- both have means that are less than their standard deviation
163. For a hypothesis test with a probability of a Type II Error of 60

percent and probability of a Type I error of 5% which of the following
statements is TRUE?
A. The power of the test is 40% and there is 5% of probability that

the test statistic will exceed the critical value(s).
B. There is a 95% of probability that the test statistic will be between
the critical values if this is a two-tail test.
C. There is a 5% of probability that the null hypothesis will be
rejected when actually true, and the probability of rejecting the null
when it is false is 40%.
CHAPTER 1- THE TIME VALUE OF MONEY
(Answers)
1.- Francesco just won the lottery. He has two options to take the money. He
can take the lump sum of $3,000,000 or he can take the level payments of
$500,000 over 6 years. If he takes the lump sum, Francesco will deposit the
money into an account earning i% annually. If Francesco takes the payment
plan, he will deposit the payments at the end of each year at a compounded
interest of 14%. After 16 years, the accounts will be equal. Calculate i.
A. 10.95%
B. 5.63%
C. 10.65%
Answer A
Second option
0 1 2 3 4 5 6 … 16
500,000 500,000 500,000 500,000 500,000 500,000 …. X
Second option - Present value at t=0

N =6; I/Y=14%; PMT 500000; PV=X; FV =0; then PV= $1,944,333,76
Future Value at t=16

N =16; I/Y=14; PMT =0; PV=1,944,333,76 FV =X then $15,821,528,50
First option: Lump sum

0 1 2 3 4 5 6 … 16
3,000,000 - - - - - - - X
Set value in second option equal the lump sum accumulated value at t=16
N =16; I/Y=X; PMT =0; FV=15,821,528,50 PV =-3,000,000 then I/Y=10.95%
Use the following information to answer Questions 2 through 3.
2.- An annuity plan gives you two options: either the payment of a lump sum
of $ 120,000 on your 63rd birthday, or an annuity of C $ until your death. The
annual effective interest rate is 12% and your life expectancy is 75 years.
What is the annuity that would make the two options equivalents, assuming
that the data provided (12% and 12 years of remaining life) are reliable?
A. $19,365
B. $19,372
C. $19,383
Answer B
63th 75th
anniv. anniv.
0 1 2 3 4 5 6 … 12
120,000 X X X X X X - X
N =12; I/Y=12%; PMT = X; PV= -120,000; FV =0

PMT= $19,372.42 / year.
3.- If you had joined the pension plan at age 45, what annual end-of-period
contribution would have accumulated $ 120,000 at your 63rd birthday,
assuming the expected annual effective rates are 10% for the first eight years
and 12% thereafter?
A. $2,235
B. $2,248
C. $2,261
Answer C
45 63
anniv. anniv.
0 1 2 … 8 9 …. 18
-- X X X X X X X
10% 12%
Calculate FV8 (from 1 to 8th anniversary)

N =8; I/Y=10%; PMT = 1; PV= 0; FV8factor =? Then FV8factor =11,4359
FV8= FV8factor X = 11,4359X
Calculate FV18 (from 9 to 18th anniversary)

N =10; I/Y=12%; PMT = 1; PV= 0; FV18factor =? Then FV18factor =17,5487
FV18= FV18factor X = 17,5487X
In t=18 (63th Anniversary)

$120 000 = $11,4359 x (1+0,12)10+$17,5487X then X = $2,261.30 / year
4.- You finish your university studies and you team up with two of your study
colleagues to open an administrative consulting office. You will need an
amount of $ 70,000 to get started. You think you can borrow this amount from
a financial institution at a rate of 15% capitalized every month. You believe
you can make the following payments: $ 20,000 in 1 year, $ 30,000 in 2
years, $ 20,000 in 3 years and the final payment at the end of the 4th year.
What will be the value of this last payment?
A. $30,160
B. $32,160
C. $34,164
Answer B
CF0 CF1 CF2 CF3 CF4

70 000 (20 000) 30 000 20 000 X
Interest = ((1+0.15/12)12-1)=16.08%
$70,000=-$20 000/1.1608+30,000/1,16082+20,000/1,16083+X/1,16084
X=$32,160.34
5. -For your studies, you borrowed $ 5,000 from one of your uncles who
asked you to repay him this amount in 16 equal quarterly installments of $
368.25. At what annual effective interest rate did your uncle give you this
loan?
A. 8.24%
B. 8.42%
C. 8.28%
Answer A
0 1 2 3 4 ….. 16
5 000 368,25 368,25 368,25 368,25 368,25 368,25
N=16; I/Y=X; PV=-5000; FV=0; PMT=-368,25 then I/Y=2% quarterly

I/Y annual = (1+0,02)4-1=8.243%
6. -You are analyzing the last five years of earnings per share data for a
company. The figures are $4.00, $4.50, $5.00, $6.00, and $7.00. At what
compound annual rate did EPS grow during these years?
A. 15.02%
B. 14.07%
C. 12.05%
Answer A
FV = PV(1+r)n then 7= 4(1+r)4 => r=15.02% EPS grew at annual rate of

15.02% during the four years.
7.- An analyst expects that a company's net sales will double and the
company's net income will triple over the next five-year period starting now.
Based on the analyst's expectations, which of the following best describes the
expected compound annual growth?
A. Net sales will grow 15% annually and net income will grow 25% annually.
B. Net sales will grow 20% annually and net income will grow 35% annually.
C. Net sales will grow 25% annually and net income will grow 25% annual
Answer A
For sales: N=5; I/Y=?; PMT=0; PV=1; FV =-2; then I/Y=14,87%

For Income: N=5; I/Y=?; PMT=0; PV=1; FV =-3; then I/Y=24,57%
8.- An investor invested $10,000 into an account five years ago. Today, the
account value is $18,682. What is the investor's annual rate of return on a
continuously compounded basis?
A. 13.31%.
B. 11.33%.
C. 12.50%.
Answer C
Using continuous compounding: FV= PV*er*5 then 18,682=$10,000* er*5

rc=12.50%
9.- An investor wants to receive $1,000 at the beginning of each of the next
ten years with the first payment starting today. If the investor can earn 10
percent interest, what must the investor put into the account today in order to
receive this $1,000 cash flow stream?
A. $7,145.
B. $6,759.
C. $6,145.
Answer B
0 1 2 … 6 7 8 9 10
1,000 1,000 1,000 …. 1,000 1,000 1,000 1,000 1,000
Change calculator to mode BGN mode:
Present value at t=0
N =10; I/Y=10%; PMT 1000; PV= X; FV =0; then PV=$6,759.02
Another way to get same result is using END mode:

Present value at t=0 (from year 1 to year 9)
N =9; I/Y=10%; PMT 1000; PV= X; FV =0 then PV1=$5,759.02 and
PV=$5,759.02 + $1,000=$6,759.02
10. John and Elsa borrowed $15,000 to help finance their wedding and
reception. The annual payment loan carries a term of seven years and an
11% interest rate. Respectively, the amount of the first payment that is
interest and the amount of the second payment that is principal are
approximately:
A. $1,650; $1,702.
B. $1,650; $1,468.
C. $1,468; $1,702.
Answer A
Calculation of the annual payment

N =7, I/Y=11%, PMT = X, PV= -15000 FV =0 then PMT=$3,183.23
Initial PMT - End

Year balance PMT Interest Interest Balance
0 - - - - 15 000
1 15 000 3 183 1 650 1 533 13 467
2 13 467 3 183 1 481 1 702 11 765
11.- An investor deposits $1,000 into an account that pays 8% per annum
compounded continuously. The value of the account at the end of four years
is closest to:
A. $1,285.41.
B. $1,252.15.
C. $1,377.13.
Answer C
Using continuous component: FV = PVe0,08*4 = $1,377.13
12.- If the price of a stock goes from $15.00 to $16.20 in one year, the
continuously compounded rate of return is closest to:
A. 7.70%.
B. 8.33%.
C. 8.00%.
Answer A
r = Ln (S2/S1) = 7.70%
Verification: S1*e(Rc) = S2 --> 15.00*e(0.077) = 16.20
13.- Two years from now, a client will receive the first of three annual
payments of $20,000 from a small business project. If she can earn 9 percent
annually on her investments and plans to retire in six years, how much will
the three business project payments be worth at the time of her retirement?
A. 77,894
B. 75,562.
C. 78,981.
Answer A
0 1 2 3 4 5 6
- 20 000 20 000 20 000 - -
Future value at t=4
N =3; I/Y=9%; PMT 20000; PV= 0; FV =X; then FV=$65,562
Future value at t=6
N =2; I/Y=9%; PMT =0; PV=65,562; FV =X; then FV=$77,894.2
14.- A perpetual preferred stock position pays quarterly dividends of $1,000
indefinitely (forever). If an investor has a required rate of return of 12 percent
per year on this type of investment, how much should he be willing to pay for
this dividend stream?
A. $32,678
B. $33,333
C. $34,251
Answer B
0 1 2 3 …
1 000 1 000 1 000 1 000
r= 12/4=3% then PV = (A/r) = (1000/0,03) = 33,333,33
The investor has to pay $33,333.33 today to receive $1000 per quarter
forever.
15.- A client plans to send a child to college for 4 years starting 18 years from
now. Having set aside money for tuition, she decides to plan for room and
board also. She estimates these costs at $20,000 per year, payable at the
beginning of each year, by the time her child goes to college. If she starts
next year and makes 17 payments into a savings account paying 5 percent
annually, what annual payments must she make?
A. $2,744
B. $3,177
C. $2,477
Answer A
0 1 2 … 17 18 19 20 21
X X …. X 20 000 20 000 20 000 20 000
1. Total cost at t=17 (BGN MODE)

N =4; I/Y=5%; PMT 20000 PV= X; FV =0 then PV = $74,464.96
2. Total savings at t=17 has to be equal to total cost at t=17 (END MODE)
N =17; I/Y=5%; PMT =X; PV=0; FV =74,464.96 then PMT=$2,744.50
16.- You and two of your brothers are equal shareholders in a retail business.
You are thinking of modernizing trade accounting by implementing a
microcomputer system. The entire system turns out to be quite expensive
and each of you will have to invest $ 15,000 personally. You don't own this
money, but you could borrow it from your financial institution. However, you
already have a mortgage loan to repay. This loan was taken out 10 years ago
at a rate of 8%, for an initial maturity of 20 years. You still have to pay $
30,000 on the initial amount. You have two solutions to find the amount of $
15,000.
1) Take out a second mortgage on your house in the amount of $ 15,000

at 12% capitalized semi-annually and repayable over 10 years.
2) Refinance in full the mortgage and personal loan balance ($ 45,000)
at a rate of 10% capitalized semi-annually, repayable over 10 years.
Which option will you choose?
A. First option
B. Second option
C. Both options
Answer A
1.-First Option
Current mortgage
0 1 2 3 4 5 … 120
30 000 X X X X X X X
I/Y= 8%/2=4% quarterly –> I/Y=(1+0,04)2-1=0.6558% monthly

N =120, I/Y= 0,6558%, PMT=X, PV=-30,000, FV =0 –>PMT=$361.92
Second range mortgage

0 1 2 3 4 5 … 120
15 000 X X X X X X X
I/Y= 12%/2=6% quarterly–>I/Y=(1+0,06)2-1=0.9759% monthly

N =120, I/Y=0,9759%, PMT=C, PV=-15,000, FV =0 –> PMT=$212,70
The total payment is $361,92 +$212,70 =$574,62
2.- Second Option

Current mortgage
0 1 2 3 4 5 … 120
45 000 X X X X X X X
I/Y= 10%/2=5% quarterly->I/Y=(1+0,05)2-1=0.8165% monthly

N =120; I/Y=0,8165%; PMT=X; PV=-45,000; FV =0 –> PMT=$589,65
Answer: First option is the best
17.- John Smith borrows a sum of $ 5,000 from one of his associates. He
agrees to repay it through 10 semi-annual end-of-period payments. The
borrowing rate used for borrowing purposes is 12% / year capitalized semi-
annually. Immediately after making the sixth installment, the borrower decides
to pay off the balance of his debt with a final payment. You are asked to
calculate this final amount.
A. $2,374
B. $2,573
C. $2,354
Answer C
0 1 2 3 4 5 … 10
5 000 X X X X X X X
I/Y= 12%/2=6% semi-annual

N =10, I/Y=6%, PMT=X, PV=-5000, FV =0 then PMT=X=$679.34
0 1 2 3 4
… 6 7 8 9 10
PV6 679,34 679,34 679,34 679,34
N =4, I/Y=6%, PMT=679.34 PV=-X, FV =0 then PV6= $2,353.98
18. -A business owner is considering purchasing mechanical equipment with

a useful life of four years, with zero residual value after four years. This
equipment must provide additional net revenues each year estimated at:
$ 20,000 for the first year

$ 15,000 for the second year
$ 10,000 for the third year
$ 7,000 for the fourth year
Assuming that the investment is made at the start of the first year and the
additional revenue is made at the end of each year, calculate the maximum
amount that this owner should invest for this equipment, knowing that he
wants to obtain a 12% effective rate of return per year.
A. $45,480
B. $41,381
C. $37,284
Answer B
- 1 2 3 4
PV 20 000 15 000 10 000 7 000
I/Y=12%; CF0=0; CF1=20000; CF2=15000; CF3=10000; CF4=7000

Maximum amount to pay: PV= $41,381,48
19.-Mr. Rene Levesque has just obtained from his bank a personal loan of $
10,000 to repay over 3 years at the rate of $ 4,533.33 per year, at year end.
The interest rate posted by the bank was 12%. However, the bank calculated
the amount of annual repayments as follows:
Loan amount $ 10,000

Annual interest (12% X $ 10,000 = $ 1,200)
Interest payable ($ 1,200 X 3) $ 3,600
Total reimbursements $ 13,600
Annual reimbursement to be done ($ 13,600 / 3) $ 4,533.33
What is the implicit rate that the bank actually charged him for this loan?
A. 17.10%
B. 14.38%
C. 17.28%
Answer A
0 1 2 3
10 000 (4 533) (4 533) (4 533)
N=3, I/Y=X% PMT=-4533,33 PV=10000 FV=0 then I/Y=17,1035%

20.- An amount of $ 1,000 is invested for 5 years at 12% capitalized quarterly,
then replaced with interest for 4 years at 10% capitalized monthly and, finally,
the whole is replaced for 3 years at 8% capitalized annually. What amount will
have been accumulated at the end of 12 years?
A. $3,488
B. $3,287
C. $3,388
Answer C
0 1 2 3 4 5 6 7 8 9 10 11 12
1000 VF12
12% 10% 8%
r1 quarterly=12%/4=3%-->r1 =((1+0,03)4)-1=12,55% /year

r2 quarterly=10%/12=0,8333%-->r2 =((1+0,008333)12)-1=10.47% / year
r3 =8%/year
VF12=1000 x(1+0,1255)5 x (1+0,1047)4 x (1+0,08)3=$3,388.55
21.- The board of directors of Kappa & Gamma Inc. usually declares the
amount of the four quarterly dividends for the following year each year. The
next quarterly dividend for the common stock of Kappa & Gamma Inc. has
been set at $ 0.50 and will be paid in three months. You anticipate that after
the next four dividends of $ 0.50, the board will have to decrease the four
dividends by 4% for the following year. Suppose this scenario will have to
recur for the following years. Thus, at the start of each year, the declared
dividends should be 4% lower than the dividends of the previous year. You
also anticipate that the financial difficulties of Kappa & Gamma Inc. will force
the board of directors to cease paying dividends altogether after nine years. If
you demand an effective rate of return of 10% on your investments, how
much do you value the common stock of Kappa & Gamma Inc.?
A. 10
B. 11
C. 12
Answer A
First, we must find the annual dividend equivalent to the first 4 quarterly
dividends
0 1 2 3 4
- 0,50 0,50 0,50 0,50
r1 quarterly = (1+0,10) (1/4)-1=2,411% /year

D1=FV=X; PMT=0,5; PV=0; N=4; I/Y=2,411%
D1=2,07351
Decreasing periodicity per year

0 1 2 … 9
Vo =Price D1 D2 D9
22.- John Hernandez pays a $700.00 monthly rent and is due on the first day
of every month. If the stated annual interest rate is 6 percent, the present
value of a full year’s rent payments is closest to:
A. $8,135.
B. $8,174.
C. $8,866.
Answer: B
imonthly = 0.06/12 = 0.005

N=12; I/Y = 0,5%; PMT=700 PV=? FV=0 (BGN MODE)
PV = $8,173,92
23.- Shelly Madore is choosing between two one-year investment plans with
a quoted rate of 8% and 12% respectively, each of which are compounded
continuously. Smith intends to invest $250,000 with the objective of
generating a minimum amount of $270,000 for his son's college education.
He is not concerned with maximizing his return. To achieve his objective,
Shelly will opt for:
A. the savings plan with a quoted rate of 8%

B. the savings plan with a quoted rate of 12%
C. either of the two saving plans
Answer: C
Annual effective rate = ercc-1

At 8% -> ($250,000)e(0,08)=$270,821,77
At 12% -> ($250,000)e(0,12)=$281,874,21
Both options are greater than $ 270,000,00
24. A stock doubled in value last year. Its continuously compounded return
over the period was closest to:
A. 18.20%
B. 69.30%
C. 100.00%
Answer: B
Ln(2)=0.6931
25. A perpetuity paying 1 at the beginning of each 6-month period has a

present value of 20. A second perpetuity pays X at the beginning of every 2
years. Assuming the same annual effective interest rate, the two present
values are equal. Determine X .
A. 3.51
B. 3.62
C. 3.71
Answer: C
PV1=1+1/isemi-annual then 20=1+1/i -> isemi-annual =
0,052631 i two years = (1+0,052631)4-1=0,227734
PV2=X+X/i two years then 20=X+ X/0,227734 --> X=20/5,39108785=3,70982

CHAPTER 2 - ORGANIZING,
VISUALIZING, AND DESCRIBING DATA
(Answers)
26. Consider the investment in the following table:
Start of Year 1 One share purchased at $100

End of Year 1 $5.00 dividend/share paid and one additional share purchased at
$125
End of Year 2 $5.00 dividend/share paid and both shares sold for $140 per
Assuming dividends are not reinvested, compared with the time-

weighted return, the money-weighted return is:
A. lower.
B. the same.
C. higher.
Answer A
Time - Weighted Rate

Year Start-of-year End of year
1 100 130
2 250 290
=(130-
HPY year 1 0,3 100)/100
HPY year 2 0,16 =(290-
250)/250
22,8%
Money Weighted Rate (TIR)

Year Cash Flow
0 -100 CF0
1 -120 CF1
2 290 CF2
TIR 20,6%
Difference between the TWR and MWR if this investment =

22,80%-20,55% = 2,25%
27. An analyst gathers the following information about the performance

of a portfolio ($ millions):
Quarter Value at Cash Inflow Value at End

Beginning of (Outflow) at of Quarter
Quarter (Prior Beginning of
to Inflow or Quarter
Outflow)
1 2.0 0.2 2.4
2 2.4 0.4 2.6
3 2.6 (0.2) 3.2
4 3.2 1.0 4.1
The portfolio’s annual time-weighted rate of return is closest to:
A. 8%.
B. 32%.
C. 27%.
Answer B
Val. Begining Val. Total Val.

Quarter +Inflow + Outflows Beginning End HPR
1 2 + 0,2 =2,20 2,2 2,4 9,09%
2 2,4 + 0,4 =2,80 2,8 2,6 -7,14%
3 2,6-0,20 =2,40 2,4 3,2 33,33%
4 3,20+1.0 =4,20 4,2 4,1 -2,38%
TWR=
then the portfolio 's annual time-weighted is 31,85 %
28.-The investment performance of Gamma Fund for the year 2019 is

as follows:
• On 1 January 2019, the fund had market value of $70 million.
• The holding period return for the fund from 1 January to 30 June was
18%.
• On 1 July 2019 the fund received an additional $35 million.
• On 31 December 2019 the fund received total dividends of $8 million.
• The fund’s market value on 31 December 2019 including $8 million
dividends was $134 million.
The time-weighted return computed by the manager is closest to:
A. 33.95%.
B. 32.22%.
C. 34.46%.
Answer C
Start of End of
Semester Semester Semester
1 70 initial value 82,6 =70x1,18
value including
2 117,6 =82,6+35 134 dividends
HPY Year 1 18,00%
HPY Year 2 13,95%
Time weighted rate of = ((1+0,18)*
return = 34,46% (1+0,1395))-1
29.- Given below are the sample monthly returns for YTM stock:
January 18.5%
February 6.6%
March -3.5%
April -11.4%
May 5.4%
June -17%
With the target return of 6.0%, the target semi-variance is closest to:
A. 234.47.
B. 184.47.
C. 207.45.
Answer B
For all Xi <B, tarjet semivarince:
30.- Henry wants to borrow $100,000 to finance his business. He is

offered a rate of 6% from a local bank, but is told that he would be
paying an effective interest rate of 6.09%. The frequency of
compounding on this loan is closest to:
A. Monthly.
B. Quarterly.
C. Semi‐annually.
Answer: C
Effective annual interest rate with monthly compounding= (1+0,06/4)12-

1=6,14%
Effective annual interest rate with quarterly compounding= (1+0,06/12) 4-
1=6,17%
Effective annual interest rate with semi-annual compounding=
(1+0,06/12)2-1=6,09%
31.- An analyst gathered the following information for Delta stock:
Year Return
1 7,50%
2 4,65%
3 -3,20%
4 5,50%
The mean absolute deviation of Delta stock’s return is closest to:
A. 3.53%
B. 3.41%
C. 3.75%
Answer B
32. Calculate the first, second and third quartiles of the hypothetical
portfolio.
-11,89% -11,07% -8,69% -6,61% -5,52%

-3,59% -1,49% -0,17% 2,89% 3,21%
4,17% 4,53% 6,22% 6,74% 8,60%
A. Q25 =-6.10% Q50=2.89% Q75=6.74%

B. Q25 =-6.10% Q50=-0.17% Q75=6.74%
C. Q25 =-6.10% Q50=-0.17% Q75=4.53%
Answer C
n=15
Ly = (n+1)(y/100)
L25 = 4 then Q25 = -6.10%

L50 = 8 then Q50 = -0.17%
L75 = 12 then Q75 = 4.53%
33.-Some statistics regarding the distribution of returns of two

hypothetical portfolios are shown in the table below. What portfolio
would an investor choose?
Mean Standard Skewness Excess

Monthly Deviation Kurtosis
Return
Portfolio 1.6792% 5.31% -0.1395 -0.0187
Alpha
Portfolio 1.8375% 5.90% 0.4934 -0.8525
Beta
A. Portfolio Alpha
B. Portfolio Beta
C. Neither Alpha nor Beta
Answer B
Neither of the two portfolios stands out significantly, since a higher

return implies a greater risk, additionally we do not have information in
terms of risk and return. In terms of asymmetry and in general, many
investors prefer a positive asymmetry since it results in lower
probabilities of extreme negative returns while allowing for extreme
positive returns.
34. The table above shows the annualized returns and standard
deviations annualized for different Canadian asset class between 2000
and 2018. The returns were obtained from Morningstar Direct.
Asset Class Returns Standard

Arithmetic Deviation of
Mean Return
S&P/TSX Composite TR 6.41% 15.75%
S&P/TSX Small Cap TR 7.15% 19.18%
DEX All Corporate Universe TR 7.01% 3.34%
DEX Government Bond 6.71% 3.81%
DEX Canadian Treasury Bill 30 2.63% 0.44%
day
Determine the asset class with the highest levels of risk in utilizing the
coefficient of variation (CV) as a measure of relative dispersion.
A. Small Cap, Composite, Government Bond, Corporate Universe,

Treasury 30 day
B. Small Cap, Composite, Government Bond, Treasury 30-day,
Corporate Universe
C. Small Cap, Composite, Corporate Universe, Government Bond,
Treasury 30 day
Answer A
Asset Class Coeff. Of

Variation
S&P/TSX Composite TR 2,457
S&P/TSX Small Cap TR 2,683
DEX All Corporate Universe
0,476
TR
DEX Government Bond 0,568
DEX Canadian Treasury Bill
0,167
30 day
The higher the coefficient of variation, the more risky the asset class, so
we must sort the asset classes from largest to smallest: Small Cap,
Composite, Government Bond, Corporate Universe, Treasury 30 day.
35. An analyst gathers the following information about the price-

earnings (P/E) ratios for the common stocks held in a portfolio:
Interval P/E Range Frequency

I 5-15 20
II 15-25 55
III 25-35 32
IV 35-45 18
The relative frequency for Interval III is closest to:
A. 27.27%.
B. 32.15%.
C. 25.60%.
Answer: C
The relative frequency is: 32/(20+55+32+18)=25.60%
36. An equity analyst is using the P/E ratio to rank the component firms
of a broad-based equity market index. The exhibit below is an excerpt
from the information that the analyst gathered about the 35 companies
included in the index.
N0 Company P/E ratio

1 Alpha 0,55
2 Beta 0,67
3 Delta 1,1
4 Gamma 1,47
5 Zetha 2,89
The estimate for the 10th percentile for the P/E ratio is closest to:
A. 1.362.
B. 1.322.
C. 1.391.
Answer: B
n=35 L10=(35+1)(10/100)=3,6
The 10th percentile is : 1,10+(3,6-3)(1,47-1,10)=1,322
Use the following information to answer Questions 37 through 38

Portfolio Alpha Beta Gamma Zetha
E(Rp) 5% 11% 14% 18%
VARP 8% 21% 34% 40%
37. Given a threshold level of return of 4%, use Roy’ safety first criterion
to choose the optimal portfolio:
A. Alpha
B. Gamma
C. Zetha
Answer: C
SFRzetha = (18-4)/40=0.35 is the largest value
38. Given a threshold level of return of 0.00%, use Roy’ safety first
criterion to choose the optimal portfolio:
A. Alpha
B. Beta
C. Zetha
Answer: A
SFRalpha = (5-0)/8=0.625 is the largest value
CHAPTER 3 – PROBABILITY
CONCEPTS (Answers)
39. The following information applies to a portfolio composed of Fund

Alpha and Fund Beta:
Funds Funds Beta

Alpha
Portfolio Weights (%) 70 30
Expected Returns (%) 10 16
Standard Deviations (%) 7 10
Correlation Fund Alpha and 0.80
Beta
The portfolio's standard deviation of return is closest to:
A. 7.38%.
B. 7.52%.
C. 8.35%.
Answer B
=0,80 x7% x10%=0,0056

40. An analyst has established the following prior probabilities
regarding a company's next quarter's earnings per share (EPS)
exceeding, equaling, or being below the consensus estimate.
Prior Probabilities
EPS exceed consensus 30%
EPS equal consensus 45%
EPS are less than 25%
consensus
Several days before releasing its earnings statement, the company

announces a cut in its dividend. Given this new information, the
analyst revises his opinion regarding the likelihood that the company
will have EPS below the consensus estimate. He estimates the
likelihood the company will cut the dividend, given that EPS
exceeds/meets/falls below consensus, as reported below.
Probabilities the Company Cuts Dividends,

Conditional on EPS Exceeding/Equaling/Falling
below Consensus
P(Cut div│EPS exceed) 10%
P(Cut div│EPS equal) 20%
P(Cut div│EPS below) 70%
The analyst thus determines that the unconditional probability for a

cut in the dividend, P(Cut div), is equal to 29.50. Using Bayes’
formula, the updated (posterior) probability that the company’s EPS
are below the consensus is closest to:
A. 85%.
B. 59%.
C. 20%.
Answer B
41. An economist states that the probability of having the gross

domestic product (GDP) of a country higher than 3% is 0.20. What
are the odds against a GDP higher than 3%?
A. 5 to 1
B. 6 to 1
C. 4 to 1
Answer C
P(GDP>3%) = 20%
odds against P(GDP>3) = (1-P(GDP>3))/P(GDP>3) = 4
This means that given the probability stated, the odds against GDP
above 3% are 4 to 1
42. The joint probability of returns for securities Alpha and Beta are
as follows:
Return Return
Joint on on Return
Beta Beta on Beta
Probabilities 30% 10% 0%
The covariance of the returns between Securities Alpha and Beta is

closest to:
A. 58.
B. 44.
C. 53.
Answer A
E(RA) = (0,20)(0,30) + (0,12)(0,50)+(0,05)(0,20) =13%

E(RB) = (0,30)(0,30) + (0,10)(0,50)+(0,00)(0,20) =14%
Cov(RA,RB)=∑∑P(RAi,RBj)(RAi-E(RA))(RBj-E(RB))=(0,3)(0,2-0,13)(0,3-
0,14)+(0,5)(0,12-0,13)(0,1-0,14)+(0,2)(0,05-0,13)(0-0,14)=0,00580
Cov(RA,RB ) =58
43. The variance of returns of Asset Alpha is 525. The variance of

returns of Asset Beta is 1,250. The covariance of returns between
Asset Alpha and Asset Beta is 500. The correlation of returns
between Asset Alpha and Asset Beta is closest to:
A. 0.62.
B. 0.69.
C. 0.47.
Answer A
44.- A group of fund analysts have to select the first, second, and
third best fund manager of the year for 2020 based on their subjective
judgment. If 10 fund managers are candidates for the three awards,
the number of ways in which each analyst can make his ranking is
closest to:
A. 630.
B. 720.
C. 520.
Answer B
Order matters
n=10 r=3
to:
A. 0.2658
B. 0.0715
C. 0.1237
Answer A
Odds P(Z) = P(Z))/(1-P(Z))= 0.21/(1-0.21) =0.2658
46. An analyst applies four valuation screens to a set of potential

investments. The screens are independent of each other.
Valuation Probability of
Screen Passing
1 0.55
2 0.40
3 0.35
4 0.25
If there are 1,200 potential investments, the number expected to

simultaneously pass all four screens is closest to:
A. 32.
B. 66.
C. 42.
Answer C
Probability of passing all four screen simultaneously:

P(ABCD) = P(A)P(B)P(C)P(D)=0.0351
Then 1,200 x 0.0351 = 42 potential investments will pass the 4
screens
to:
A. 0.2658
B. 0.0715
C. 0.1237
Answer A
Odds P(Z) = P(Z))/(1-P(Z)) = 0.21/(1-0.21) =0.2658

48. An analyst calculated the expected value of Delta Inc.’s EPS as
$5.825 based on the probability distribution of Delta’s EPS for the
current fiscal year
Probability Distribution
Probability EPS ($)
12% 7.25
38% 6.15
40% 5.75
10% 4.15
The standard deviation of the Delta’s EPS for the current fiscal year is
closest to:
A. 0.9662.
B. 0.9829.
C. 0.7527
Answer C
= 0,566625 then
49. A portfolio is invested in stocks Alpha and Beta with 30% of the
portfolio invested in Alpha. The exhibit below illustrates the
covariance matrix and expected returns with respect to the portfolio.
Stock Alpha Beta

E(R)=12% E(R)=8%
Covariance matrix
Stock Alpha Beta
Alpha 450 225
Beta 225 180
The correlation between Alpha and Beta is closed to
A. 0.12-
B. 0.63
C. 0.79
Answer: C
50. Compute the standard deviation of a two-stock portfolio if stock

Alpha (40% weight) has a variance of 0.0015, stock Beta (60%
weight) has a variance of 0.0021, and the correlation coefficient for
the two stocks is -0.35?
A. 1.39%.
B. 0.07%.
C. 2.64%.
Answer C
Stock Alpha Stock Beta

Weight 0,4 0,6
Variance 0,0015 0,0021
Standard dev. 0,0387 0,0458
Correlation -0,35
(Rp)=w2 a (Ra ) + w2b (Rb ) + 2wa wb CovRa Rb = (0.40)2(0.0015) +
(0.60)2(0.0021) + 2(0.40)(0.60)(-0.35)(0.0387)(0.0458)=0.00069783
then (Rp)=2.64%

52
51. In how many ways can 3 boys and 3 girls sit in a row?
A. 520
B. 720
C. 650
Answer B
Since we assume that each person is unique, the total number of

ordering is given by (3+3)! = 6! = 720 possible orderings.
52. In how many ways can 3 boys and 3 girls sit in a row if the boys
and the girls are each to sit together?
A. 60
B. 84
C. 72
Answer C
We have 3! Orderings of each group of the 3 boys and girls. Since we

can put these groups of boys and girls in 2! Different ways (either the
boys first or the girls first) we have: (2!).(3!).(3!) =2.6.6=72 possible
orderings.
53. In how many ways if only the boys must sit together?
A. 144
B. 121
C. 136
Answer A
If the boys must sit together we have 3! = ways to arrange the blocks
of boys. This block of boys can be placed in four locations: (4!).
(3!)=144

55

chemistry book be arranged on a bookshelf if the books can be
arranged in any order?
A. 720
B. 520
C. 650
Answer A
(3+2+1)! = (6!) = 720 possible orderings

chemistry book be arranged on a bookshelf if the mathematics books
must be together and the novels must be together?
A. 52
B. 72
C. 65
Answer B
The mathematic books can be arranged in 2! ways and the novels in

3! ways. Then the block ordering of mathematics, the block ordering
of novels and chemistry book can be arranged in 3! Ways resulting in:
(3!).(2!).(3!)=72 possible orderings.
56. A dance class consists of 22 students, of which 10 are women

and 12 are men. If 5 men and 5 women are to be chosen and then
paired off, how many results are possible?
A. 52,950,070
B. 23,950,080
C. 72,080,950
Answer B
1.- We must choose five women from ten in possible ways.
2.- We must choose five men from 12 in possible ways.

3.- Once these groups are chosen then we have 5! pairings of men
and women.
Thus in total we will have: 5! = 252 x 792 x 120=23,950,080

possible pairings.
57. A committee of 7, consisting of 2 Republicans, 2 Democrats, and
3 Independents, is to be chosen from a group of 5 Republicans, 6
Democrats, and 4 Independents. How many committees are
possible?
A. 600
B. 520
C. 612
Answer A
1.- We can choose 2 Republicans from the 5 in possible ways.
2.- We can choose 2 Democrats from the 6 in possible ways.
3.- We can choose 3 Independents from the 4 in possible ways.
In total we will have: = 600 possible ways.
58. If 8 new teachers are to be divided among 4 schools, how many

divisions are possible if each school must receive 2 teachers?
A. 2,600
B. 2,520
C. 2,612
Answer B
If each school must receive 2 teachers in each school then:
59. A retail establishment accepts either the American Express or the

VISA credit card. A total of 24 percent of its customers carry an
American Express card, 61 percent carry a VISA card, and 11 percent
carry both cards. What percentage of its customers carries a credit
card that the establishment will accept?
A. 77%
B. 67%
C. 55%
Answer A
Let A be the event that a person carries the American Express card
and B be the event that a person carries the VISA card. P(AUB)=P(A)
+P(B)-P(AnB)=0,24+0,64-0,11=0,77

61
be of the same color?
A. 8.75%
B. 8.88%
C. 8.57%
Answer B
We want the probability that each ball will be of the same color. This
is given by:
= 0.08875
be of different colors?
A. 24.77%
B. 28.88%
C. 24.70%
Answer C
We want the probability that all three balls are different colors is given
by:
= 0.247
62. If a die is rolled 4 times, what is the probability that 6 comes up at

least once?
A. 51.77%
B. 48.55%
C. 55.36%
Answer A
This is the complement of the probability that six never appears or:
63. A group of 6 men and 6 women is randomly divided into 2 groups

of size 6 each. What is the probability that both groups will have the
same number of men?
A. 50.77%
B. 48.55%
C. 43.29%
Answer C
The only way to have equal numbers of men in each group is to have
three men in each group (and thus three women in each group). The
probability is given by
P= = =0.4329
64. Suppose that a laboratory test to detect a certain disease has the
following statistics. Let A = event that the tested person has the
disease and B = event that the test result is positive. It is known that
P(B I A) = 0.99 and P(B I Ac) = 0.005 and 0.1 percent of the
population actually has the disease. What is the probability that a
person has the disease given that the test result is positive?
A. 50.50%
B. 16.50%
C. 43.29%
Answer B
The desired probability is P (tested person has the disease/test result positive
)=P(A/B)
Note that only 16.5% of the cases where the tests are positive will the
person actually have disease even though the test is 99 percent
effective in detecting the disease when it is, in fact, present.
65. An entrepreneur has two businesses in operation N1 and N2. The

first shows losses in 20% in the income statement and the second
only in 4%. Assuming that the business volume is the same for N1
and N2 and analyzing a balance at random, this one got losses. What
is the probability that it is from the first business?
A. 4/7
B. 5/6
C. 3/5
Answer B
E =Lost in the income statement
P(N1) = 0,5; P(N2) = 0,5; P(E/N1) = 0,20; P(E/N2) = 0,04
The desired probability is P (tested business is N1/lost in income

statement) = P(N1/E)

67
A committee of 5 persons is to be selected randomly from a group of

5 men and 10 women. Find
66. The probability that the committee consists of 2 men and 3

women.
A. 30%
B. 40%
C. 50%
Answer B
P= =
67. Find the probability that the committee consists of all women.
A. 8.0%
B. 8.2%
C. 8.4%
Answer C
P= =

69.
Either the following events:

A = P (Google stock increases 15% during the year) = 0.4
B = P (Apple shares increased by 15% during the year) = 0.3
C = P (Google and Apple shares increased by 15% during the year) =
0.2
68. What is the probability that Google will not increase by 15%?
A. 50%
B. 60%
C. 70%
Answer B
P (probability Google stock not increase by 15%) = 1 – P (probability

Google stock increase 15%)=1-0,4=60%
69. Determine the probability that the stock of Google or Apple will
increase by 15%.
A. 30%
B. 40%
C. 50%
Answer C
P(Google or Apple increase 15% ) = P(Google increase 15% ) +

P(Apple increase 15%) - P(Google and Apple increase in 15% )
=0,4+0,3-0,2=50%
through 71
A specialist noted that the return on Microsoft's stock was likely to

increase or decrease depending on certain macroeconomic
conditions. Here is the analysis:
Probability
State of Conditional/Prob.
of the Stock
the of stock
Economic Performance
Economy Performance
State
Increases 65%
Good 60%
Decreases 35%
Increases 45%
Poor 40%
Decreases 55%
70. Calculate the probability that the stock will decrease.
A. 33%
B. 43%
C. 53%
Answer B
P(stock decrease) = P(stock decreases/economy is good ) x

P(Economy is good ) + P(stock decreases/economy is poor) x
P(Economy is poor ) = (0,35)(0,6)+(0,55)(0,40) =43%
71. Calculate the probability that the Economy is good given the stock
will increase.
A. 63,5%
B. 65,4%
C. 68,4%
Answer C
We use Bayes formule:
P(Economy is fine/stock increase ) = P(stock increase/economy is

fine )x P(Economy is fine )/ P(stock increase)= [(0.65)(0.60)]/[(0.65)
(0.6)+(0.45)(0.40)]=68.42%

through 73
A finance student has three types of books on their shelf. He has 3

CFA books, 1 portfolio management book, and 2 statistics books. For
questions (A) and (B), books of the same theme are considered to be
different from each other.
72. How many arrangements are possible if he can put them in any
order?
A. 680
B. 720
C. 840
Answer B
(3+1+2)! = 6! = 720 possible orderings
73. How many arrangements are possible if all the books on the
same topic have to be together?
A. 72
B. 78
C. 64
Answer A
group 1: 3 books of CFA1=3!

group 2: 1 book of Fixed income =1!
group 3: 2 books of Statistic=2!
groups1,2,3 together: 3! 3!x1!x2!
x3! = 72 possible orderings
74. How many arrangements are possible if books on the same
subject are the same?
A. 67
B. 57
C. 60
Answer C
75. As an investor, you have just placed 2 limit orders, respectively on

the shares of Alpha and Beta. There is a 60% chance that the limit
order placed on Alpha will be executed by the end of the day. The
probability that the limit order placed on Beta shares will be executed
by the end of the day is 35%. The probability that both limit orders will
be executed by the end of the day is 15%. What is the probability that
one of the two limit orders will be executed by the end of the day?
A. 60%
B. 70%
C. 80%
Answer C
P(Alpha or Beta) = P(Alpha) + P(Beta) - P(Alpha and Beta)=

0,60+0,35-0,15 =80%
76. You are a portfolio manager and have just compiled the name of
all the stocks that meet your investment criteria.
• Among this compilation, 10% of the shares are in the energy sector.
• Of this compilation, 2% of the shares are in the energy sector and
pay dividends.
What is the probability that a stock will pay a dividend knowing that it
is one of the companies operating in the energy field that met your
investment criteria?
A. 10%
B. 20%
C. 30%
Answer B
P(Dividend/Energy)=P(Dividend and Energy)/P(Energy)=

(0,02)/(0,10)=20%
1) Company size (market capitalization> $ 800 million)

<12)
Among all the securities listed on the Toronto Stock Exchange, there
is a probability of:
• 12% that a share meets the size criterion
• 20% that a share meets the price-earnings ratio criterion
• 45% that a share meets the dividend criterion
If all criteria are independent, how many companies will be selected?
A. 1.08%
B. 2.03%
C. 1.15%
Answer A
Independent events:
P(criteria 1 and criteria 2 and criteria 3 )=P(A) x P(B) x P(C)=(0,12)
(0,20)(0,45)= 1.08%
the stocks that will be part
of his portfolio:

<12)
A stock chosen at random from among all the securities listed on the
Toronto Stock Exchange has a 30% chance of satisfying price-
earnings ratio criterion. A stock chosen at random from among all the
securities listed on the Toronto Stock Exchange has a 50% chance of
satisfying the dividend payment criterion. A share that meets the
price-earnings ratio criterion has a 60% chance also meeting the
dividend payment criterion.
What is the probability that a stock chosen at random from among all
the securities listed on the Toronto Stock Exchange will meet both
selection criteria?
A. 15%
B. 18%
C. 30%
Answer B
P(criterion 2/criterion 1)=P( dividend criterion /price-earnings criterion

)=60%
P(criteria 2 and criteria 1) =P(criterion 2/ criterion 1)x P(criterion 1) =
(0,6)(0,3)=18%

through 80
You should forecast the level of annual sales for Delta Inc. from the
following probabilities:
Probability Sells (M$)

20% 500
35% 550
23% 600
15% 650
7% 700
79.-Calculate the expected value of Delta's sales for next year.
A. $555 million
B. $525 million
C. $577 million
Answer C
E(Sells ) =∑P(Xi)Xi=20%(500)+35%(550)+23%(600)+15%(650)+ 7%
(700) = 0,2*500 + 0,35*550 + 0,23*600 + 0,15*650+0,07*700=$577
millions
80. Calculate the variance and standard deviation of Delta’s expected

sales.
A. $55.67 million
B. $57.56 million
C. $58.49 million
Answer C
(500-577)2x20% + (550-577)2 x 35% + (600-577)2x23%
+ (650-577)2x15% + (700-577)2x7% =3,421 then =58.49
81. If odds in favor of X solving a problem are 4 to 3 and odds against

Y solving the same problem are 2 to 6. Find probability for:
P(X) P(Y)
A) 4/7 3/4
B) 3/4 1/3
C) 4/7 1/3
Answer A
Given odds in favor of X solving a problem are 4 to 3.

Number of favorable outcomes = 4
Number of unfavorable outcomes = 3
P(X) = P(solving the problem) = 4/(4 + 3)= 4/7
Given odds against Y solving the problem are 2 to 6

Number of favorable outcomes = 6
Number of unfavorable outcomes = 2
P(Y) = P(solving the problem) = 6/(2 + 6)= 6/8= 3/4
82. If X represents the possible values obtained by rolling an

unbiased die. Calculate E[Y], where: Y = 2X2-5
A. 24.68
B. 25.33
C. 21.55
Answer B
83. An analyst is calculating the times series mean return for a

portfolio allocated 30% to U.S. equities and 70% to U.S. bonds. He
has collected annual return data for years 2014-2018
Stock and Bond Return Data 2014-

2018
Stocks(%) Bonds(%)
2014 7,4 10,1
2015 -5,6 3,4
2016 3,7 -1,1
2017 9,3 7,9
2018 14,7 12,8
The time series mean return for the portfolio is closest to:
A. 9.50%
B. 6.40%
C. 10.30%
Answer: B
Year 2014 : Portfolio return = (0,3)(7,4%)+(0,7)

(10,1%)=9,29%
Year 2015 : Portfolio return= (0,3)(-5,6%)+(0,7)
(3,4%)=0,70%
Year 2016 : Portfolio return= (0,3)(3,7%)+(0,7)
(-1,10%)=0,34%
(7,90%)=8,32%
(12,80%)=13,37%
Times series mean return =
(9,29%+0,70%+0,34%+8,32%+13,37%)/5=6,40%
84. Joseph Kelvin is an equity analyst at Delta Associates. Joseph is
following the stock of a pharmaceutical. He is attempting to analyze
whether the upcoming launch of a Type-I diabetic drug will be
successful and increase the market price of the pharmaceutical's
share. The probability that the stock price will increase given a
successful drug launch P(A/S) is 0,35. Joseph has summarized
important forecast probabilities in the exhibit below:
Probability
Probability stock price increases 0,4
Probability stock price is unchanged 0,6
Probability drug launch is successful 0,45
Probability drug launch is
unsuccessful 0,55
The probability that the stock price increases given that the drug
launch is unsuccessful is closest to:
A. 52.50%
B. 44.00%
C. 50.30%
Answer: B
P(A)=P(A/S)P(S)+P(A/SC)P(SC) -> 0,40=(0,35)(0,45)
+ P(A/SC)(0,55) then P(A/SC)=0,44
85. The table below illustrates the covariance matrix for global
equities, global bonds and real estate held in the proportions 40%, 25%
and 35% respectively, held in Sarah Keller’s portfolio.
Covariance Matrix
Global Global Real
Equities Bonds Estate
Global
Equities 125 150 80
Global
Bonds 150 45 90
Real Estate 80 90 62
Based on the information, the standard deviation of Sarah’s portfolio
return is
closest to:
A. 9.93%.
B. 8.33%.
C. 5.93%.
Answer: A
(Rp)=w2 1 (R 1) + w2 2 (R 2) + w2 3 (R 3) + 2w 1w 2CovR 1R 2 +
2w1w3CovR1R3 + 2w2w3CovR2R3 = (0.40)2(125) +(0.25)2(45) +
(0.35)2(62) + 2(0.40)(0.25)(150) + 2(0.4)(0.35)(80) + 2(0.25)(0.35)

(90)=98.5575 then (Rp)=9.93%
86. Selena Gomez manages an equity fund allocated to U.S. and

Canadian equities in the proportions 45% and 55% respectively. The
expected returns and covariance between the two equities are
illustrated in the exhibit below:
Covariance Matrix
U.S. Canada
U.S. 200 125
Canada 125 350
U.S. Canada
Equity E(R)=15% E(R)=25%
The correlation between the two stocks is closest to:
A. 0.47.
B. 0.05.
C. 0.27.
Answer: A
ρ(Rus/canadian)=Cov(Rus,Rcanadian)/[σ(Rus)σ(Rcanadian)]=125/[(200)0.5(350)0.5]
=0.47

91
Joint Probabilities
Return Rb=0,5 Rb=0,0 Rb=0,0
Ra=-0,10 0,40 0,00 0,00

Ra= 0,10 0,00 0,30 0,00
Ra= 0,30 0,00 0,00 0,30
87.-Given the joint probability table, the expected return on stock A is

closet to:
A. 0.12
B. 0.08
C. 0.20
Answer: B
E(Ra)=(0.4)(-0.1)+(0.3)(0.1)+(0.3)(0.3) =0.08 or 8.0%
88. Given the joint probability table, the standard deviation of stock B
is closet to:
A. 0.060
B. 0.212
C. 0.2449
Answer: C
E(RB)=(0.4)(0.5)=0.20
VAR(Rb)=(0.4)(0.5-0.2)2+(0.3)(0-0.2)2+(0.3)(0-0.2)2 =0.06
(0.06)0.5=0.2449
89. Given the joint probability table, the Variance of A is closet to:
A. 0.0276
B. 0.1661
C. 0.0450
Answer: A
E(Ra)=(0.4)(-0.1)+(0.3)(0.1)+(0.3)(0.3) =0.08
VAR(Ra)=(0.4)(-0.1-0.08)2+(0.3)(0.10-0.08)2+(0.3)(0.3-0.08)2 =0.0276
90. Given the joint probability table, the covariance between stock A
and stock B is closet to:
A. 0.036
B. 0.028
C. -0.036
Answer: C
Cov(Ra,Rb)=(0.4)(-0.1-0.08)(0.5-0.2)+(0.3)(0.10-0.08)(0-0.2)+(0.3)
(0.3-0.08)(0-0.2) =-0.036
91. Given the joint probability table, the correlation between Ra and Rb
is closet to:
A. -0.88
B. -0.33
C. +0.33
Answer: A
95
State of Probability of Conditional/Prob.

the the Economic Stock of stock
Economy State performance Performance
Good 60%
Good 30% Neutral 30%
Poor 10%
Good 30%
Neutral 50% Neutral 40%
Poor 30%
Good 10%
Poor 20% Neutral 60%
Poor 30%
92. What is the conditional probability of having good stock

performance in a poor economic environment?
A. 0.02
B. 0.03
C. 0.10
Answer: C
P(good stock performance/poor economy)= 0.10
93. What is the joint probability of having a good economy and a

neutral stock performance?
A. 0.09
B. 0.20
C. 0.30
Answer: A
P(good economy and neutral performance)=

P(good economy)P(neutral performance/good economy)= (0.30)
(0.30)=0.09
94. What is the total probability of having a good performance in the

stock?
A. 0.20
B. 0.35
C. 0.65
Answer: B
This is the sum of all joint probabilities for good performance over all
states.
(0.30)(0.60)+(0.50)(0.3)+(0.20)(0.10) =0.35
95. Given that the stock had a good performance, the probability the
state of the economy was good is closet to:
A. 0.31
B. 0.46
C. 0.51
Answer: C
= 0.5143
96. Given the conditional probabilities in the table below un the

unconditional probabilities (Y=1)=0.3 and P(Y=2)=0.7 ,what is the
expected value of X :
Xi P(Xi/Y=1) P(Xi/Y=2)
0 20% 10%
5 40% 80%
10 40% 10%
A. 4.31
B. 5.46
C. 5.30
Answer: C
E(X/Y=1) = (0.2)(0.0)+(0.4)(5.00)+(0.40)(10) =6.00

E(X/Y=2) = (0.1)(0.0)+(0.8)(5.00)+(0.10)(10) =5.00
E(X) = (0.3)(6.0)+(0.7)(5.00)=5.30
97. Compare the standard deviation of Delta's stock price given a

good, a neutral and poor economy state:
Prob. of
State of the Conditional/
the Economy Price Stock Prob. of
Price Economy State variation stock Price Price
Good 30% Stable 30% 235 $
Declining 10% 200 $
212 $ Neutral 50% Stable 40% 210 $
Declining 30% 195 $
Poor 20% Stable 60% 185 $
Declining 30% 150 $
A.
B.
C.
Answer: C
= 335.25
Then $18.31
Where =
205x10%+185x60%+150x30%=176.50
= 95.25
Then $9.76
where =
220x30%+210x40%+195x30%=208.50
= 227.25
Then
where =
250x60%+235x30%+200x10%=240.50
98. Let X be a Normal random variable N (1, 2) and Y a random

variable Y = a + b * X, with a constant and b> 0. What is the
distribution of Y?
A. N(a + b, 2)
B. N(a + b, 2b2)
C. N(1 + a, 2 * b)
Answer: B
99.- Let the random variable X, whose mean is 5 and the variance is
3. We apply the following transformation: Y = 20X + 8. What will be
the mean and the variance of the variable Y?
A. 100 1500
B. 108 1200
C. 108 1500
Answer: B
= (20)2(3) = 1200
100. A jewelry box contains 5 white pearl, 2 gold rings and 6 silver
rings. What are the odds of drawing a white pearl from the jewelry
box?
A. 8:5
B. 5:13
C. 5:8
Answer: C
Number of successes = 5
Number of failures = 2 + 6 = 8
Then the odds are 5:8 (This means the number of ways to draw a
white pearl: number of ways to draw another jewelry).
CHAPTER 4 – COMMON PROBABILITY
DISTRIBUTIONS (Answers)
101. A discrete uniform distribution consists of the following 10
values:
-2,8 6,3 7,2 -5,1 8,9

2,5 7,7 1,8 0,5 -6,3
On a single draw from the distribution, the probability of drawing a

value between -3,0 and 3,0 from the distribution is closet to:
A. 40.00%.
B. 27.59%.
C. 33.33%.
Answer A
Then 4 of the 10 values ( -2,8,0,5,1,8,2,5) are between -3,0 and 3,0.

Thus probability of a draw from the distribution between -3,0 and 3,0
is 4/10=0,40
102. The following table shows the discrete uniform probability

distribution of gross profits from the purchase of an option:
Profit Cumulative
Distribution
Function
$0 0.2
$1 0.4
$2 0.6
$3 0.8
$4 1.0
The probability of a profit greater than or equal to $1 and less than or

equal to $4 is closest to:
A. 0.4.
B. 0.6.
C. 0.8.
Answer C
P(x)=0.2 and P(1≤x≤4)=P(1)+P(2)+P(3)+P(4)=0.80 or F(4)-F(0)=1.0-

0.2=0.80
103. A normally distributed random variable has a mean of 100 and a

standard deviation of 12. The probability of observing a value greater
than 82 is the cumulative distribution function (cdf) of the standard
normal variable:
A. N(1.5).
B. N(–1.5).
C. 1 – N(1.5).
Answer A
P(X>82)= P(z>(82-100/12))
p(X>82)= p(z>-1,50) =P(z<1.5)=N(1,5)
104. A company has an unsecured line of credit and needs to

maintain its EBIT-to-interest coverage ratio greater than 2.0. Its EBIT
is estimated to be between $36 million and $48 million, with all values
equally likely. If the forecasted interest charge for the year is $20
million, the probability that EBIT/interest will be more than 2.0 is
closest to:
A. 61.5%.
B. 33.3%.
C. 66.7%.
Answer C
EBIT –> Uniform continuous distribution with A=36, B=48

Coverage ratio = EBIT/Int. = 2 with Int. = 20 then EBIT = $40 million
P(EBIT/Int.>2)=1-P(EBIT/Int.<2) –> P(EBIT<40) =P((40-36)/(48-
36))=33.3%
Finally P(EBIT/Int.>2) = 1-P(EBIT/Int.<2) = 1-P(EBIT<40) =
100%-33.33%=66.70%
105. The following table shows the forecasted price movements of a
stock that is currently priced at 40 and does not pay a dividend.
Movement Probability of Period Return if

Movement Movement
Up 65% +10%
Down 35% –10%
Using the binomial model, the probability that the stock’s price will be
$39.60 at the end of two periods is closest to:
A. 45.50%.
B. 42.25%.
C. 22.75%.
Answer A
t=0 t=1 t=2

48,4
p=65%
44
p=65% p=35%
40 39,6
p=35% p=65%
36
p=35%
32,4
Probability the stock’s price will be $39.60 = P(up)P(down) +

P(down)P(up), then 0.35x0.65 + 0.35x0.65= 45.50%
106. A noisy transmission channel has a per-digit

error probability p = 0.01. Calculate the probability of
more than one error in 10 received digits.
A. 0.42%
B. 0.43%
C. 0.44%
Answer A
X~Bin (n=10, p=0,01)

Then P[X>1] = 1-P[X=0]-P[X=1] =
107. A discrete distribution (each event has an equal probability of

occurrence) has the following possible outcomes for X . The
variance of this distribution is closest to:
A. 0.00
B. 1.00
C. 1.25
Answer: C
Expected value = (1/4) x (1+2+3+4) = 2.5

Variance = (1/4) x ((1-2.5)2+(2-2.5)2+(3-2.5)2+(4-2.5)2) = 1.25
108. Which of the following s NOT a probability distribution?
A.
B.
C.
Answer: C
prob
109. In a Random experiment, event A occurs with probability 0.2.

The experiment is carried out three times and the random variable X
is defined by the number of times that A has occurred in the three
tests that are supposed to be independent. Calculate and
A. 0.50 0.48
B. 0.60 0.48
C. 0.48 0.60
Answer B
X Bin(n=3; p=0.20)
E[X]=np=0.6 and =np(1-p)=0.48
110. Given the variable X with normal distribution, N (0,1). A sample

of four values of X is chosen at random, what is the probability that at
least two of them belong to the interval (-1.96; 1.96)?
A. 99.95%
B. 95.99%
C. 99.90%
Answer A
We consider the event X belongs to the interval (-1.96,1.96) as

success:
Y~ Bin(n=4, p=P[-1.96<X<1.96]) = 0.95 then P[Y≥2] = 1-P[Y=0]-
P[Y=1] = 1-(4¦0)(0.95)0(0.05)4- (4¦1)(0.95)1(0.05)3=0.9995
through to 114
Let X being a discrete random variable which can take the following
values:
111. Calculate the expectation of X: E[X]
A. 8,90
B. 9,90
C. 10,9
Answer B
E (7)(0,35)+(9)(0,25)+(13)(0,40)=9,9
112. Calculate the expectation of 1/X : E[1/X]
A. 0.1085
B. 0.1025
C. 0.1185
Answer A
E = (1/7)(0,35)+(1/9)(0,25)+(1/13)(0,40)=0,1085
113. Calculate E[X2]
A. 103
B. 104
C. 105
Answer C
E[X2] =(72)(0,35)+(92)(0,25)+(132)(0,40)=105
114. Calculate
A. 6.99
B. 7.15
C. 8.99
Answer A
(7-9.9)2 x 0.35 +(9-9.9)2 x 0.25 + (13-9.6)2 x 0.40=6.99
115. Let F (X) being a cumulative distribution function of any

continuous distribution. What is F (0.5)?
A. F(0.5)=Impossible to determine
B. F(0.5)=0
C. F(0.5)=1/2
Answer A
The probability distribution of X is necessary.
116. -The exams leading to the CFA® designation are recognized for
their difficulty. To this end, the annual passing rate for the first exam is
regularly under 40%. A few years ago, candidates had to choose
between 4 answer choices for each of the 120 questions on the first
exam. As of June 2009, this exam has only presented 3 answer
options to each of the 120 questions. If an exam candidate answers
each of the questions at random, now that 3 answer choices are
provided, what is the probability that this candidate obtains exactly 45
correct answers?
A. 4.57%
B. 4.74%
C. 3.69%
Answer B
Only two possibilities: a good answer or a bad answer. This is a

binomial distribution Bin(n=120, p=1/3) then Probability to get 45
correct answers:
P(X=k) =
P(X=45) = 4,7388%
117. A mortgage broker needs to meet 10 potential clients today.

Each time, he estimates that he has a one in five chance of
convincing his interlocutor to do business with the financial institution
he works for. The financial institution will pay a performance bonus to
the broker if he succeeds in convincing at least 6 clients. What is the
probability that the broker will receive a performance bonus?
A. 63.69%
B. 64.74%
C. 63.29%
Answer A
Only two possibilities: To convince or not to convince. This is a

binomial distribution Bin(n=10, p=1/5) The probability to convince
at least 6 clients:
Broker has 63.69 % to get a prime where
55.05%+7.86%+0.74%+0.04%=63.69%
118. The monthly stock performance of a large American corporation

that does not pay dividends is characterized by
- A mean of 2.50%;
- A standard deviation of 2%;
- An asymmetry coefficient of 0;
- A kurtosis coefficient of 3 (excess kurtosis of 0).
Based on this information, calculate the probability that an investor
will realize a negative monthly return on the company’s shares.
A. 10.565%
B. 11.552%
C. 13.255%
Answer A
With a Coefficient of Asymmetry of 0 and Kurtosis of 3 ( excess de

kurtosis 0), it seems that monthly returns (X) are distributed on a
normal distribution, then X -> N(2,50%,2%) where P(X<0)=P(Z<(0-
2,50%)/2%))=P(Z<-1,25%)=1-N(1,25)=1-0,89435=0,10565 or
10.565%
119. Calculate the proportion of employees with income above $

18,000 per year for an economic sector whose salary distribution
measured in thousands of dollars follows a lognormal distribution
model with parameter µ= 2 and 1.2
A. 23.56%
B. 22.96%
C. 31.25%
Answer B
Y=ex=annual income per employee in a certain economic sector

Lognormal
Then Ln Y = X N(µ=2, σ=1.20) therefore
P(Y≥18)=P(ex≥18)=P(X≥Ln18)=P(X≥2.89)=P(X-µ/σ≥2.89-
2/1.20) P(Z≥0.74)=1-P(Z≤0.74)=1-0.7704=0.2296
X 0 1 2 3
P(X) 1/8 3/8 3/8 1/8
Calculate E[4X2+X+3]
A. 16,50
B. 14.35
C. 20.55
Answer A
E(4 + 3)= 4E( ) + E(X) + 3 = 4 3+ +3=

16,5
X 0 1 2 3 4
P(X) 0,20 0,40 0,30 0,08 0,02
Calculate
A. 5.39
B. 3.45
C. 3.59
Answer C

124
Probability distribution of discrete random variable X

X 0 1 2 3 4 5 6 7
P(X) 4% 11% 18% 24% 14% 17% 9% 3%
122. The cdf of 5 or F(5) is
A. 14%
B. 88%
C. 71%
Answer: B
(0.04+0.11+0.18+0.24+0.14+0.17)= 0.88 or 88%
123. The probability that X is greater than 3 is:
A. 24%
B. 43%
C. 57%
Answer: B
(0.14+0.17+0.09+0.03)=0.43
124.-
A. 73%
B. 17%
C. 38%
Answer: A
(0.18+0.24+0.14+0.17)=0.73
125. The table below lists closing prices for Alpha Stock over the
course of 5 days.
Alpha Stock Closing Price
Date Closing Price
07-sept-20 49,40
08-sept-20 49,95
09-sept-20 50,64
10-sept-20 51,14
11-sept-20 50,60
Estimate the volatility of Alpha shares. (Annualize volatility based on

250 days in a year).
A. 0.1770
B. 0.1950
C. 0.1675
Answer: A
First, we calculate continuously compounded daily returns, Xt =

ln(Yt/Yt‐1), using the closing prices provided. This is done in Column
3 below:
Closing
Date Price ($) Xt = ln(Yt /Yt−1 ) (Xt − Xmean)2
07-sept-20 49,40 - -
08-sept-20 49,95 0,011072081 2,572E-05
09-sept-20 50,64 0,013719273 5,958E-05
10-sept-20 51,14 0,009825192 1,463E-05
11-sept-20 50,60 -0,010615394 2,761E-04

Sum 0,024001152 0,000376017
Variance = 0.000376 /(4- 1) =0.000125

Standard deviation = (0.000125)0.5=0.011195
Annualize Alpha Stock price volatility based on a 250‐day year is
calculated as:
Annualized volatility Daily standard deviation x (250)0.5=0.011195 x
(250)0.5=0.1770
CHAPTER 5 – SAMPLING AND
ESTIMATION (Answers)
126. Consider a two-tailed test of the hypothesis that the population mean is
zero. The sample has 50 observations. The population is normally distributed
with a known variance.
t-Test rejection level

Degrees of p = 0.10 p = 0.05 p = 0.025
freedom
49 1.299 1.677 2.010
50 1.299 1.676 2.009
z-Test Rejection α = 0.10 α = 0.05 α = 0.025
level
1.645 1.960 2.330
At a 0.05 significance level, the rejection points are most likely at:
A. –2.009 and 2.009.
B. –2.010 and 2.010.
C. –1.960 and 1.960.
Answer C
Normal Distribution: variance known

Rejection points at 5% significance level are: z<-1,96 and z>1,96
Verification: Two-tailed test in Cumulative Z table 0,025 each side,
Rejection points are: z<-1,96 and z>1,96
127. A sample of 100 observations drawn from a normally distributed
population has a sample mean of 12 and a sample standard deviation of 4.
Cumulative Probabilities for a Standard Normal Distribution P(Z ≤ x) = N(x) for x ≥ 0 or

P(Z ≤ z) = N(z) for z ≥ 0
x 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
or
z
1.5 0.9332 0.9345 0.9357 0.9370 0.9382 0.9394 0.9406 0.9418 0.9429 0.9441
1.6 0.9452 0.9463 0.9474 0.9484 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545
1.7 0.9554 0.9564 0.9573 0.9582 0.9591 0.9599 0.9608 0.9616 0.9625 0.9633
1.8 0.9641 0.9649 0.9656 0.9664 0.9671 0.9678 0.9686 0.9693 0.9699 0.9706
1.9 0.9713 0.9719 0.9726 0.9732 0.9738 0.9744 0.9750 0.9756 0.9761 0.9767
2.0 0.9772 0.9778 0.9783 0.9788 0.9793 0.9798 0.9803 0.9808 0.9812 0.9817
Using the excerpt from the z-distribution given above, the 95% confidence
interval for the Population mean is closest to:
A. 11.340 to 12.660.
B. 11.216 to 12.784.
C. 4.160 to 19.840.
Answer B
128. An analyst determines that approximately 99% of the observations of

daily sales for a company are within the interval from $230,000 to $480,000
and that daily sales for the company are normally distributed. If approximately
99% of all the observations fall in the interval μ ± 3σ, then using the
approximate z-value rather than the precise table, the standard deviation of
daily sales for the company is closest to:
A. $41,667.
B. $62,500.
C. $83,333.
Answer A
99 percent of observations under normal distribution will be approximately

three-standard deviations:
($480,000-$355,000)/3=$41,667
129. An analyst calculated the average return of a hedge fund by taking a

random sample of 6 years’ return. The hedge fund has been in existence for
last 20 years. Assume the hedge fund return is normally distributed with a
population mean and standard deviation of 34% and 42% respectively. The
99% confidence interval around the population mean for the analyst’s sample
of hedge fund return is closest to:
A. -9.88%; 60.58%
B. -10.24%; 78.24%
C. -8.59%; 54.25%
Answer B
130. Assume that monthly returns are normally distributed with a mean of 1
percent and a sample standard deviation of 4 percent. The population
standard deviation is unknown. Construct a 95 percent confidence interval for
the sample mean of monthly returns if the sample size is 24.
A. -0.39%; 2.69%
B. -0.69%; 2.69%
C. -0.69%; 2.39%
Answer B
131. The average salary for a sample of 61 CFA Charterholders with 10 year
experience is $200,000, and the sample standard deviation is $80,000.
Assume the population is normally distributed. Which of the following is a 99%
confidence interval for the population mean salary of CFA Charterholders with
10 years of experience?
Student's t-Distribution
Level of Significance for One-Tailed Test
df 0,100 0,050 0,025 0,010 0,005 0,0005
Level of Significance for Two-Tailed Test
df 0,20 0,10 0,05 0,02 0,01 0,001
40 1,303 1,684 2,021 2,423 2,704 3,551
60 1,296 1,671 2,000 2,390 2,660 3,460
120 1,289 1,658 1,980 2,358 2,617 3,373
A. $172,514 to $227,486.
B. $160,000 to $240,000.
C. $172,754 to $227,246.
Answer C
132. Let X be a random variable with mean 33 and variance 16. Find
a lower bound for P [23 <X <43].
A. 21/25
B. 22/25
C. 23/25
Answer A
P(23<x<43) = P(23-33<X-33<43-33) = P(-10<X-33<10) = P(|X-u|<10) where
10=kσ, σ=4 then k=5/2 then using Chebyshev:
P[23<X<43] = P[|X-µ|<5/2x4] ≥ [1-1/(5/2)2]≥21/25

133. The number of people who attend a meeting room daily is a random
variable with unknown distribution whose mean is 300 people with a variance
of 81 people. How many chairs must be available in the room to be able to
attend these people with probability not less than 90?
A. 327
B. 328
C. 329
Answer C
As a distribution of variable X (number of people who attend daily) is

unknown, then we will use Chebyshev’s inequality: P[µ-kσ<x<kσ] ≥ (1-1/k 2) =
0.90
Then k=3.16 µ=300; σ=9 then (µ+kσ)=300+(3.16)x(9)=328.44 Finally, the
number of seats available will be 329
134. A sample of size n = 10 is selected from a normal population with

unknown mean µ resulting in: 40,45,39,46,58,52,50,45,57,49
Construct a 95% confidence interval for the parameter µ, assuming that the
population variance is 49.
A. 43,77; 52.43
B. 45,77; 54,43
C. 47,77; 56,43
Answer A
135. Variable X follows a normal distribution N ( , 4), calculate the minimum
sample size, with 99% confidence, that the interval
contains the parameter .
A. 46
B .47
C .48
Answer B
Zα/2=2.57 then 2.57x4/n0.5 =1.50 where n=46.92 then the minimum sample size
is 47.
136. A random sample of 25 with a mean 80 is taken from a population of

1000 that is normally distributed with a standard deviation of 30. Find the 95%
confidence intervals for the unknown population mean.
A) 68,24; 91.76
B) 69,24; 92,76
C) 70,24; 93,76
Answer A
137. A researcher wishes to estimate the mean weekly wage of the several
thousands of workers employed in a plant within plus or minus $20 and with a
99% degree of confidence. From past experience, the researcher knows that
the weekly wages of these workers are normally distributed with a standard
deviation of $40. What is the minimum sample size required?
A. 26
B. 27
C. 28
Answer B
z=2.58 with 99% degree of confidence
138. A random sample of n=25 with =80 is taken from a population of 1000
with =30.Suppose that we know that the population from which the sample is
taken is not normally distributed. Find the 95% confidence interval for the
unknown population mean.
A. 52; 106
B. 53; 107
C. 54; 108
Answer B
Since we know that the population from which the sample is taken is not
normally distributed and n<30 we can use neither the normal nor the t-
distributions. We can apply Chebyshev's theorem, which states regardless of
the shape of the distribution, the proportion of observations is at least 1-(1/K 2):
1-(1/K2) =0.95 with K=4.47 then µ=80±4.47(30/250.5) = 80±26.82
Thus µ is approximately between 53 and 107 with a 95% level of confidence.
139. The size of the equity-risk premium is a source of considerable

controversy, as it is used in the CAPM to obtain a required rate of return from
the investor. The results published by Dimson, Marsh and Staunton (2006)
mention that the annual market risk premium in Canada over the period 1900-
2005 is: 7.60% based on an arithmetic mean with a standard deviation of
16.80%. Assuming that the market risk premium behaves like a normal
distribution with a known variance (the one published), construct a 95%
confidence interval of the average Canadian market risk premium.
A. 4.40%; 10.80%
B. 4.40%; 8.80%
C. 4.50%; 10.90%
Answer A
140. Ten analysts disclose their forecast for the company's expected profit
over the next fiscal year. Here's the breakdown of analyst forecasts:
Forecasts (Xi) # Analysts

2.15 1
2.18 1
2.19 3
2.21 2
2.24 1
2.27 1
2.30 1
The sample is a small proportion of the total of analysts who cover the
company, and assume that earnings follow a normal distribution. Assuming
you don't know the variance of the forecasts, calculate an interval at 95% of
the mean of the analysts' forecasts.
A. 2,18; 2.24
B. 2,24; 2.30
C. 2,12; 2.18
Answer A
#
Prévision Xini Xi-Xmean (Xi-Xmean)2 ni(Xi-Xmean)
analystes
2,15 1 2,15 -0,063 0,003969 0,003969
2,18 1 2,18 -0,033 0,001089 0,001089
2,19 3 6,57 -0,023 0,000529 0,001587
2,21 2 4,42 -0,003 9E-06 1,8E-05
2,24 1 2,24 0,027 0,000729 0,000729
2,27 1 2,27 0,057 0,003249 0,003249
2,3 1 2,3 0,087 0,007569 0,007569
Sum 10 22,13 0,01821
Mean 2,213
Variance 0,002023
Standard deviation 0,044981
(Answers)
141. Using a two-tailed test of the hypothesis that the population

mean is zero, the calculated test statistic is 2.51. The sample has 23
observations. The population is normally distributed with an unknown
variance.
Degrees
of p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005
freedom
21 1.323 1.721 2.080 2.518 2.831
22 1.321 1.717 2.074 2.508 2.819
23 1.319 1.714 2.069 2.500 2.807
24 1.318 1.711 2.064 2.492 2.797
An analyst will most likely reject the null hypothesis at significance

levels of:
A. 0.10 only.
B. 0.10, 0.05, and 0.01.
C. 0.10 and 0.05.
Answer C
Ho: µ=0 vs Ha: µ≠0

df = n -1 =23-1=22
p (2 tailed
Significance level ) Rejection points for t test
10% 0,0500 t<-1,717 and t>1,717
5% 0,0250 t<-2,074 and t>2,074
1% 0,0050 t<-2,819 and t>2,819
T-test statistic is 2,51 then the null hypothesis is rejected at 5% and

10% levels of significance.
142. When an investigator wants to test whether a particular

parameter is greater than a specific value, the null and alternative
hypothesis are best defined as:
A. H0: θ ≥ θ0 versus Ha: θ < θ0.

B. H0: θ = θ0 versus Ha: θ ≠ θ0
C. H0: θ ≤ θ0 versus Ha: θ > θ0.
Answer C
The null hypothesis is what the investigator wants to reject and the
alternative hypothesis is what he wants to accept.
143. For a two-tailed hypothesis test, the p-value is given as 0.05. At

the 10% of significance, the null hypothesis wills most like be:
A. Rejected
B. Not rejected
C. Accepted
Answer: A
The p-value is the lowest level of significance at with the null

hypothesis can be rejected. At the 10% significance level the null
hypothesis will be rejected as the significance level of the test is
greater than the p-value (5%).
144. John Smith is evaluating the effects of the 2008 market decline
on the volume of trading. Specifically, he wants to test whether the
decline affected trading volume. He selected a sample of 500
companies and collected data on the total annual volume for one year
prior to the decline and for one year following the decline. What is the
set of hypotheses that Smith is testing?
A. H0: μd = μd0 versus Ha: μd ≠ μd0.

B. H0: μd = μd0 versus Ha: μd > μd0.
C. H0: μd ≠ μd0 versus Ha: μd = μd0.
Answer A
145. Knowing that the two graphs come from the same law for a
hypothesis test. One of them represents a critical threshold of 0.05
and the other represents the "p-value" which has a value of 0.013.
Identify which graph represents each measure.
(1)
(2)
A. Graph 1 represents the critical threshold (5%) and graph 2

B Graph 2 represents the critical threshold (5%) and graph 1
C Neither 1 nor 2
Answer A
Graph 1 represents the critical threshold (5%) and graph 2 represents

the “p-value” (1.30%). We reject the null hypothesis for all values
below the alpha threshold
146. Omicron Company is a manufacturing company. During the last

business cycle (6 year cycle) Omicron's average net profit was $ 30
million per year with a standard deviation of $ 10 million. In previous
business cycles, Omicron's average net income was $ 24 million per
year.
Omicron managers say that Omicron's recent good performance is

driven by a new business model and cannot be compared to the
average performance achieved in previous business cycles. Identify
the appropriate statistic and determine the acceptance or rejection of
the null hypothesis with a significance level of 0.05.
A. the statistic is 1,4697 and we cannot reject
B. the statistic is 1,4697 and we can reject

C. the statistic is 2,015 and we cannot reject
Answer A
H0: u≤24M$ vs H1: u>24M$

Right – tail test with critical region to the right of t=2.015 at 5% level of
significance and 5 degrees of freedom,
Then we can not reject H0

147. An analyst wants to test the hypothesis that the standard
deviation of American stocks in 2018 is less than 4.0% (one-sided
test). To achieve this, he recovered a standard deviation of 3.6% for
stock market data from 24 companies based across the country.
Identify the appropriate statistic and determine the acceptance or
rejection of the null hypothesis with a significance level of 0.05.

Answer A
H0 σ≥4% H1: σ<4% then this is a bilateral Chi-square test with n-

1=23 degrees of freedom, point of rejection =13.091 with α=5% and
chi-square =
Then we can reject H0
148. You are analyzing an equity fund that has been in existence for 3
years (36 months). During this period, the fund recorded an average
performance of 2.10% per month with a sample standard deviation of
3.10%. Given its level of systematic risk, this investment fund should
have earned 1.20% return per month during the period. Assuming a
normal distribution, are the results obtained consistent with the
assumption of an average monthly return of 1.20%. Identifies the
appropriate statistical test and identifies if you can reject the null
hypothesis at 10% threshold. Is this also the case at 1% threshold?
A. Reject at threshold = 10%. Do not reject at threshold = 1%,

B. Do not reject at threshold = 10%. Do not reject at threshold = 1%,
C. Do not reject at threshold = 10%. Reject at threshold = 1%,
Answer C
H0: u=1.20 vs H1: u≠1.20 Two tailed , t-test, with n-1 = 35 degrees of
freedom
Then we can not reject H0 at α=10% but we can rejec H0 at α=1%
149. During the 2000s, the standard deviation of annual returns for
XYZ stock was 10.426%. You want to test whether this sample is
sufficient to demonstrate your conclusion that the variance of the titre
is different from 0.5% at the 5% threshold.

Answer A
This is a bilateral Chi-square test with n-1=9 degrees of freedom and
Chi-square =
Since the chi-square distribution is not symmetric, it is important to

find the right critical values (two different values) at the appropriate
degree of freedom. This is a two-tailed test at α=5%, so we have to
look for a first critical value such that 2.5% of the distribution is to the
right of the critical value. In addition, the second critical value will be
the one that has 2.5% on the left side of the distribution. The two
critical values of a chi-square with α=5% and 9 degree of freedom are
respectively: 2,700 and 19,023. Since the statistical test is greater
than the critical value of 19.566> 19.023, we can therefore reject the
null hypothesis at the threshold α = 5%.
150. We want to test the hypothesis whether the average of the

returns on a stock index in the 1990s is substantially different from
the 2000s. Suppose the variance between the two decades is
equivalent. Is the difference statistically significant? Here is a table
showing the data:
N Average monthly Standard
Period returns (%) deviations of
returns
Years 1990 100 0.612 4.896
Years 2000 100 1.525 5.235
Identify the right statistical test. Determine whether or not you should
reject the null hypothesis at the 10% thresholds.
A. The statistic is -1,27 and we can reject

C. The statistic is -1,27 and we cannot reject
Answer C
H0 : µ1-µ2 =0 vs Ha: µ1-µ2 ≠0

T-student, two tailed t-test with n1+n2-2 = 238
degrees of freedom, point of rejection t<-1.645 or
t>1,645 with α=10% an t statistic = -1.477
Then we cannot reject H0 (It means, the mean
difference is not significantly different from zero).
151. We want to test the hypothesis whether the average bond

recovery rate on a $ 100 basis is similar between utility bonds to non-
utility bonds. Is the difference statistically significant? Here is a table
showing the data.
Sample of utilities bonds Sample of non-utilities bonds

Average Standard Average Standard
Number of Number of
recovery deviation recovery deviation
observation observation
rate ($) ($) rate ($) ($)
65 62,51 12,56 48 50,48 29,21
Determine the number of degrees of freedom for the statistical test.

Should you reject the null hypothesis at the 10% threshold or not?
A. 62 degrees of freedom and we can reject

B. 65 degrees of freedom and we can reject
C. 62 degrees of freedom and we cannot reject
Answer A
H0: u1-u2=0 vs Ha: u1-u2 ≠0: T-student two-tailed test with 62 degrees
of freedom and point of rejection t<-1,671 or t>1,671 withα=10% and
tdf=2.68 then we can reject H0. It means the difference is significantly
different from zero.
152. Kappa Consulting examined the investment strategy of investing

in the 10 stocks with the highest dividends (by rebalancing the
portfolio on an annual basis) compared to a buy-and-hold investment
in the Dow Jones Industrial Index Average across the 30 index
companies. The study period is the 50-year period from 1950 to
2000. Is the observed difference in yield statistically significant? Here
is a table showing the results:
Average Standard
Strategy
Return deviation
Dow-10 15.81% 20.15%
Dow-30 12.45% 17.29%
Difference 3.85% 7.22%*
* Sample standard deviation of return differences
if the difference in average return between the two strategies is equal
to 0. Determine whether or not you should reject the null hypothesis
at the 1% threshold.

B. The statistic is 3.77, we cannot reject
C. The statistic is 2.68, we can reject
Answer A
H0: ud=0 vs Ha:ud≠0.

Unknown population variance. T-student rwo tailed t-test with n-1=50-
1=49 degrees of freedom and point of rejection 2,68 with α=1%.
= =3.77
Then we can reject means, the correlation between the
returns of the two strategies is positive ).
153. You need to analyze whether the population variance of the S &
P 500 Growth Index returns was affected by the October 2008 stock
market crash to a significance level of 0.05. To do this, you retrieved
data on the monthly returns for the 120 months preceding the crash
and the 120 months following the 2008 crash.
Average Variance
Period N monthly of
return (%) returns
Before October
121 1,521 25,43
2008
After October
121 1,556 22,47
2008

with what you need to analyze. Identify the right statistical test.
Determine whether or not you should reject the null hypothesis at the
5% threshold.
B. The statistic is 1.132 and we cannot reject
C. The statistic is 1.235 and we cannot reject
Answer B
H0: σ 2before = σ2after; H1: σ2 before ≠σ 2 after

The F test is appropriate for evaluating the equality of population
variances with d1=n-1=121-1=120 and d2=n-1=121-1=120 at a 0.025
level of significance, rejection point at 1.43 and F=
Then we cannot reject H0.
154. We have retrieved the monthly returns of 5 financial indices and

want to test the correlation. For each market index, we collected 348
monthly data, which allowed us to calculate 347 monthly returns.
Correlation
S&P
500 MSCI 1 MSCI 2 MSCI 3
S&P/TSX
Composite 0,7588 0,0445 0,1251 0,0951
For each foreign index, test the hypothesis that the correlation with
the TSX Composite is 0. Use a significance level of 10% and point of
rejection equal 1.65. Identify the right statistical test. Determine
whether or not you should reject the null hypothesis.
A. reject absence of correlation between TSX and S&P500, MCI
2, MCI 3; but do not reject absence of correlation between TSX

and MCI 1.
B. reject absence of correlation between TSX and S&P500, MCI
3; but do not reject absence of correlation between TSX and MCI

1, MCI 2.
C. reject absence of correlation between TSX and S&P500; but
do not reject absence of correlation between TSX and MCI 1,
MCI 2, MCI 3.
Answer A
H0: ρ=0 VS ρ≠0 This is a bilateral t-test with n-2 =345 degrees of
freedom and point of rejection of t=±1,645 at α=10% with:
Then ts&p500=21,6391; tMCI 1=0.8273; tMCI 2=2.34202; tMCI 3=1.77445

We can reject H0 (absence of correlation) between TSX and S&P,
MCI 2 and MCI 3, but we cannot reject H0 (absence of correlation)
between TSX and MCI 1.
155. The exhibit provides information concerning quarterly returns on
two otherwise identically managed equity funds, Alpha and Beta, as
well as statistical estimates concerning their mean return differences
over the past fifty quarters.
Differences
Fund Alpha Fund Beta ( Fund A - Fund
Measure Return (%) Return(%) B)
Mean 2 780 3 756 -0,976
Standad
Deviation 4 672 5 468 -0,796
Using a critical value of 1.671, which of the following conclusions is

most likely valid concerning differences between the mean returns on
Fund Alpha and Beta?
A. The difference is significant.

B. The difference is not significant as the null hypothesis is rejected.
C. The difference is not significant as the null hypothesis is not
rejected.
Answer: C
H0: ud=0 vs Ha: ud≠0.

Unknown population variance. T-student two tailed t-test. Point of
rejection of 1.671.
Then we cannot reject H0. (It means, the difference in means returns
is not statistically significant).
156. Donald Smith, a portfolio manager, is comparing the

performance of a client’s portfolio before and after the inclusion of
energy stocks. He has complied relevant data in a table. He aims to
analyze whether quarterly returns have changed significantly
between the two periods. He collects returns data five years prior to
and five years after the inclusion.
Mean Variance
Quarterly of
N Returns(%) Returns
Before 2
inclusion 20 584 225
1
After inclusion 20 821 151
Using a 2.1555 rejection point, the manager will most likely conclude
that the inclusion of real estate:
A. significantly alters portfolio performance.

B. has an indeterminate effect on portfolio performance.
C. does not significantly alter portfolio performance
Answer: C
H0: σ1=σ2; H1: σ1≠σ2

This is a F-test and the larger of the 2 ratios appears in the
numerator:
F=
Point of rejection of 2.1555. Then we cannot reject H0, (it means, the
population variances of returns are same in five years prior and five
years post inclusion of the energy stocks. The inclusion of this asset
does not significantly alter the portfolio performance.

161
Two samples were drawn form a normally distributed population. For

the first sample, the mean was $50 and the standard deviation was
$5. For the second sample the mean was $55 and the standard
deviation as $6. The first sample consist of 25 observations and the
second sample of 36 observations. (note: In the questions below the
subscripts 1 and 2 indicate the first and second sample respectively).
157. Consider the hypotheses structured as

null hypotheses:
A.- cannot be rejected
B.- should be rejected
C.- should neither be rejected nor failed t be rejected
Answer: A
H0: µ1=48 vs Ha: µ2≠48

Two tailed t-test with n-1=24 degrees of freedom and t0.5%df=24=2.797
Then we cannot reject H0 at α=1%
Answer: A
H0 : σ2≤24 vs H1 :σ2>24, this is single Chi-square test, used to test

single population variance with n-1=24 degrees of freedom.
The right-tail critical Chi-square value is 36.415. Since Chi-square

statistic = 25 < 36.415, then H0 cannot be rejected.
159. Consider the hypothesis structured as:
null hypothesis:
Answer: B
A one-tailed t-test is appropriate. The decision rule is to reject H0 if

the computed t-statistic > t-critical at α=0.05 with df=24 and t-critical =
t24 = 1.711
Since t>t critical, H0 should be rejected.

Answer: A
H0: σ1=σ2 vs H1: σ1≠σ2

F-test is appropriate for evaluating the equality of population
variances with d1=n-1=36-1=35 and d2=n-1=25-1=24 at a 0.025 level
of significance, rejection point at 2.18 then
161. If the level of significance of a test is 0.05 and the probability of

Type II error is 0.15, what is the power of the test?
A. 0.850
B. 0.950
C. 0.975
Answer: A
The power of the test is 1- P(Type II error) =1-0.15=0.85
162. All of the following are true about F- distribution and Chi-square
distribution EXCEPT they:
A.- are both asymmetrical

B.- are both bound by zero on the left
C.- both have means that are less than their standard deviation
Answer: C
There is no consist relationship between the mean and the standard
deviation of the Chi-square distribution or F-distribution
163. For a hypothesis test with a probability of a Type II Error of 60

percent and probability of a Type I error of 5% which of the following
statements is TRUE?
A. The power of the test is 40% and there is 5% of probability that the
test statistic will exceed the critical value(s).
B. There is a 95% of probability that the test statistic will be between
the critical values if this is a two-tail test.
C. There is a 5% of probability that the null hypothesis will be rejected
when actually true, and the probability of rejecting the null when it is
false is 40%.
Answer: C
A type I error is rejecting the null hypothesis when it is true. The

probability of rejecting a false null is (1-Prob Type II) = 40%, which is
called power of the test. A and B are not necessarily true, since the
null maybe false and the probability of rejection unknown.
CHAPTER 7 LINEAR REGRESSION
(90 practice questions)
Question #1
Wanda Brunner, CFA, is working on a regression
analysis based on publicly available
macroeconomic time series data. The most
important limitation of regression analysis in this
instance is:
A. the error term of one
observation is not correlated
with that of another observation.
B. limited usefulness in identifying profitable
investment strategies.
C. low confidence intervals.
Question #2
The standard error of estimate is closest to the:
A. standard deviation of the
residuals.
B. standard deviation of the
independent variable.
C.standarddeviationofthedependen
t variable.
Question #3
A simple linear regression equation had a
coefficient of determination (R2) of 0.8. What is the
correlation coefficient between the dependent and
independent variables and what is the covariance
between the two variables if the variance of the
independent variable is 4 and the variance of the
dependent variable is 9?
Correlation
Covariance
coefficient
A) 0.89 5.34
B) 0.91 4.8
C) 0.89 4.8
Questions #49
A study of a sample of incomes (in thousands of
dollars) of 35 individuals shows that income is
related to age and years of education. The following
table shows the regression results:
Standard t- P--
Coefficient
Error statistic value
Intercept 5.65 1.27 4.44 0.01
Age 0.53 ? 1.33 0.21
Years of
2.32 0.41 ? 0.01
Education
Anova df SS MS F
Regression ? 215.1 ? ?
Error ? 115.1 ?
Total ? ?
Question #4
The standard error for the coefficient of age and t-
statistic for years of education are:
A. 0.32; 1.65.
B. 0.53; 2.96.
C. 0.40; 5.66.
Question #5
The mean square regression (MSR) is:
A. 6.72
B. 102.10
C. 107.55
Question #6
The mean square error (MSE) is:
A. 3.58
B. 7.11
C. 3.60
Question #7
What is the R2 for the regression?
A. 65%
B. 76%
C. 107.55
Question
#8
What is the predicted income of a 40yearold person
with 16 years of education?
A. $62,120.
B. $63,970.
C. $74,890
Question #9
What is the Fvalue?
A. 29.88.
B. 1.88.
C. 14.36.
Question #10
Assume an analyst performs two simple regressions.
The first regression analysis has an Rsquared of
0.90 and a slope coefficient of 0.10. The second
regression analysis has an Rsquared of 0.70 and a
slope coefficient of 0.25. Which one of the following
statements is most accurate?
A. The first regression has more explanatory power

than the second regression.
B. The influence on the dependent variable of a one
unit increase in the independent variable is 0.9 in
the first analysis and 0.7 in the second analysis.
C. Results of the second analysis are more reliable
than the first analysis.
Question #11
Paul Frank is an analyst for the retail industry. He is
examining the role of television viewing by
teenagers on the sales of accessory stores. He
gathered data and estimated the following
regression of sales (in millions of dollars) on the
number of hours watched by teenagers (TV, in
hours per week): Salest = 1.05 + 1.6 TVt
The predicted sales if television watching is 5 hours

per week is:
A. $9.05 million.
B. $8.00 million.
C. $2.65 million.
Question #12
The independent variable in a regression equation
is called all of the following EXCEPT:
A. Predicting variable.
B. explanatory variable.
C. predicted variable
Question #13
Consider a sample of 60 observations on variables X
and Y in which the correlation is 0.42. If the level of
significance is 5%, we:
A. cannot test the significance of the correlation with
this information.
B. conclude that there is no significant correlation
between X and Y.
C. conclude that there is statistically significant
correlation between X and Y.
Question #14
Consider the following estimated regression
equation: ROEt = 0.23 - 1.50 CEt
The standard error of the coefficient is 0.40 and the
number of observations is 32. The 95% confidence
interval for the slope coefficient, b1, is:
A. {2.300 < b < 0.700}.

B. {2.317 < b < 0.683}.
C. {0.683 < b < 2.317}
Question #15
In order to have a negative correlation between two
variables, which of the following is most accurate?
A. Either the covariance or one of the standard
deviations must be negative.
B. The covariance can never be negative.
C. The covariance must be negative.
Question #16
Assume you perform two simple regressions. The
first regression analysis has an R-squared of 0.80
and a beta coefficient of 0.10. The second
regression analysis has an R-squared of 0.80 and a
beta coefficient of 0.25. Which one of the following
statements is most accurate?
A. The influence on the dependent variable of a one-unit
increase in the independent variable is the same in
both analyses.
B. Results from the first analysis are more reliable than
the second analysis.
C. Explained variability from both analyses is equal.
Question #17
A sample covariance for the common stock of the Earth
Company and the S&P 500 is −9.50. Which of the
following statements regarding the estimated covariance
of the two variables is most accurate?
A. The two variables will have a slight tendency to move

together.
B. The relationship between the two variables is not easily
predicted by the calculated covariance.
C. The two variables will have a strong tendency to move
in opposite directions.
Question #18
An analyst has been assigned the task of evaluating
revenue growth for an online education provider company
that specializes in training adult students. She has
gathered information about student ages, number of
courses offered to all students each year, years of
experience, annual income and type of college degrees, if
any. A regression of annual dollar revenue on the number
of courses offered each year yields the results shown
below.
Coefficient Estimates
Standard
Error of
Predictor Coefficient
the
Coefficient
Intercept 0.1 0.5
Slope (Number
2.2 0.6
of Courses)
Which statement about the slope coefficient is most

correct, assuming a 5% level of significance and 50
observations?
A. t-Statistic: 0.20. Slope: Not significantly different from
zero.
B. t-Statistic: 3.67. Slope: Significantly different from zero.
C. t-Statistic: 3.67. Slope: Not significantly different from
zero
Question #19
A simple linear regression is run to quantify the
relationship between the return on the common stocks of
medium sized companies (Mid Caps) and the return on
the S&P 500 Index, using the monthly return on Mid Cap
stocks as the dependent variable and the monthly return
on the S&P 500 as the independent variable. The results
of the regression are shown below:
Coefficient Standard tValue

Error of
Coefficient
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
R2 = 0.599
Use the regression statistics presented above and

assume this historical relationship still holds in the future
period. If the expected return on the S&P 500 over the
next period were 11%, the expected return on Mid Cap
stocks over the next period would be:
A. 8.4%.
B. 20.3%.
C. 33.8%
Question #20
Unlike the coefficient of determination, the coefficient of
correlation:
A. measures the strength of association between the two

variables more exactly.
B. indicates the percentage of variation explained by a
regression model.
C. indicates whether the slope of the regression line is
positive or negative
Question #21
Consider the regression results from the regression of Y
against X for 50 observations:
Y= 0.78 - 1.5 X
The standard error of the estimate is 0.40 and the
standard error of the coefficient is 0.45.
Which of the following reports the correct value of the t-
statistic for the slope and correctly evaluates H0: b1 ≥ 0
versus Ha: b1 < 0 with 95% confidence?
A. t = 3.750 ; slope is significantly different from zero.
B. t = 3.333 ; slope is significantly negative.
C. t = 3.750 ; slope is significantly different from zero.
Question #22
Bea Carroll, CFA, has performed a regression analysis of
the relationship between 6-month LIBOR and the U.S.
Consumer Price Index (CPI). Her analysis indicates a
standard error of estimate (SEE) that is high relative to
total variability. Which of the following conclusions
regarding the relationship between 6-month LIBOR and
CPI can Carroll most accurately draw from her SEE
analysis? The relationship between the two variables is:
A. very weak.
B. very strong.
C. positively correlated
Question #23
The standard error of the estimate measures the variability
of the:
A. actual dependent variable values about the estimated
regression line.
B. predicted y-values around the mean of the observed
y-values.
C. values of the sample regression coefficient.
Question #24
The R2 of a simple regression of two factors, A and B,
measures the:
A. impact on B of a one unit change in A.
B. statistical significance of the coefficient in the
regression equation.
C. percent of variability of one factor explained by the
variability of the second factor.
Question #25
Y= 0.78 + 1.2 X
standard error of the coefficient is 0.45
statistic for the slope and correctly evaluates its statistical
significance with 95% confidence?
A. t = 1.789 ; slope is not significantly different from zero.
B. t = 3.000 ; slope is significantly different from zero.
Question #26
Which of the following statements about the standard
error of the estimate (SEE) is least accurate?
A. The SEE will be high if the relationship between the
independent and dependent variables is weak.
B. The SEE may be calculated from the sum of the
squared errors and the number of observations.
C. The larger the SEE the larger the R
Question #27
An analyst performs two simple regressions. The first
regression analysis has an R-squared of 0.40 and a beta
coefficient of 1.2. The second regression analysis has an
R-squared of 0.77 and a beta coefficient of 1.75. Which
one of the following statements is most accurate?
A. The R-squared of the first regression indicates that
there is a 0.40 correlation between the independent
and the dependent variables.
B. The first regression equation has more explaining
power than the second regression equation.
C. The second regression equation has more explaining
power than the first regression equation
Question #28
Jason Brock, CFA, is performing a regression analysis to
identify and evaluate any relationship between the
common stock of ABT Corp and the S&P 100 index. He
utilizes monthly data from the past five years, and
assumes that the sum of the squared errors is .0039.
The calculated standard error of the estimate (SEE) is
closest to:
A. 0.0082.
B. 0.0360.
C. 0.0080.
Question #29
Determine and interpret the correlation coefficient for the
two variables X and Y. The standard deviation of X is
0.05, the standard deviation of Y is 0.08, and their
covariance is −0.003.
A. −0.75 and the two variables are negatively associated.
B. −1.33 and the two variables are negatively associated.
C. +0.75 and the two variables are positively associated.
Questions #3035
Erica Basenj, CFA, has been given an assignment by
her boss. She has been requested to review the
following regression output to answer questions about
the relationship between the monthly returns of the
Toffee Investment Management (TIM) High Yield Bond
Fund and the returns of the index (independent variable).
Regression
Statistics
R2 ??
Standard
Error ??
Observations 20
Signific.
ANOVA df SS MS F
F
Regression 1 23,516 23,516 ? ?
Residual 18 ? 7
Total 19 23,644
Regression Std. t-
Coeffic. Pvalue
Equation Error statistic
Intercept 5.29 1.615 ? ?
Slope 0.87 0.0152 ? ?
Question #30
What is the value of the correlation coefficient?
A. 0.8700.
B. −0.9973.
C. 0.9973.
Question #31
What is the sum of squared errors (SSE)?
A. 23,644.
B. 23,515.
C. 128
Question #32
What is the value of R2?
A. 0.9471.
B. 0.9946.
C. 0.0055.
Question #33
Is the intercept term statistically significant at the 5% level
of significance and the 1% level of significance,
respectively?
1% 5%
A) No No
B) Yes No
C) Yes Yes
Question #34
What is the value of the F-statistic?
A. 3,359.
B. 0.9945.
C. 0.0003.
Question #35
Heteroskedasticity can be defined as:
A. nonconstant variance of the error terms.
B. error terms that are dependent.
C. independent variables that are correlated with each
other
Question #36
Consider the following analysis of variance (ANOVA)
table:
Source Sum of Degrees of Mean

squares freedom square
Regressio 500 1 500
n
Error 750 50 15
Total 1,250 51
The R2 and the F-statistic are, respectively:
A. R = 0.40 and F = 33.333.
B. R = 0.40 and F = 0.971.
C. R = 0.67 and F = 0.971.
Question #37
Consider the case when the Y variable is in U.S. dollars
and the X variable is in U.S. dollars. The 'units' of the
covariance between Y and X are:
A. squared U.S. dollars.
B. U.S. dollars.
C. a range of values from −1 to +1.
Question #38
table:

Regressio 200 1 200
n
Error 400 40 10
Total 600 41
A. R = 33% and F = 2.0.
B. R = 50% and F = 2.0.
C. R = 33% and F = 20.0
Question #39
Which of the following statements about linear regression
is least accurate?
A. The independent variable is uncorrelated with the
residuals (or disturbance term).
B. The correlation coefficient, ρ, of two assets x and y =
(covariance ) × standard deviation × standard
deviation.
C. R2 = RSS / SST.
Question #40
A sample of 200 monthly observations is used to run a
simple linear regression: Returns = b 0 + b1Leverage + u.
The t-value for the regression coefficient of leverage is
calculated as t = - 1.09. A 5% level of significance is used
to test whether leverage has a significant influence on
returns. The correct decision is to:
A. do not reject the null hypothesis and conclude that
leverage significantly explains returns.
B. reject the null hypothesis and conclude that leverage
does not significantly explain returns.
C. do not reject the null hypothesis and conclude that
leverage does not significantly explain returns
Question #41
Standard
Coefficien Error tValue
t of
coefficient
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
R2= 0.599
The strength of the relationship, as measured by the

correlation coefficient, between the return on Mid Cap
stocks and the return on the S&P 500 for the period
under study was:
A. 0.599.
B. 0.774.
C. 0.130
Questions #4247
Craig Standish, CFA, is investigating the validity of
claims associated with a fund that his company offers.
The company advertises the fund as having low turnover
and, hence, low management fees. The fund was
created two years ago with only a few uncorrelated
assets. Standish randomly draws two stocks from the
fund, Grey Corporation and Jars Inc., and measures the
variances and covariance of their monthly returns over
the past two years. The resulting variance covariance
matrix is shown below. Standish will test whether it is
reasonable to believe that the returns of Grey and Jars
are uncorrelated. In doing the analysis, he plans to
address the issue of spurious correlation and outliers.
Grey Jars
Grey 42.2 20.8
Jars 20.8 36.5
Standish wants to learn more about the performance of

the fund. He performs a linear regression of the fund's
monthly returns over the past two years on a large
capitalization index. The results are below:
ANOVA Df SS MS F
Regressio 1 92.53009 92.5300 28.09117
n 9
Residual 22 72.46625 3.29392
1
Total 23 164.9963
Coefficient Standard tstatistic Pvalue

s Error
Intercept 0.148923 0.391669 0.38022 0.707424
5
Large Cap 1.205602 0.227467 5.30011 2.56E-05
Index
Standish forecasts the fund's return, based upon the

prediction that the return to the large capitalization index
used in the regression will be 10%. He also wants to
quantify the degree of the prediction error, as well as the
minimum and maximum sensitivity that the fund actually
has with respect to the index.
He plans to summarize his results in a report. In the
report, he will also include caveats concerning the
limitations of regression analysis. He lists four limitations
of regression analysis that he feels are important:
relationships between variables can change over time,
multicollinearity leads to inconsistent estimates of
regression coefficients, if the error terms are
heteroskedastic the standard errors for the regression
coefficient may not be reliable, and if the error terms are
correlated with each other over time the test statistics
may not be reliable.
Question #42
Given the variance/covariance matrix for Grey and Jars,
in a one-sided hypothesis test that the returns are
positively correlated H0: ρ ≤ 0 vs. H1: ρ > 0, Standish
would:
A. reject the null at the 5% but not the 1% level of
significance.
B. reject the null at the 1% level of significance.
C. need to gather more information before being able to
reach a conclusion concerning significance
Question #43
In using the correlation coefficient between returns on
Grey and Jars, Standish would most appropriately
question the issue of:
A. issue of outliers but not the issue of spurious
correlation.
B. spurious correlation but not the issue of outliers.
C. Both spurious correlation and outliers.
Question #44
If the large capitalization index has a 10% return, then the
forecast of the fund's return will be:
A. 12.2.
B. 16.1.
C. 13.5.
Question #45
The standard deviation of monthly fund returns is closest
to:
A. 2.68.
B. 12.84.
C. 7.17.
Question #46
A 95% confidence interval for the slope coefficient is:
A. 0.760 to 1.650.
B. 0.734 to 1.677.
C. 0.905 to 1.506.
Question #47
Of the four caveats of regression analysis listed by
Standish, the least accurate is:
A. the relationships of variables change over time.
B. multicollinearity leads to inconsistent estimates of the
regression coefficients.
C. if the error terms are heteroskedastic the standard
errors for the regression coefficients may not be
reliable.
Question #48
We are examining the relationship between the number
of cold calls a broker makes and the number of accounts
the firm as a whole open. We have determined that the
correlation coefficient is equal to 0.70, based on a
sample of 16 observations. Is the relationship statistically
significant at a 10% level of significance, why or why
not? The relationship is:
A. not significant ; the critical value exceeds the t--
statistic by 1.91.
B. significant ; the t-statistic exceeds the critical value by
3.67.
C. significant ; the t-statistic exceeds the critical value by
1.91
Question #49
error of estimate is least accurate? The standard error of
estimate:
A. measures the Y variable's variability that is not
explained by the regression equation.
B. is the square of the coefficient of determination.
C. is the square root of the sum of the squared
deviations from the regression line divided by (n − 2).
Question #50
Y = 5.0 + 1.5 X
standard error of the forecast is 0.52. The 95%
confidence interval for the predicted value of Y if X is 10
is:
A. {18.980 < Y < 21.019}.
B. {18.954 < Y < 21.046}.
C. {19.480 < Y < 20.052}.
Question #51
analysis is most accurate?
A. An assumption of linear regression is that the
residuals are independently distributed.
B. The coefficient of determination is defined as the
strength of the linear relationship between two
variables.
C. When there is a strong relationship between two
variables we can conclude that a change in one will
cause a change in the other.
Question #52
A sample covariance of two random variables is most
commonly utilized to:
A. calculate the correlation coefficient, which is a
measure of the strength of their linear relationship.
B. identify and measure strong nonlinear relationships
between the two variables.
C. estimate the "pure" measure of the tendency of two
variables to move together over a period of time
Question #53
Regression analysis has a number of assumptions.
Violations of these assumptions include which of the
following?
A. Independent variables that are not normally
distributed.
B. A zero mean of the residuals.
C. Residuals that are not normally distributed
Question #54
For the case of simple linear regression with one
independent variable, which of the following statements
about the correlation coefficient is least accurate?
A. If the correlation coefficient is negative, it indicates that
the regression line has a negative slope coefficient.
B. The correlation coefficient can vary between −1 and
+1.
C. If the regression line is flat and the observations are
dispersed uniformly about the line, the correlation
coefficient will be +1.
Question #55
In the estimated regression equation Y = 0.78 - 1.5 X,
which of the following is least accurate when interpreting
the slope coefficient?
A. If the value of X is zero, the value of Y will be 1.5.
B. The dependent variable declines by 1.5 units if X
increases by 1 unit.
C. The dependent variable increases by 1.5 units if X
decreases by 1 unit.
Question #56
Which of the following is least likely an assumption of
linear regression? The
A. residuals are mean reverting ; that is, they tend
towards zero over time.
B. residuals are independently distributed.
C. expected value of the residuals is zero.
Question #57
In the scatter plot below, the correlation between the return on stock A and
the market index is:
A. positive.
B. not discernable using the scatter plot.
C. negative.
Question #58
An analyst is examining the relationship between two
random variables, RCRANTZ and GSTERN. He performs
a linear regression that produces an estimate of the
relationship:
RCRANTZ = 61.4 − 5.9GSTERN
Which interpretation of this regression equation is least
accurate?
A. The intercept term implies that if GSTERN is zero,
RCRANTZ is 61.4.
B. The covariance of RCRANTZ and GSTERN is
negative.
C. If GSTERN increases by one unit, RCRANTZ should
increase by 5.9 units
Question #59
Ron James, CFA, computed the correlation coefficient for
historical oil prices and the occurrence of a leap year and
has identified a statistically significant relationship.
Specifically, the price of oil declined every fourth calendar
year, all other factors held constant. James has most
likely identified which of the following conditions in
correlation analysis?
A. Positive correlation.
B. Spurious correlation.
C. Outliers.
Question #60
The most appropriate measure of the degree of variability
of the actual Y-values relative to the estimated Y-values
from a regression equation is the:
A. sum of squared errors (SSE).
B. standard error of the estimate (SEE).
C. coefficient of determination (R2).
Question #61
A variable Y is regressed against a single variable X
across 24 observations. The value of the slope is 1.14,
and the constant is 1.3. The mean value of X is 1.10, and
the mean value of Y is 2.67. The standard deviation of
the X variable is 1.10, and the standard deviation of the Y
variable is 2.46. The sum of squared errors is 89.7. For
an X value of 1.0, what is the 95% confidence interval for
the Y value?
A. −1.68 to 6.56.
B. −1.83 to 6.72.
C. 0.59 to 4.30.
Question #62
Suppose the covariance between Y and X is 10, the
variance of Y is 25, and the variance of X is 64. The
sample size is 30. Using a 5% level of significance,
which of the following statements is most accurate? The null
hypothesis of:
A. no correlation is rejected.
B. no correlation cannot be rejected.
C. significant correlation is rejected.
Question #63
table:

Regressio 556 1 556
n
Error 679 50 13.5
Total 1,235 51
The R2 for this regression is:
A. 0.55.
B. 0.45.
C. 0.82.
Question #64
Rafael Garza, CFA, is considering the purchase of ABC
stock for a client's portfolio. His analysis includes
calculating the covariance between the returns of ABC
stock and the equity market index. Which of the
following statements regarding Garza's analysis is
most accurate?
A. A covariance of +1 indicates a perfect positive
covariance between the two variables.
B. The covariance measures the strength of the linear
relationship between two variables.
C. The actual value of the covariance is not very
meaningful because the measurement is very
sensitive to the scale of the two variables.
Question #65
Which of the following statements regarding scatter plots
is most accurate? Scatter plots:
A. are used to examine the third moment of a distribution
(skewness).
B. illustrate the scatterings of a single variable.
C. illustrate the relationship between two variables
Question #66
A regression between the returns on a stock and its
industry index returns gives the following results:
Coefficient Standard t-
Error value
Intercept 2.1 2.01 1.04
Industry 1.9 0.31 6.13
Index
The t-statistic critical value at the 0.01 level of significance

is 2.58
Standard error of estimate = 15.1
Correlation coefficient = 0.849
The regression statistics presented indicate that the
dispersion of stock returns about the regression line is:
A. 72.10
B. 15.10
C. 63.20
Question #67
Which of the following statements about covariance and
correlation is least accurate?
A. A zero covariance implies a zero correlation.
B. There is no relation between the sign of the covariance
and the correlation.
C. The covariance and correlation are always the same
sign, positive or negative
Question #68
The most appropriate test statistic to test statistical
significance of a regression slope coefficient with 45
observations and 2 independent variables is a:
A. onetail tstatistic with 42 degrees of freedom.
B. twotail tstatistic with 42 degrees of freedom.
C. onetail tstatistic with 43 degrees of freedom
Question #69
linear regression?
A. The residuals are normally distributed.
B. The independent variable is correlated with the
residuals.
C. The variance of the residuals is constant
Question #70
If X and Y are perfectly correlated, regressing Y onto X
will result in which of the following:
A. the regression line will be sloped upward.
B. the alpha coefficient will be zero.
C. the standard error of estimate will be zero
Use the following data to answer Questions 71

through 73.
An analyst is interested in predicting annual sales for XYZ
Company, a maker of paper products. The following table
reports a regression of the annual sales for XYZ against
paper product industry sales.
Regression Output
Regression
Output
Standard
Parameters Coefficient error
Intercept -94.88 32.97
Slope(industry
sales) 0.2796 0.0363
The correlation between company and industry sales is

0.9757. The regression was based on five observations.
Question #71
Which of the following is closest to the value and reports
the most likely interpretation of the R2 for this regression?
The R2 is:
A. 0.048, indicating that the variability of industry sales
explains about 4.8o/o of the variability of company sales.
B. 0.952, indicating that the variability of industry sales
explains about 95.2% of the variability of company sales.
C. 0.952, indicating that the variability of company sales
explains about 95.2% of the variability of industry sales.
Question #72
Based on the regression results, XYZ Company's market
share of any increase in industry sales is expected to be
closest to:
A. 4%.
B. 28%.
C. 45%.
Question #73
The analyst determines that the t-statistic is 7.72 and that
the correlation coefficient is not significant (using 95o/o
confidence). Is the analyst correct?
A. Yes.
B. No, because the test statistic is 60.93.
C. No, because the correlation coefficient is significantly
different from zero (using 95o/o confidence).
Use the following information to answer Questions 74

and 75.
A study was conducted by the British Department of
Transportation to estimate urban travel time between
locations in London, England. Data was collected for
motorcycles and passenger cars. Simple linear regression
was conducted using data sets for both types of vehicles,
where Y = urban travel time in minutes and X= distance
between locations in kilometers. The following results were
obtained:
Question #74
The estimated increase in travel time for a motorcycle
commuter planning to move 8 km farther from his
workplace in London is closest to:
A. 31 minutes.
B. 15 minutes.
C. 0.154 hours.
Question #75
Based on the regression results, which model is more
reliable?
A. The passenger car model because 3.86 > 1.93.
B. The motorcycle model because 1.93 < 3.86.
C. The passenger car model because 0.758 > 0.676.
Question #76
Which of the following is not a necessary assumption of
simple linear regression analysis?
B. There is a constant variance of the error term.
C. The dependent variable is uncorrelated with the
residuals.
Question #77
Which of the following statements regarding simple linear
regression is most accurate?
A. If the units of the independent variable are tons instead
of pounds, the estimated slope coefficient will be 2,000
times larger.
B. If the slope of the regression line is + 1, the variables
are perfectly positively correlated.
C. If a researcher knows the sum of squared errors, the
number of observations, and the standard error of
estimate, he can calculate the coefficient of determination
for the regression.
Question #78
What is the most appropriate interpretation of a slope
coefficient estimate equal to 10.0?
A. The predicted value of the dependent variable when the
independent variable is zero is 10.0.
B. For every one unit change in the independent variable,
the model predicts that the dependent variable will change
by 10 units.
C. For every one unit change in the independent variable,
by 0.1 units.
Question #79
What is the appropriate alternative hypothesis to test the
statistical significance of the intercept term in the following
regression?
Y=a1+a2(x) +e
Question #80
Consider the following statement: In a simple linear
regression, the appropriate degrees of freedom for the
critical t-value used to calculate a confidence interval
around both a parameter estimate and a predicted Y-value
is the same as the number of observations minus two. The
statement is:
A. justified.
B. not justified, because the appropriate of degrees of
freedom used to calculate a confidence interval around a
parameter estimate is the number of observations.
C. not justified, because the appropriate of degrees of
predicted Y-value is the number of observations.
Question #81
The variation in the dependent variable explained by the
independent variable is measured by the:
A. mean squared error.
B. sum of squared errors.
C. regression sum of squares.
Use the following information for Questions 82

through 87.
Bill Coldplay, CPA, is analyzing the performance of the
Vanguard Growth Index Fund (VIGRX) over the past three
years. The fund employs a passive management
investment approach designed to track the performance of
the MSCI US Prime Market Growth index, a broadly
diversified index of growth stocks oflarge U.S. companies.
Coldplay estimates a regression using excess monthly
returns on VIGRX (exVIGRX) as the dependent variable
and excess monthly returns on the S&P 500 Index
(exS&P500) as the independent variable. The data are
expressed in decimal terms (e.g., 0.03, not 3%).
exVIGRXt = b0+b1(exS&SP500t) + et
A scatter plot of excess returns for both return series from

June 2004 to May 2007 are shown in the following figure
Results from that analysis are presented in the following

figures.
Estimated Coefficients
Coefficients Coefficient Standard
Estimate Error
b0 0.0023 0.0022
b1 1.1163 0.0624
Partial ANOVA Table

Source of Sum of
Variation Squares
Regression
(explained) 0.0228
Error
(unexplained) 0.0024
Question #82
The 90% confidence interval for b0 is closest to:
A. -0.00 14 to +0.0060.
B. -0.0006 to +0.0052.
C. +0.000 1 to +0.0045.
Question #83
Are the intercept term and the slope coefficient statistically
significantly different from zero at the 5% significance
level? Intercept term significant? Slope coefficient
significant?
A. Yes Yes
B. Yes No
C. No Yes
Question #84
Coldplay would like to test the following hypothesis: H0: b1
≤ 1 versus H1: b1 > 1 at the 1% significance level. The
calculated t-statistic and the appropriate conclusion are:
Calculated t-statistic Appropriate conclusion
A. 1.86 Reject H0
B. 1.86 Fail to reject H0
C. 2.44 Reject H0
Question #85
Coldplay forecasts the excess return on the S&P 500 for
June 2007 to be 5% and the 95% confidence interval for
the predicted value of the excess return on VIGRX for
June 2007 to be 3.9% to 7.7%. The standard error of the
forecast is closest to:
A. 0.0080.
B. 0.0093.
C. 0.01 11.
Question #86
The R2 from the regression is closest to:
A. 0.095.
B. 0.295.
C. 0.905.
Question #87
The standard error of estimate (SEE) is closest to:
A. 0.008.
B. 0.014.
C. 0.049.
Question #88
Which of the following statements Least accurately
describes a limitation of correlation analysis?
A. Outliers may influence the results of regression.
B. Serial correlation means that there may appear to be a
relationship between two or more variables when, in fact,
there is none.
C. Correlation only measures linear relationships, but not
nonlinear ones.
Question #89
Regression analysis is Least Likely to be limited by:
A. parameter instability.
B. insufficient data.
C. violations of the assumptions underlying regression
analysis.
Question #90
Carla Preusser finds that the total assets under
management by a popular hedge fund manager, and the
number of lizards lying out in the sun in a nearby park, can
be modeled as functions of time: f(t) = t l .8 and f(t) = t + 5,
respectively. The correlation between the two models is
0.98. Two potential problems with using the lizards to
predict total assets include:
A. spurious correlation and the non-linear relationship in
the total assets function.
B. spurious correlation and the non-geometric relationship
in the lizard function.
C. outliers and non-linear relationship in the total assets
function
CHAPTER 7.- LINEAR REGRESSION
(answers)
Question #1
Wanda Brunner, CFA, is working on a regression
analysis based on publicly available macroeconomic
time series data. The most important limitation of
regression analysis in this instance is:
A. the error term of one observation is
not correlated with that of another
observation.
B. limited usefulness in identifying profitable investment
strategies.
C. low confidence intervals.
Answer A
Regression analysis based on publicly available data is
of limited usefulness if other market participants are also
aware of and make use of this evidence.
Question #2
The standard error of estimate is closest to the:
A. standard deviation of the residuals.
B. standard deviation of the
independent variable.
C.standarddeviationofthedependentvariable.
Answer A
The standard error of the estimate measures the
uncertainty in the relationship between the actual and
predicted values of the dependent variable. The
differences between these values are called the
residuals, and the standard error of the estimate helps
gauge the fit of the regression line (the smaller the
standard error of the estimate, the better the fit).
Question #3
A simple linear regression equation had a coefficient of
determination (R2) of 0.8. What is the correlation
coefficient between the dependent and independent
variables and what is the covariance between the two
variables if the variance of the independent variable is 4
and the variance of the dependent variable is 9?
Correlation
Covariance
coefficient
A) 0.89 5.34
B) 0.91 4.8
C) 0.89 4.8
Answer A
The correlation coefficient is the square root of the R2, r =
0.89. To calculate the covariance multiply the correlation
coefficient by the product of the standard deviations of the
two variables: COV = 0.89 × √4 × √9 = 5.34
Questions #49
A study of a sample of incomes (in thousands of dollars)
of 35 individuals shows that income is related to age and
years of education. The following table shows the
regression results:
Standard t- P--
Coefficient
Error statistic value
Intercept 5.65 1.27 4.44 0.01
Age 0.53 ? 1.33 0.21
Years of
2.32 0.41 ? 0.01
Education
Anova df SS MS F
Regression ? 215.1 ? ?
Error ? 115.1 ?
Total ? ?
Question #4
The standard error for the coefficient of age and tstatistic
for years of education are:
A. 0.32; 1.65.
B. 0.53; 2.96.
C. 0.40; 5.66.
Answer C
standard error for the coefficient of age = coefficient / t-
value = 0.53 / 1.33 = 0.40
tstatistic for the coefficient of education = coefficient /
standard error = 2.32 / 0.41 = 5.66
Question #5
The mean square regression (MSR) is:
A. 6.72
B. 102.10
C. 107.55
Answer C
df for Regression = k = 2
MSR = RSS / df = 215.10 / 2 = 107.55
Question #6
The mean square error (MSE) is:
A. 3.58
B. 7.11
C. 3.60
Answer C
df for Error = n k 1 =35 2 1 = 32
MSE = SSE / df = 115.10 / 32 = 3.60
Question #7
What is the R2 for the regression?
A. 65%
B. 76%
C. 107.5%
Answer A
SST = RSS + SSE = 215.10 + 115.10 = 330.20
R2= RSS / SST = 215.10 / 330.20 = 0.65
Question #8
What is the predicted income of a 40yearold person with
16 years of education?
A. $62,120.
B. $63,970.
C. $74,890
Answer B
income = 5.65 + 0.53 (age) + 2.32 (education) = 5.65 +
0.53 (40) + 2.32 (16)= 63.97 or $63,970
Question #9
What is the Fvalue?
A. 29.88.
B. 1.88.
C. 14.36.
Answer A
F = MSR / MSE = 107.55 / 3.60 = 29.88
Question #10
Assume an analyst performs two simple regressions. The
first regression analysis has an Rsquared of 0.90 and a
slope coefficient of 0.10. The second regression analysis
has an Rsquared of 0.70 and a slope coefficient of 0.25.
Which one of the following statements is most accurate?
A. The first regression has more explanatory power than

the second regression.
B. The influence on the dependent variable of a one unit
increase in the independent variable is 0.9 in the first
analysis and 0.7 in the second analysis.
C. Results of the second analysis are more reliable than
the first analysis.
Answer A
The coefficient of determination (Rsquared) is the
percentage of variation in the dependent variable
explained by the variation in the independent variable.
The larger Rsquared (0.90) of the first regression means
that 90% of the variability in the dependent variable is
explained by variability in the independent variable, while
70% of that is explained in the second regression. This
means that the first regression has more explanatory
power than the second regression. Note that the Beta is
the slope of the regression line and doesn't measure
explanatory power.
Question #11
Paul Frank is an analyst for the retail industry. He is
examining the role of television viewing by teenagers on
the sales of accessory stores. He gathered data and
estimated the following regression of sales (in millions of
dollars) on the number of hours watched by teenagers
(TV, in hours per week): Salest = 1.05 + 1.6 TVt
The predicted sales if television watching is 5 hours per

week is:
A. $9.05 million.
B. $8.00 million.
C. $2.65 million.
Answer A
The predicted sales are: Sales = $1.05 + [$1.6 (5)] =
$1.05 + $8.00 = $9.05 million.
Question #12
The independent variable in a regression equation is
called all of the following EXCEPT:
A. Predicting variable.
B. explanatory variable.
C. predicted variable
Answer C
The dependent variable is the predicted variable.
Question #13
Consider a sample of 60 observations on variables X and
Y in which the correlation is 0.42. If the level of
significance is 5%, we:
A. cannot test the significance of the correlation with this
information.
B. conclude that there is no significant correlation
between X and Y.
C. conclude that there is statistically significant correlation
between X and Y.
Answer C
The calculated t is t = (0.42 × √58) / √(1-0.42^2) = 3.5246
and the critical t is approximately 2.000. Therefore, we
reject the null hypothesis of no correlation.
Question #14
Consider the following estimated regression equation:
ROEt = 0.23 - 1.50 CEt
number of observations is 32. The 95% confidence
interval for the slope coefficient, b1, is:
A. {2.300 < b < 0.700}.

B. {2.317 < b < 0.683}.
C. {0.683 < b < 2.317}
Answer B
The confidence interval is -1.50 ± 2.042 (0.40), or {-2.317
< b1 < -0.683}.
Question #15
In order to have a negative correlation between two
variables, which of the following is most accurate?
A. Either the covariance or one of the standard deviations
must be negative.
B. The covariance can never be negative.
C. The covariance must be negative.
Answer C
In order for the correlation between two variables to be
negative, the covariance must be negative. (Standard
deviations are always positive.)
Question #16
Assume you perform two simple regressions. The first
coefficient of 0.10. The second regression analysis has an
R-squared of 0.80 and a beta coefficient of 0.25. Which
one of the following statements is most accurate?
A. The influence on the dependent variable of a one-unit

increase in the independent variable is the same in
both analyses.
B. Results from the first analysis are more reliable than
the second analysis.
C. Explained variability from both analyses is equal.
Answer C
The coefficient of determination (R-squared) is the
The R-squared (0.80) being identical between the first
and second regressions means that 80% of the variability
in the dependent variable is explained by variability in the
independent variable for both regressions. This means
that the first regression has the same explaining power as
the second regression.
Question #17
A sample covariance for the common stock of the Earth
Company and the S&P 500 is −9.50. Which of the
following statements regarding the estimated covariance
of the two variables is most accurate?
A. The two variables will have a slight tendency to move

together.
B. The relationship between the two variables is not
easily predicted by the calculated covariance.
C. The two variables will have a strong tendency to
move in opposite directions.
Answer B
The actual value of the covariance for two variables is
not very meaningful because its measurement is
extremely sensitive to the scale of the two variables,
ranging from negative to positive infinity. Covariance
can, however be converted into the correlation
coefficient, which is more straightforward to interpret.
Question #18
An analyst has been assigned the task of evaluating
revenue growth for an online education provider company
that specializes in training adult students. She has
gathered information about student ages, number of
courses offered to all students each year, years of
experience, annual income and type of college degrees, if
any. A regression of annual dollar revenue on the number
of courses offered each year yields the results shown
below.
Coefficient Estimates
Standard
Error of
Predictor Coefficient
the
Coefficient
Intercept 0.1 0.5
Slope (Number
2.2 0.6
of Courses)
Which statement about the slope coefficient is most

correct, assuming a 5% level of significance and 50
observations?
A. t-Statistic: 0.20. Slope: Not significantly different from
zero.
B. t-Statistic: 3.67. Slope: Significantly different from
zero.
C. t-Statistic: 3.67. Slope: Not significantly different from
zero
Answer B
t = 2.20/0.60 = 3.67. Since the t-statistic is larger than an
assumed critical value of about 2.0, the slope coefficient
is statistically significant.
Question #19
Coefficient Standard tValue

Error of
Coefficient
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
R2 = 0.599
Use the regression statistics presented above and

assume this historical relationship still holds in the future
period. If the expected return on the S&P 500 over the
next period were 11%, the expected return on Mid Cap
stocks over the next period would be:
A. 8.4%.
B. 20.3%.
C. 33.8%
Answer A
Y = intercept + slope(X)
Mid Cap Stock returns = 1.71 + 1.52(11) =18.4%
Question #20
Unlike the coefficient of determination, the coefficient of
correlation:
A. measures the strength of association between the two

variables more exactly.
B. indicates the percentage of variation explained by a
regression model.
C. indicates whether the slope of the regression line is
positive or negative
Answer C
In a simple linear regression, the coefficient of
determination (R2) is the squared correlation coefficient,
so it is positive even when the correlation is negative.
Question #21
Y= 0.78 - 1.5 X
standard error of the coefficient is 0.45.
statistic for the slope and correctly evaluates H0: b1 ≥ 0
versus Ha: b1 < 0 with 95% confidence?
A. t = 3.750 ; slope is significantly different from zero.
B. t = 3.333 ; slope is significantly negative.
Answer B
The test statistic is t = (-1.5 - 0) / 0.45 = -3.333. The
critical 5%, one-tail t-value for 48 degrees of freedom is
+/- 1.667. However, in the Schweser Notes you should
use the closest degrees of freedom number of 40 df.
which is +/-1.684. Therefore, the slope is less than zero.
We reject the null in favor of the alternative.
Question #22
Bea Carroll, CFA, has performed a regression analysis of
the relationship between 6-month LIBOR and the U.S.
Consumer Price Index (CPI). Her analysis indicates a
standard error of estimate (SEE) that is high relative to
total variability. Which of the following conclusions
regarding the relationship between 6-month LIBOR and
CPI can Carroll most accurately draw from her SEE
analysis? The relationship between the two variables is:
A. very weak.
B. very strong.
C. positively correlated
Answer A
The SEE is the standard deviation of the error terms in the
regression, and is an indicator of the strength of the
relationship between the dependent and independent
variables. The SEE will be low if the relationship is strong
and conversely will be high if the relationship is weak.
Question #23
The standard error of the estimate measures the
variability of the:
A. actual dependent variable values about the
estimated regression line.
B. predicted y-values around the mean of the observed
y-values.
C. values of the sample regression coefficient.
Answer A
The standard error of the estimate (SEE) measures the
uncertainty in the relationship between the independent
and dependent variables and helps gauge the fit of the
regression line (the smaller the standard error of the
estimate, the better the fit).
Remember that the SEE is different from the sum of
squared errors (SSE). SSE = the sum of (actual value -
predicted value)2. SEE is the square root of the SSE
"standardized" by the degrees of freedom, or SEE =
[SSE / (n - 2)]1/2
Question #24
The R2 of a simple regression of two factors, A and B,
measures the:
A. impact on B of a one unit change in A.
B. statistical significance of the coefficient in the
regression equation.
C. percent of variability of one factor explained by the
variability of the second factor.
Answer C
The coefficient of determination measures the
Question #25
Y= 0.78 + 1.2 X
standard error of the coefficient is 0.45
statistic for the slope and correctly evaluates its statistical
significance with 95% confidence?
A. t = 1.789 ; slope is not significantly different from
zero.
B. t = 3.000 ; slope is significantly different from zero.
Answer C
Perform a t-test to determine whether the slope
coefficient if different from zero. The test statistic is t =
(1.2 - 0) / 0.45 = 2.667. The critical t-values for 48
degrees of freedom are ± 2.011. Therefore, the slope is
different from zero.
Question #26
error of the estimate (SEE) is least accurate?
A. The SEE will be high if the relationship between the
independent and dependent variables is weak.
B. The SEE may be calculated from the sum of the
squared errors and the number of observations.
C. The larger the SEE the larger the R
Answer C
The R2, or coefficient of determination, is the
explained by the variation in the independent variable. A
higher R2 means a better fit. The SEE is smaller when
the fit is better.
Question #27
An analyst performs two simple regressions. The first
coefficient of 1.2. The second regression analysis has
an R-squared of 0.77 and a beta coefficient of 1.75.
Which one of the following statements is most accurate?
A. The R-squared of the first regression indicates that
there is a 0.40 correlation between the independent
and the dependent variables.
B. The first regression equation has more explaining
power than the second regression equation.
C. The second regression equation has more
explaining power than the first regression equation
Answer C
The coefficient of determination (R-squared) is the
The larger R-squared (0.77) of the second regression
means that 77% of the variability in the dependent
variable is explained by variability in the independent
variable, while only 40% of that is explained in the first
regression. This means that the second regression has
more explaining power than the first regression. Note that
the Beta is the slope of the regression line and doesn't
measure explaining power.
Question #28
Jason Brock, CFA, is performing a regression analysis
to identify and evaluate any relationship between the
common stock of ABT Corp and the S&P 100 index. He
utilizes monthly data from the past five years, and
assumes that the sum of the squared errors is .0039.
The calculated standard error of the estimate (SEE) is
closest to:
A. 0.0082.
B. 0.0360.
C. 0.0080.
Answer A
The standard error of estimate of a regression equation
measures the degree of variability between the actual
and estimated Y-values. The SEE may also be referred
to as the standard error of the residual or the standard
error of the regression. The SEE is equal to the square
root of the mean squared error. Expressed in a formula,
SEE = √(SSE / (n-2)) = √(.0039 / (60-2)) = .0082
Question #29
Determine and interpret the correlation coefficient for the
two variables X and Y. The standard deviation of X is
0.05, the standard deviation of Y is 0.08, and their
covariance is −0.003.
A. −0.75 and the two variables are negatively
associated.
B. −1.33 and the two variables are negatively
associated.
C. +0.75 and the two variables are positively associated.
Answer A
The correlation coefficient is the covariance divided by the
product of the two standard deviations, i.e. −0.003 / (0.08
× 0.05).
Questions #3035
Erica Basenj, CFA, has been given an assignment by
her boss. She has been requested to review the
following regression output to answer questions about
the relationship between the monthly returns of the
Toffee Investment Management (TIM) High Yield Bond
Fund and the returns of the index (independent
variable).
Regression
Statistics
R2 ??
Standard
Error ??
Observations 20
Signific.
ANOVA df SS MS F
F
Regression 1 23,516 23,516 ? ?
Residual 18 ? 7
Total 19 23,644
Regression Std. t-
Coeffic. Pvalue
Equation Error statistic
Intercept 5.29 1.615 ? ?
Slope 0.87 0.0152 ? ?
Question #30
What is the value of the correlation coefficient?
A. 0.8700.
B. −0.9973.
C. 0.9973.
Answer C
R2 is the correlation coefficient squared, taking into
account whether the relationship is positive or negative.
Since the value of the slope is positive, the TIM fund and
the index are positively related. R2 is calculated by
taking the (RSS / SST) = 0.99459. (0.99459) 1/2 =
0.9973.
Question #31
What is the sum of squared errors (SSE)?
A. 23,644.
B. 23,515.
C. 128
Answer C
SSE = SST − RSS = 23,644 − 23,516 = 128.
Question #32
What is the value of R2?
A. 0.9471.
B. 0.9946.
C. 0.0055.
Answer B
R2 = RSS / SST = 23,516 / 23,644 = 0.9946
Question #33
Is the intercept term statistically significant at the 5% level
of significance and the 1% level of significance,
respectively?
1% 5%
A) No No
B) Yes No
C) Yes Yes
Answer C
The test statistic is t = b / std error of b = 5.29 / 1.615 =
3.2755.
Critical t-values are ± 2.101 for the degrees of freedom =
n − k − 1 = 18 for alpha = 0.05. For alpha = 0.01, critical t-
values are ± 2.878. At both levels (two-tailed tests) we
can reject H0 that b = 0
Question #34
What is the value of the F-statistic?
A. 3,359.
B. 0.9945.
C. 0.0003.
Answer A
F = mean square regression / mean square error = 23,516
/ 7 = 3,359.
Question #35
Heteroskedasticity can be defined as:
A. nonconstant variance of the error terms.
B. error terms that are dependent.
C. independent variables that are correlated with each
other
Answer A
Heteroskedasticity occurs when the variance of the
residuals is not the same across all observations in the
sample. Autocorrelation refers to dependent error terms.
Question #36
table:

Regressio 500 1 500
n
Error 750 50 15
Total 1,250 51
A. R = 0.40 and F = 33.333.
B. R = 0.40 and F = 0.971.
C. R = 0.67 and F = 0.971.
Answer A
R2 = 500 / 1,250 = 0.40. The F-statistic is 500 / 15 =
33.33.
Question #37
Consider the case when the Y variable is in U.S. dollars
and the X variable is in U.S. dollars. The 'units' of the
covariance between Y and X are:
A. squared U.S. dollars.
B. U.S. dollars.
C. a range of values from −1 to +1.
Answer A
The covariance is in terms of the product of the units of Y
and X. It is defined as the average value of the product of
the deviations of observations of two variables from their
means. The correlation coefficient is a standardized
version of the covariance, ranges from −1 to
+1, and is much easier to interpret than the covariance.
Question #38
table:

Regressio 200 1 200
n
Error 400 40 10
Total 600 41
A. R = 33% and F = 2.0.
B. R = 50% and F = 2.0.
C. R = 33% and F = 20.0
Answer C
R2 = 200 / 600 = 0.333. The F-statistic is 200 / 10 = 20.
Question #39
is least accurate?
A. The independent variable is uncorrelated with the
residuals (or disturbance term).
B. The correlation coefficient, ρ, of two assets x and y =
(covariance ) × standard deviation × standard
deviation.
C. R2 = RSS / SST.
Answer B
The correlation coefficient, ρ, of two assets x and y =
(covariancex,y) divided by (standard deviationx ×
standard deviationy). The other statements are true.
Question #40
A sample of 200 monthly observations is used to run a
simple linear regression: Returns = b 0 + b1Leverage + u.
The t-value for the regression coefficient of leverage is
calculated as t = - 1.09. A 5% level of significance is used
to test whether leverage has a significant influence on
returns. The correct decision is to:
A. do not reject the null hypothesis and conclude that
leverage significantly explains returns.
B. reject the null hypothesis and conclude that leverage
does not significantly explain returns.
C. do not reject the null hypothesis and conclude that
leverage does not significantly explain returns
Answer C
Do not reject the null since |-1.09|<1.96(critical t-value).
Question #41
Standard
Coefficien Error tValue
t of
coefficient
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
R2= 0.599
The strength of the relationship, as measured by the

correlation coefficient, between the return on Mid Cap
stocks and the return on the S&P 500 for the period
under study was:
A. 0.599.
B. 0.774.
C. 0.130
Answer B
You are given R2 or the coefficient of determination of
0.599 and are asked to find R or the coefficient of
correlation. The square root of 0.599 = 0.774.
Questions #4247
Craig Standish, CFA, is investigating the validity of
claims associated with a fund that his company offers.
The company advertises the fund as having low turnover
and, hence, low management fees. The fund was
created two years ago with only a few uncorrelated
assets. Standish randomly draws two stocks from the
fund, Grey Corporation and Jars Inc., and measures the
variances and covariance of their monthly returns over
the past two years. The resulting variance covariance
matrix is shown below. Standish will test whether it is
reasonable to believe that the returns of Grey and Jars
are uncorrelated. In doing the analysis, he plans to
address the issue of spurious correlation and outliers.
Grey Jars
Grey 42.2 20.8
Jars 20.8 36.5
Standish wants to learn more about the performance of

the fund. He performs a linear regression of the fund's
monthly returns over the past two years on a large
capitalization index. The results are below:
ANOVA Df SS MS F
Regressio 1 92.53009 92.5300 28.09117
n 9
Residual 22 72.46625 3.29392
1
Total 23 164.9963
Coefficient Standard tstatistic Pvalue

s Error
Intercept 0.148923 0.391669 0.38022 0.707424
5
Large Cap 1.205602 0.227467 5.30011 2.56E-05
Index
Standish forecasts the fund's return, based upon the

prediction that the return to the large capitalization index
used in the regression will be 10%. He also wants to
quantify the degree of the prediction error, as well as the
minimum and maximum sensitivity that the fund actually
has with respect to the index.
He plans to summarize his results in a report. In the
report, he will also include caveats concerning the
limitations of regression analysis. He lists four limitations
of regression analysis that he feels are important:
relationships between variables can change over time,
multicollinearity leads to inconsistent estimates of
regression coefficients, if the error terms are
heteroskedastic the standard errors for the regression
coefficient may not be reliable, and if the error terms are
correlated with each other over time the test statistics
may not be reliable.
Question #42
Given the variance/covariance matrix for Grey and Jars,
in a one-sided hypothesis test that the returns are
positively correlated H0: ρ ≤ 0 vs. H1: ρ > 0, Standish
would:
A. reject the null at the 5% but not the 1% level of
significance.
B. reject the null at the 1% level of significance.
C. need to gather more information before being able to
reach a conclusion concerning significance
Answer B
First, we must compute the correlation coefficient, which
is 0.53 = 20.8 / (42.2 × 36.5)0.5.
The t-statistic is: 2.93 = 0.53 × [(24 - 2) / (1 − 0.53 ×
0.53)]0.5, and for df = 22 = 24 − 2, the t-statistics for the
5% and 1% level are 1.717 and 2.508 respectively.
Question #43
In using the correlation coefficient between returns on
Grey and Jars, Standish would most appropriately
question the issue of:
A. issue of outliers but not the issue of spurious
correlation.
B. spurious correlation but not the issue of outliers.
C. Both spurious correlation and outliers.
Answer C
Both these issues are important in performing correlation
analysis. A single outlier observation can change the
correlation coefficient from significant to not significant
and even from negative (positive) to positive (negative).
Even if the correlation coefficient is significant, the
researcher would want to make sure there is a reason for
a relationship and that the correlation is not spurious (i.e.,
caused by chance).
Question #44
If the large capitalization index has a 10% return, then the
forecast of the fund's return will be:
A. 12.2.
B. 16.1.
C. 13.5.
Answer A
The forecast is 12.209 = 0.149 + 1.206 × 10, so the
answer is 12.2.
Question #45
The standard deviation of monthly fund returns is closest
to:
A. 2.68.
B. 12.84.
C. 7.17.
Answer A
Variance of fund returns = SST/(n-1) = 164.9963/23 =
7.17. Standard deviation = (7.17)0.5 = 2.68
Question #46
A 95% confidence interval for the slope coefficient is:
A. 0.760 to 1.650.
B. 0.734 to 1.677.
C. 0.905 to 1.506.
Answer B
The 95% confidence interval is 1.2056 ± (2.074 ×
0.2275). Remember, to use 2-tailed t-statistic for
confidence intervals.
Question #47
Of the four caveats of regression analysis listed by
Standish, the least accurate is:
A. the relationships of variables change over time.
B. multicollinearity leads to inconsistent estimates of the
regression coefficients.
C. if the error terms are heteroskedastic the standard
errors for the regression coefficients may not be
reliable.
Answer B
In the presence of multicollinearlity, the regression
coefficients would still be consistent but unreliable. The
other possible shortfalls listed are valid.
Question #48
We are examining the relationship between the number
of cold calls a broker makes and the number of accounts
the firm as a whole open. We have determined that the
correlation coefficient is equal to 0.70, based on a
sample of 16 observations. Is the relationship
statistically significant at a 10% level of significance,
why or why not? The relationship is:
A. not significant ; the critical value exceeds the t--
statistic by 1.91.
B. significant ; the t-statistic exceeds the critical value
by 3.67.
C. significant ; the t-statistic exceeds the critical value
by 1.91
Answer C
The calculated test statistic is t-distributed with n - 2
degrees of freedom: t = r√(n - 2) / √(1 - r 2) = 2.6192 /
0.7141 = 3.6678 From a table, the critical value = 1.76
Question #49
error of estimate is least accurate? The standard error of
estimate:
A. measures the Y variable's variability that is not
explained by the regression equation.
B. is the square of the coefficient of determination.
C. is the square root of the sum of the squared
deviations from the regression line divided by (n − 2).
Answer B
Note: The coefficient of determination (R2) is the square
of the correlation coefficient in simple linear regression.
Question #50
Y = 5.0 + 1.5 X
standard error of the forecast is 0.52. The 95%
confidence interval for the predicted value of Y if X is 10
is:
A. {18.980 < Y < 21.019}.
B. {18.954 < Y < 21.046}.
C. {19.480 < Y < 20.052}.
Answer B
The predicted value of Y is: Y = 5.0 + [1.5 (10)] = 5.0 + 15
= 20. The confidence interval is 20 ± 2.011 (0.52) or
{18.954 < Y < 21.046}.
Question #51
analysis is most accurate?
A. An assumption of linear regression is that the
residuals are independently distributed.
B. The coefficient of determination is defined as the
strength of the linear relationship between two
variables.
C. When there is a strong relationship between two
variables we can conclude that a change in one will
cause a change in the other.
Answer A
Even when there is a strong relationship between two
variables, we cannot conclude that a causal relationship
exists. The coefficient of determination is defined as the
percentage of total variation in the dependent variable
explained by the independent variable.
Question #52
A sample covariance of two random variables is most
commonly utilized to:
A. calculate the correlation coefficient, which is a
measure of the strength of their linear relationship.
B. identify and measure strong nonlinear relationships
between the two variables.
C. estimate the "pure" measure of the tendency of two
variables to move together over a period of time
Answer A
Since the actual value of a sample covariance can
range from negative to positive infinity depending on the
scale of the two variables, it is most commonly used to
calculate a more useful measure, the correlation
coefficient.
Question #53
Regression analysis has a number of assumptions.
Violations of these assumptions include which of the
following?
A. Independent variables that are not normally
distributed.
B. A zero mean of the residuals.
C. Residuals that are not normally distributed
Answer C
The assumptions include a normally distributed residual
with a constant variance and a mean of zero.
Question #54
For the case of simple linear regression with one
independent variable, which of the following statements
about the correlation coefficient is least accurate?
A. If the correlation coefficient is negative, it indicates
that the regression line has a negative slope
coefficient.
B. The correlation coefficient can vary between −1 and
+1.
C. If the regression line is flat and the observations are
dispersed uniformly about the line, the correlation
coefficient will be +1.
Answer C
Correlation analysis is a statistical technique used to
measure the strength of the relationship between two
variables. The measure of this relationship is called the
coefficient of correlation.
If the regression line is flat and the observations are
dispersed uniformly about the line, there is no linear
relationship between the two variables and the
correlation coefficient will be zero.
Both of the other choices are CORRECT.
Question #55
In the estimated regression equation Y = 0.78 - 1.5 X,
which of the following is least accurate when interpreting
the slope coefficient?
A. If the value of X is zero, the value of Y will be 1.5.
B. The dependent variable declines by 1.5 units if X
increases by 1 unit.
C. The dependent variable increases by 1.5 units if X
decreases by 1 unit.
Answer A
The slope represents the change in the dependent
variable for a one-unit change in the independent variable.
If the value of X is zero, the value of Y will be equal to the
intercept, in this case, 0.78.
Question #56
linear regression? The
A. residuals are mean reverting ; that is, they tend
towards zero over time.
B. residuals are independently distributed.
C. expected value of the residuals is zero.
Answer A
The assumptions regarding the residuals are that the
residuals have a constant variance, have a mean of zero,
and are independently distributed.
Question #57
In the scatter plot below, the correlation between the return on stock A and
the market index is:
A. positive.
B. not discernable using the scatter plot.
C. negative.
Answer A
In the scatter plot, higher values of the return on stock
A are associated with higher values of the return on
the market, i.e. a positive correlation between the two
variables.
Question #58
An analyst is examining the relationship between two
random variables, RCRANTZ and GSTERN. He performs
a linear regression that produces an estimate of the
relationship:
RCRANTZ = 61.4 − 5.9GSTERN
Which interpretation of this regression equation is least
accurate?
A. The intercept term implies that if GSTERN is zero,
RCRANTZ is 61.4.
B. The covariance of RCRANTZ and GSTERN is
negative.
C. If GSTERN increases by one unit, RCRANTZ should
increase by 5.9 units
Answer C
The slope coefficient in this regression is -5.9. This
means a one-unit increase of GSTERN suggests a
decrease of 5.9 units of RCRANTZ. The slope
coefficient is the covariance divided by the variance of
the independent variable. Since variance (a squared
term) must be positive, a negative slope term implies
that the covariance is negative.
Question #59
Ron James, CFA, computed the correlation coefficient for
historical oil prices and the occurrence of a leap year and
has identified a statistically significant relationship.
Specifically, the price of oil declined every fourth calendar
year, all other factors held constant. James has most
likely identified which of the following conditions in
correlation analysis?
A. Positive correlation.
B. Spurious correlation.
C. Outliers.
Answer B
Spurious correlation occurs when the analysis
erroneously indicates a linear relationship between two
variables when none exists. There is no economic
explanation for this relationship ; therefore this would be
classified as spurious correlation.
Question #60
The most appropriate measure of the degree of variability
of the actual Y-values relative to the estimated Y-values
from a regression equation is the:
A. sum of squared errors (SSE).
B. standard error of the estimate (SEE).
C. coefficient of determination (R2).
Answer B
The SEE is the standard deviation of the error terms in the
regression, and is an indicator of the strength of the
relationship between the dependent and independent
variables. The SEE will be low if the relationship is strong,
and conversely will be high if the relationship is weak.
Question #61
A variable Y is regressed against a single variable X
across 24 observations. The value of the slope is 1.14,
and the constant is 1.3. The mean value of X is 1.10, and
the mean value of Y is 2.67. The standard deviation of
the X variable is 1.10, and the standard deviation of the Y
variable is 2.46. The sum of squared errors is 89.7. For
an X value of 1.0, what is the 95% confidence interval for
the Y value?
A. −1.68 to 6.56.
B. −1.83 to 6.72.
C. 0.59 to 4.30.
Answer B
First the standard error of the estimate must be
calculated-it is equal to the square root of the mean
squared error, which is equal to the sum of squared
errors divided by the number of observations minus 2 =
(89.7 / 22)1/2 = 2.02. The variance of the prediction is
equal to:
= 2.06
The prediction value is 1.3 + (1.0 × 1.14) = 2.44. The t-

value for 22 degrees of freedom is 2.074. The endpoints of
the interval are 2.44 ± 2.074 × 2.06 = −1.83 and 6.72.
Question #62
Suppose the covariance between Y and X is 10, the
variance of Y is 25, and the variance of X is 64. The
sample size is 30. Using a 5% level of significance,
which of the following statements is most accurate? The
null hypothesis of:
A. no correlation is rejected.
B. no correlation cannot be rejected.
C. significant correlation is rejected.
Answer B
The correlation coefficient is r = 10 / (5 × 8) = 0.25. The
test statistic is t = (0.25 × √28) / √(1 − 0.0625) = 1.3663.
The critical t-values are ± 2.048. Therefore, we cannot
reject the null hypothesis of no correlation.
Question #63
table:
Regressio 556 1 556
n
Error 679 50 13.5
Total 1,235 51
The R2 for this regression is:
A. 0.55.
B. 0.45.
C. 0.82.
Answer B
R2 = RSS/SST = 556/1,235 = 0.45.
Question #64
Rafael Garza, CFA, is considering the purchase of
ABC stock for a client's portfolio. His analysis includes
calculating the covariance between the returns of ABC
stock and the equity market index. Which of the
following statements regarding Garza's analysis is
most accurate?
A. A covariance of +1 indicates a perfect positive
covariance between the two variables.
B. The covariance measures the strength of the linear
relationship between two variables.
C. The actual value of the covariance is not very
meaningful because the measurement is very
sensitive to the scale of the two variables.
Answer C
Covariance is a statistical measure of the linear
relationship of two random variables, but the actual value
is not meaningful because the measure is extremely
sensitive to the scale of the two variables. Covariance
can range from negative to positive infinity.
Question #65
Which of the following statements regarding scatter plots
is most accurate? Scatter plots:
A. are used to examine the third moment of a
distribution (skewness).
B. illustrate the scatterings of a single variable.
C. illustrate the relationship between two variables
Answer C
A scatter plot is a collection of points on a graph where
each point represents the values of two variables. They
are used to examine the relationship between two
variables.
Question #66
A regression between the returns on a stock and its
industry index returns gives the following results:
Coefficient Standard t-
Error value
Intercept 2.1 2.01 1.04
Industry 1.9 0.31 6.13
Index
The t-statistic critical value at the 0.01 level of significance

is 2.58
Standard error of estimate = 15.1
Correlation coefficient = 0.849
The regression statistics presented indicate that the

dispersion of stock returns about the regression line is:
A. 72.10
B. 15.10
C. 63.20
Answer B
The standard deviation of the differences between the
actual observations and the projection of those
observations (the regression line) is called the standard
error of the estimate. The standard error of the estimate
is the unsystematic risk.
Question #67
Which of the following statements about covariance and
correlation is least accurate?
A. A zero covariance implies a zero correlation.
B. There is no relation between the sign of the
covariance and the correlation.
C. The covariance and correlation are always the same
sign, positive or negative
Answer B
The other two choices are accurate statements. The
correlation is the ratio of the covariance to the product of
the standard deviations of the two variables. Therefore,
the covariance and the correlation have the same sign,
and a zero covariance implies a zero correlation.
Question #68
The most appropriate test statistic to test statistical
significance of a regression slope coefficient with 45
observations and 2 independent variables is a:
A. onetail tstatistic with 42 degrees of freedom.
B. twotail tstatistic with 42 degrees of freedom.
C. onetail tstatistic with 43 degrees of freedom
Answer B
df = n − k − 1 = 45 − 2 – 1
Question #69
linear regression?
B. The independent variable is correlated with the
residuals.
C. The variance of the residuals is constant
Answer B
The assumption is that the independent variable is
uncorrelated with the residuals.
Question #70
If X and Y are perfectly correlated, regressing Y onto X
will result in which of the following:
A. the regression line will be sloped upward.
B. the alpha coefficient will be zero.
C. the standard error of estimate will be zero
Answer C
If X and Y are perfectly correlated, all of the points will
plot on the regression line, so the standard error of the
estimate will be zero. Note that the sign of the
correlation coefficient will indicate which way the
regression line is pointing (there can be perfect negative
correlation sloping downward as well as perfect positive
correlation sloping upward). Alpha is the intercept and is
not directly related to the correlation.
Use the following data to answer Questions 71

through 73.
An analyst is interested in predicting annual sales for XYZ
Company, a maker of paper products. The following table
reports a regression of the annual sales for XYZ against
paper product industry sales.
Regression Output
Regression
Output
Standard
Parameters Coefficient error
Intercept -94.88 32.97
Slope(industry
sales) 0.2796 0.0363
The correlation between company and industry sales is

0.9757. The regression was based on five observations.
Question #71
Which of the following is closest to the value and reports
the most likely interpretation of the R2 for this regression?
The R2 is:
A. 0.048, indicating that the variability of industry sales
explains about 4.8o/o of the variability of company sales.
B. 0.952, indicating that the variability of industry sales
explains about 95.2% of the variability of company sales.
C. 0.952, indicating that the variability of company sales
explains about 95.2% of the variability of industry sales.
Answer B
The R2 is computed as the correlation squared: (0.9757)2
= 0.952. The interpretation of this R2 is that 95.2% of the
variation in Company XYZ's sales is explained by the
variation in industry sales. Answer C is incorrect because
it is the independent variable (industry sales) that explains
the variation in the dependent variable (company sales).
This interpretation is based on the economic reasoning
used in constructing the regression model.
Question #72
Based on the regression results, XYZ Company's market
share of any increase in industry sales is expected to be
closest to:
A. 4%.
B. 28%.
C. 45%.
Answer B
The slope coefficient of 0.2796 indicates that a $1 million
increase in industry sales will result in an increase in firm
sales of approximately 28% ($279,600) of that amount.
Question #73
The analyst determines that the t-statistic is 7.72 and that
the correlation coefficient is not significant (using 95o/o
confidence). Is the analyst correct?
A. Yes.
B. No, because the test statistic is 60.93.
C. No, because the correlation coefficient is significantly
different from zero (using 95o/o confidence).
Answer C
The test of significance for the correlation coefficient is
evaluated using the following t-statistic:
From the t-table, we find that with df = 3 and 95%

significance, the two-tailed critical t-values are ±3.182
(recall that for the t-test the degrees of freedom = n - 2).
Because the computed t is greater than +3. 182, the
correlation coefficient is significantly different from zero.
Use the following information to answer Questions 74

and 75.
A study was conducted by the British Department of
Transportation to estimate urban travel time between
locations in London, England. Data was collected for
motorcycles and passenger cars. Simple linear regression
was conducted using data sets for both types of vehicles,
where Y = urban travel time in minutes and X= distance
between locations in kilometers. The following results were
obtained:
Question #74
The estimated increase in travel time for a motorcycle
commuter planning to move 8 km farther from his
workplace in London is closest to:
A. 31 minutes.
B. 15 minutes.
C. 0.154 hours.
Answer B
The slope coefficient is 1.93, indicating that each
additional kilometer increases travel time by 1 .93 minutes:
8X1.93=15.44 minutes
Question #75
Based on the regression results, which model is more
reliable?
A. The passenger car model because 3.86 > 1.93.
B. The motorcycle model because 1.93 < 3.86.
C. The passenger car model because 0.758 > 0.676.
Answer C
The higher R2 for the passenger car model indicates that
regression results are more reliable. Distance is a better
predictor of travel time for cars. Perhaps the
aggressiveness of the driver is a bigger factor in travel
time for motorcycles than it is for autos.
Question #76
Which of the following is not a necessary assumption of
simple linear regression analysis?
B. There is a constant variance of the error term.
C. The dependent variable is uncorrelated with the
residuals.
Answer C
The model does not assume that the dependent variable is
uncorrelated with the residuals. It does assume that the
independent variable is uncorrelated with the residuals.
Question #77
Which of the following statements regarding simple linear
regression is most accurate?
A. If the units of the independent variable are tons instead
of pounds, the estimated slope coefficient will be 2,000
times larger.
B. If the slope of the regression line is + 1, the variables
are perfectly positively correlated.
C. If a researcher knows the sum of squared errors, the
number of observations, and the standard error of
estimate, he can calculate the coefficient of determination
for the regression.
Answer A
A If the independent variable is in pounds, the
interpretation of the slope coefficient is the change in the
dependent variable for a one pound change in the
independent variable. If the independent variable is
measured in tons (2,000 pounds) the slope coefficient is
interpreted as the change in the dependent variable for a
2,000 pound change in the independent variable, which
will be 2,000 times larger. The slope of the regression line
is not a function of the correlation between the two
variables. The researcher would need to know either the
regression sum of squares or the total sum of squares,
along with the sum of squared errors, in order to calculate
the coefficient of determination.
Question #78
What is the most appropriate interpretation of a slope
coefficient estimate equal to 10.0?
A. The predicted value of the dependent variable when the
independent variable is zero is 10.0.
B. For every one unit change in the independent variable,
by 10 units.
C. For every one unit change in the independent variable,
by 0.1 units.
Answer B
The slope coefficient is best interpreted as the predicted
change in the dependent variable for a 1-unit change in
the independent variable. If the slope coefficient estimate
is 10.0 and the independent variable changes by one unit,
the dependent variable will change by 10 units. The
intercept term is best interpreted as the value of the
dependent variable when the independent variable is
equal to zero.
Question #79
What is the appropriate alternative hypothesis to test the
statistical significance of the intercept term in the following
regression?
Y=a1+a2(x) +e
Answer A
In this regression, a1 is the intercept term. To test the
statistical significance means to test the null hypothesis
that a1 is equal to zero versus the alternative that it is not
equal to zero.
Question #80
Consider the following statement: In a simple linear
regression, the appropriate degrees of freedom for the
critical t-value used to calculate a confidence interval
around both a parameter estimate and a predicted Y-value
is the same as the number of observations minus two. The
statement is:
A. justified.
B. not justified, because the appropriate of degrees of
parameter estimate is the number of observations.
C. not justified, because the appropriate of degrees of
predicted Y-value is the number of observations.
Answer A
In simple linear regression, the appropriate degrees of
freedom for both confidence intervals is the number of
observations in the sample (n) minus two.
Question #81
The variation in the dependent variable explained by the
independent variable is measured by the:
A. mean squared error.
B. sum of squared errors.
C. regression sum of squares.
Answer C
The regression sum of squares measures the variation in
the dependent variable explained by the independent
variable (i.e., the explained variation). The sum of squared
errors measures the variation in the dependent variable
NOT explained by the independent variable. The mean
squared error is equal to the sum of squared errors divided
by its degrees of freedom.
Use the following information for Questions 82

through 87.
Bill Coldplay, CPA, is analyzing the performance of the
Vanguard Growth Index Fund (VIGRX) over the past three
years. The fund employs a passive management
investment approach designed to track the performance of
the MSCI US Prime Market Growth index, a broadly
diversified index of growth stocks oflarge U.S. companies.
Coldplay estimates a regression using excess monthly
returns on VIGRX (exVIGRX) as the dependent variable
and excess monthly returns on the S&P 500 Index
(exS&P500) as the independent variable. The data are
expressed in decimal terms (e.g., 0.03, not 3%).
exVIGRXt = b0+b1(exS&SP500t) + et
A scatter plot of excess returns for both return series from

June 2004 to May 2007 are shown in the following figure
Results from that analysis are presented in the following

figures.
Estimated Coefficients
Coefficients Coefficient Standard
Estimate Error
b0 0.0023 0.0022
b1 1.1163 0.0624
Partial ANOVA Table

Source of Sum of
Variation Squares
Regression
(explained) 0.0228
Error
(unexplained) 0.0024
Question #82
The 90% confidence interval for b0 is closest to:
A. -0.00 14 to +0.0060.
B. -0.0006 to +0.0052.
C. +0.000 1 to +0.0045.
Answer A
Note that there are 36 monthly observations from June
2004 to May 2007, so n = 36. The critical two-tailed 10% t-
value with 34 (n - 2 = 36 - 2 = 34) degrees of freedom is
approximately 1.69. Therefore, the 90% confidence
interval for b0 (the intercept term) is 0.0023 +1- (0.0022)
(1.69), or -0.0014 to +0.0060.
Question #83
Are the intercept term and the slope coefficient statistically
significantly different from zero at the 5% significance
level? Intercept term significant? Slope coefficient
significant?
A. Yes Yes
B. Yes No
C. No Yes
Answer C
The critical two-tailed 5% t-value with 34 degrees of
freedom is approximately 2.03. The calculated t-statistics
for the intercept term and slope coefficient are,
respectively, 0.0023 I 0.0022 = 1 .05 and 1.1 163 I 0.0624
= 17.9. Therefore, the intercept term is not statistically
different from zero at the 5% significance level, while the
slope coefficient is.
Question #84
Coldplay would like to test the following hypothesis: H0: b1
≤ 1 versus H1: b1 > 1 at the 1% significance level. The
calculated t-statistic and the appropriate conclusion are:
Calculated t-statistic Appropriate conclusion
A. 1.86 Reject H0
B. 1.86 Fail to reject H0
C. 2.44 Reject H0
Answer B
Notice that this is a one-tailed rest. The critical one-railed
1% t-value with 34 degrees of freedom is approximately
2.44. The calculated t-statistic for the slope coefficient is
(1.1 163 - 1) I 0.0624 = 1 .86. Therefore, the slope
coefficient is not statistically different from one at the 1%
significance level and Coldplay should fail to reject the null
hypothesis.
Question #85
Coldplay forecasts the excess return on the S&P 500 for
June 2007 to be 5% and the 95% confidence interval for
the predicted value of the excess return on VIGRX for
June 2007 to be 3.9% to 7.7%. The standard error of the
forecast is closest to:
A. 0.0080.
B. 0.0093.
C. 0.01 11.
Answer B
This is a tricky question because you are given the
confidence interval and its midpoint and asked to solve for
the standard error of the forecast (sf). Remember to also
convert the percentages to decimals. The critical two-tailed
5% t-value with 34 degrees of freedom is approximately
2.03. The midpoint, or predicted value is 0.0023 + 1.1 163
x 0.05 = 0.058. Therefore, 0.058 +1- (2.03)(s f) is
equivalent to 0.039 to 0.077 and solving for s f yields : sf =
0.0093.
Question #86
The R2 from the regression is closest to:
A. 0.095.
B. 0.295.
C. 0.905.
Answer C
SST is equal to the sum of RSS and SSE: 0.0228 +
0.0024 = 0.0252. R 2 = RSS I SST = 0.0228 I 0.0252 =
0.905.
Question #87
The standard error of estimate (SEE) is closest to:
A. 0.008.
B. 0.014.
C. 0.049.
Answer A
Because n = 36, and the degrees of freedom for the sum
of squared errors (SSE) is n - 2 in simple linear regression,
the degrees of freedom for SSE is 34, and the mean
squared error is SSE I 34. The standard error of estimate
(SEE) is equal to the square root of the mean squared
error: SEE = (0.0024/34)0.5=0.008
Question #88
Which of the following statements Least accurately
describes a limitation of correlation analysis?
A. Outliers may influence the results of regression.
B. Serial correlation means that there may appear to be a
relationship between two or more variables when, in fact,
there is none.
C. Correlation only measures linear relationships, but not
nonlinear ones.
Answer B
The appearance of a relationship between two variables
when there is none is spurious correlation. Outliers may
influence the results of regression and the estimate of the
correlation coefficient. Correlation only measures linear
relationships properly.
Question #89
Regression analysis is Least Likely to be limited by:
A. parameter instability.
B. insufficient data.
C. violations of the assumptions underlying regression
analysis.
Answer B
The insufficient availability of data is not likely to be much
of a limitation for most financial and economic models;
usually an abundance of data is available. The other
choices are limitations of regression analysis
Question #90
Carla Preusser finds that the total assets under
management by a popular hedge fund manager, and the
number of lizards lying out in the sun in a nearby park, can
be modeled as functions of time: f(t) = t l .8 and f(t) = t + 5,
respectively. The correlation between the two models is
0.98. Two potential problems with using the lizards to
predict total assets include:
A. spurious correlation and the non-linear relationship in
the total assets function.
B. spurious correlation and the non-geometric relationship
in the lizard function.
C. outliers and non-linear relationship in the total assets
function
Answer A
There is little to no chance that the relationship between
total assets under management and lizards in a park is
other than a coincidence. The correlation is spurious. The
non-linear relationship in the total assets function makes
correlation a poor choice of measure.
CHAPTER 7 LINEAR REGRESION (40 extra
questions)
QUESTION #1
Variable X takes on the values shown in the following
table for five observations. The table also shows the
values for five other variables, Y1 through Y5. Which
of the variables Y1 through Y5 have a zero
correlation with variable X?
X Y1 Y2 Y3 Y4 Y5
1 7 2 4 4 1
2 7 4 2 1 2
3 7 2 0 0 3
4 7 4 2 1 4
5 7 2 4 4 5
QUESTION #2
Use the data sample below to answer the following
questions.
1. Calculate the sample mean, variance, and standard
deviation for X.
deviation for Y.
3. Calculate the sample covariance between X and Y.
4. Calculate the sample correlation between X and Y.
QUESTION #3
Statistics for three variables are given below. X is the
monthly return for a large- stock index, Y is the
monthly return for a small-stock index, and Z is the
monthly return for a corporate bond index. There are
60 observations.
1. Calculate the sample variance and standard

deviation for X, Y, and Z.
2. Calculate the sample covariance between X and Y,
X and Z, and Y and Z.
3. Calculate the sample correlation between X and Y,
QUESTION #4
Home sales and interest rates should be negatively
related. The following table gives the number of
annual unit sales for Packard Homes and mortgage
rates for four recent years. Calculate the sample
correlation between sales and mortgage rates.
Year Unit Sales Interest

Rate
(%)
2000 50 8.0
2001 70 7.0
2002 80 6.0
2003 60 7.0
QUESTION #5
The following table shows the sample correlations
between the monthly returns for four different mutual
funds and the S&P 500. The correlations are based
on 36 monthly observations. The funds are as follows:
Fund Large-cap fund
1
Fund Mid-cap fund
2
Fund Large-cap value
3 fund
Fund Emerging
4 markets
fund
S&P US domestic
500 stock index
Fund Fund Fund Fund S&P
1 2 3 4 500
Fund 1 1
Fund 2 0.9231 1
Fund 3 0.4771 0.4156 1
Fund 4 0.7111 0.7238 0.3102 1
S&P 0.8277 0.8223 0.5791 0.7515 1
500
Test the null hypothesis that each of these

correlations, individually, is equal to zero against the
alternative hypothesis that it is not equal to zero. Use
a 5 percent significance level.
QUESTION #6
Bouvier Co. is a Canadian company that sells forestry
products to several Pacific Rim customers. Bouvier's
sales are very sensitive to exchange rates. The
following table shows recent annual sales (in millions
of Canadian dollars) and the average exchange rate
for the year (expressed as the units of foreign
currency needed to buy one Canadian dollar).
Year Exchange Sales

i Rate Xi Yi
1 0.40 20
2 0.36 25
3 0.42 16
4 0.31 30
5 0.33 35
6 0.34 30
Year Exchange Sales

I Rate X i Yi
1 0.4 20 0.0016 36 −0.24
2 0.36 25 0.0000 1 0.00
3 0.42 16 0.0036 100 −0.60
4 0.31 30 0.0025 16 −0.20
5 0.33 35 0.0009 81 −0.27
6 0.34 30 0.0004 16 −0.08
Sum 2.16 156 0.0090 250 −1.39
1. Calculate the sample mean and standard

deviation for X (the exchange rate) and Y
(sales).
2. Calculate the sample covariance between the
exchange rate and sales.
3. Calculate the sample correlation between the
4. Calculate the intercept and coefficient for an
estimated linear regression with the exchange rate
as the independent variable and sales as the
dependent variable.
QUESTION #7
Julie Moon is an energy analyst examining electricity,
oil, and natural gas consumption in different regions
over different seasons. She ran a regression
explaining the variation in energy consumption as a
function of temperature. The total variation of the
dependent variable was 140.58, the explained
variation was 60.16, and the unexplained variation
was 80.42. She had 60 monthly observations.
1. Compute the coefficient of determination.

2. What was the sample correlation between
energy consumption and temperature?
3. Compute the standard error of the estimate of
Moon's regression model.
4. Compute the sample standard deviation of monthly
energy consumption.
QUESTION #8
You are examining the results of a regression
estimation that attempts to explain the unit sales growth
of a business you are researching. The analysis of
variance output for the regression is given in the table
below. The regression was based on five observations
(n = 5).
AN
OVA
df SS MSS F Significanc
e
F
Regressio 1 88.0 88.0 36.667
n 0.00904
Residual 3 7.2 2.4
Total 4 95.2
1. How many independent variables are in the

regression to which the ANOVA refers?
2. Define Total SS.
3. Calculate the sample variance of the dependent
variable using information in the above table.
4. Define Regression SS and explain how its value
of 88 is obtained in terms of other quantities
reported in the above table.
5. What hypothesis does the F-statistic test?
6. Explain how the value of the F-statistic of
36.667 is obtained in terms of other quantities
reported in the above table.
7. Is the F-test significant at the 5 percent significance
level?
QUESTION #9
The first table below contains the regression results for
a regression with monthly returns on a large-cap
mutual fund as the dependent variable and monthly
returns on a market index as the independent variable.
The analysis is performed using only 12 monthly
returns (in percent). The second table provides
summary statistics for the dependent and independent
variables.
1. What is the predicted return on the large-cap

mutual fund for a market index return of 8.00
percent?
2. Find a 95 percent prediction interval for the
expected mutual fund return.
QUESTION #10
Industry automobile sales should be related to
consumer sentiment. The following table provides a
regression analysis in which sales of automobiles and
light trucks (in millions of vehicles) are estimated as a
function of a consumer sentiment index.
Regression
Statistics
Multiple R 0.80113
R-squared 0.64181
Standard 0.81325
error
Observation 120
s
Coefficients Standard t- p-
Error Statistic Value
Intercept 6.071 0.58432 10.389 0
Slope 0.09251 0.00636 14.541 0
coefficien
t
For the independent variable and dependent variable,

the means, standard deviations, and variances are as
follows:
Sentiment Automobile
Index Sales
X (Millions of
Units) Y
Mean 91.0983 14.4981
Standard 11.7178 1.35312
deviation
Variance 137.3068 1.83094
1. Find the expected sales and a 95 percent

prediction interval for sales if the sentiment
index has a value of 90.
QUESTION #11
Use the following information to create a regression
model:
1. Calculate the sample mean, variance, and
standard deviation for X and for Y.
2. Calculate the sample covariance and the
3. Calculate and for a regression of the form

.
For the remaining three parts of this question,
assume that the calculations shown above
already incorporate the correct values for

and .
4. Find the total variation, explained variation, and
unexplained variation.
5. Find the coefficient of determination.
6. Find the standard error of the estimate.
QUESTION #12
The bid–ask spread for stocks depends on the market
liquidity for stocks. One measure of liquidity is a
stock's trading volume. Below are the results of a
regression analysis using the bid–ask spread at the
end of 2002 for a sample of 1,819 NASDAQ-listed
stocks as the dependent variable and the natural log
of trading volume during December 2002 as the
independent variable. Several items in the regression
output have been intentionally omitted. Use the
reported information to fill in the missing values.
Regression
Statistics
Multiple R X2
R-squared X1
Standard X3
error
Observation 1819
s
ANOVA df SS MSS F
Significance
F
Regressio X5 14.246 X7 X9 0
n
Residual X6 45.893 X8
Total X4 60.139
Coefficients Standard t- p- Lo
Error Statistic Value 95
Intercept 0.55851 0.018707 29.85540 0 0.52
Slope -0.04375 0.001842 X10 0 X
coefficient
QUESTION #13
An economist collected the monthly returns for KDL's
portfolio and a diversified stock index. The data
collected are shown below:
Portfolio Return Index Return

Month (%) (%)
1 1.11 −0.59
2 64.90
72.10
3 5.12 4.81
4 1.01 1.68
5 −4.97
−1.72
6 4.06 −2.06
The economist calculated the correlation between the
two returns and found it to be 0.996. The regression
results with the KDL return as the dependent variable
and the index return as the independent variable are
given as follows:
Regression
Statistics
Multiple R 0.996
R-squared 0.992
Standard
error 2.861
Observation 6
s
Standard t- p-
Coefficients Error Statistic Value
Intercep 2.252 1.274 1.768
t 0.1518
Slope 1.069 0.0477 0
22.379
When reviewing the results, Andrea Fusilier suspected
that they were unreliable. She found that the returns for
Month 2 should have been 7.21 percent and 6.49
percent, instead of the large values shown in the first
table. Correcting these values resulted in a revised
correlation of 0.824 and the revised regression results
shown as follows:
Regression
Statistics
Multiple R 0.824
R-squared 0.678
Standard 2.062
error
Observation 6
s
ANOVA df SS MSS F
Significance
F
Regressio 1 35.89 35.89 8.44 0.044
n
Residual 4 17.01 4.25
Total 5 52.91
Coefficient Standard t- p-
s Error Statistic Value
Intercep 2.242 0.863 2.597 0.060
t
Slope 0.623 0.214 2.905 0.044
Explain how the bad data affected the results.
QUESTION #14
Diet Partners charges its clients a small management
fee plus a percentage of gains whenever portfolio
returns are positive. Cleo Smith believes that strong
incentives for portfolio managers produce superior
returns for clients. In order to demonstrate this, Smith
runs a regression with the Diet Partners' portfolio
return (in percent) as the dependent variable and its
management fee (in percent) as the independent
variable. The estimated regression for a 60-month
period is
The calculated t-values are given in parentheses

below the intercept and slope coefficients. The
coefficient of determination for the regression model
is 0.794.
1. What is the predicted RETURN if FEE is 0 percent?

If FEE is 1 percent?
2. Using a two-tailed test, is the relationship
between RETURN and FEE significant at the
5 percent level?
3. Would Smith be justified in concluding that high
fees are good for clients?
The following information relates to Questions 15–
20
Kenneth McCoin, CFA, is a fairly tough interviewer.
Last year, he handed each job applicant a sheet of
paper with the information in the following table, and
he then asked several questions about regression
analysis. Some of McCoin's questions, along with a
sample of the answers he received to each, are given
below. McCoin told the applicants that the
independent variable is the ratio of net income to
sales for restaurants with a market cap of more than
$100 million and the dependent variable is the ratio of
cash flow from operations to sales for those
restaurants. Which of the choices provided is the best
answer to each of McCoin's questions?
Regression
Statistics
Multiple R 0.8623
R-squared 0.7436
Standard 0.0213
error
Observation 24
s
ANOVA df SS MSS F Significance

F
Regression 1 0.029 0.029000 63.81 0
Residual 22 0.010 0.000455
Total 23 0.040
Intercep 0.077 0.007 11.328 0
t
Slope 0.826 0.103 7.988 0
QUESTION #15
What is the value of the coefficient of determination?
A. 0.8261.
B. 0.7436.
C. 0.8623.
QUESTION #16
Suppose that you deleted several of the observations
that had small residual values. If you re-estimated the
regression equation using this reduced sample, what
would likely happen to the standard error of the
estimate and the R-squared?
Standard Error of R-
the Estimate Squared
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
QUESTION #17
What is the correlation between X and Y?
A. −0.7436.
B. 0.7436.
C. 0.8623.
QUESTION #18
Where did the F-value in the ANOVA table come from?
A. You look up the F-value in a table. The F

depends on the numerator and denominator
degrees of freedom.
B. Divide the “Mean Square” for the regression by
the “Mean Square” of the residuals.
C. The F-value is equal to the reciprocal of the t-value
for the slope coefficient.
QUESTION #19
If the ratio of net income to sales for a
restaurant is 5 percent, what is the predicted
ratio of cash flow from operations to sales?
A. 0.007 + 0.103(5.0) = 0.524.
B. 0.077 − 0.826(5.0) = −4.054.
C. 0.077 + 0.826(5.0) = 4.207.
QUESTION #20
Is the relationship between the ratio of cash flow to
operations and the ratio of net income to sales
significant at the 5 percent level?
A. No, because the R-squared is greater than 0.05.

B. No, because the p-values of the intercept and slope
are less than 0.05.
C. Yes, because the p-values for F and t for the slope
coefficient are less than 0.05.
CHAPTER 7.- LINEAR REGRESSION (
solutions 40 extra questions ),
QUESTION #1
Variable X takes on the values shown in the following
table for five observations. The table also shows the
values for five other variables, Y1 through Y5. Which
of the variables Y1 through Y5 have a zero
correlation with variable X?
X Y1 Y2 Y3 Y4 Y5
1 7 2 4 4 1
2 7 4 2 1 2
3 7 2 0 0 3
4 7 4 2 1 4
5 7 2 4 4 5
Answer: The three variables Y2 through Y4 have a

zero correlation with X. (Y1 has zero covariance with X;
but because Y1 has no variation, its correlation with X
is undefined.) Notice that although Y3 and Y4 are
clearly nonlinearly related to X (decreasing and then
increasing as the value of X increases), their overall
linear relationship with X is zero. Variable Y5 has a
correlation of 1.0 with X.
QUESTION #2
Use the data sample below to answer the following
questions.

deviation for X.
Answer: The sample mean, variance, and standard
deviation of X are

deviation for Y.
Answer: The sample mean, variance, and standard
deviation of Y are
3. Calculate the sample covariance between X and Y.
Answer: The sample covariance between X and Y is
4. Calculate the sample correlation between X and Y.

Answer: The sample correlation between X and Y is
QUESTION #3
Statistics for three variables are given below. X is the
monthly return for a large- stock index, Y is the
monthly return for a small-stock index, and Z is the
monthly return for a corporate bond index. There are
60 observations.
1. Calculate the sample variance and standard
deviation for X, Y, and Z.
Answer: The sample variances and standard
deviations are
2. Calculate the sample covariance between X and Y,

Answer: The sample covariances are
3. Calculate the sample correlation between X and Y, X
and Z, and Y and Z.
Answer: The sample correlations are
QUESTION #4
Home sales and interest rates should be negatively
related. The following table gives the number of
annual unit sales for Packard Homes and mortgage
rates for four recent years. Calculate the sample
correlation between sales and mortgage rates.
Year Unit Sales Interest

Rate
(%)
2000 50 8.0
2001 70 7.0
2002 80 6.0
2003 60 7.0
Answer: Sample mean sales are (50 + 70 + 80 +

60)/4 = 260/4 = 65.
Sample mean interest rate is (8.0 + 7.0 + 6.0 + 7.0)/4
= 28.0/4 = 7.0.
Sample variance of sales is [(50 − 65)2 + (70 − 65)2 +
(80 − 65)2 + (60 − 65)2]/3 = 500/3 = 166.7.
Sample standard deviation of sales is the square root
of the variance, or 12.91.
Sample variance of interest rates is [(8 − 7)2 + (7 −
7)2 + (6 − 7)2 + (7 − 7)2]/3 = 2/3 = 0.666667.
Sample standard deviation of interest rates is the
square root of this result, or 0.8165.
Sample covariance between sales and interest rates
is [(50 − 65)(8 − 7) + (70 − 65)(7 −7) + (80 − 65)(6 −
7) + (60 − 65)(7 − 7)]/3 = −30/3 = −10.
Sample correlation is the covariance divided by the
product of the standard deviations:
QUESTION #5
The following table shows the sample correlations
between the monthly returns for four different mutual
funds and the S&P 500. The correlations are based
on 36 monthly observations. The funds are as follows:
Fund Large-cap fund

1
Fund Mid-cap fund
2
FundLarge-cap value
3 fund
FundEmerging
4 markets
fund
S&P US domestic
500 stock index
Fund Fund Fund Fund S&P

1 2 3 4 500
Fund 1 1
Fund 2 0.9231 1
Fund 3 0.4771 0.4156 1
Fund 4 0.7111 0.7238 0.3102 1
S&P 0.8277 0.8223 0.5791 0.7515 1
500
Test the null hypothesis that each of these

correlations, individually, is equal to zero against the
alternative hypothesis that it is not equal to zero. Use
a 5 percent significance level.
Answer: The critical t-value for n − 2 = 34 df, using a

5 percent significance level and a two-tailed test, is
2.032. First, take the smallest correlation in the table,
the correlation between Fund 3 and Fund 4, and see
if it is significantly different from zero. Its calculated t-
value is
This correlation is not significantly different from zero.

If we take the next lowest correlation, between Fund 2
and Fund 3, this correlation of 0.4156 has a calculated
t- value of 2.664. So this correlation is significantly
different from zero at the 5 percent level of
significance. All of the other correlations in the table
(besides the 0.3102) are greater than 0.4156, so they
too are significantly different from zero.
QUESTION #6
Bouvier Co. is a Canadian company that sells forestry
products to several Pacific Rim customers. Bouvier's
sales are very sensitive to exchange rates. The
following table shows recent annual sales (in millions
of Canadian dollars) and the average exchange rate
for the year (expressed as the units of foreign
currency needed to buy one Canadian dollar).
Year Exchange Sales

i Rate Xi Yi
1 0.40 20
2 0.36 25
3 0.42 16
4 0.31 30
5 0.33 35
6 0.34 30
Year Exchange Sales

i Rate X i Yi
1 0.4 20 0.0016 36 −0.24
2 0.36 25 0.0000 1 0.00
3 0.42 16 0.0036 100 −0.60
4 0.31 30 0.0025 16 −0.20
5 0.33 35 0.0009 81 −0.27
6 0.34 30 0.0004 16 −0.08
Sum 2.16 156 0.0090 250 −1.39
1. Calculate the sample mean and standard

deviation for X (the exchange rate) and Y (sales).
Answer: The sample mean and standard deviation of
the exchange rate are
The sample mean and standard deviation of sales

are
2. Calculate the sample covariance between the

Answer: The sample covariance between the
exchange rate and sales is
3. Calculate the sample correlation between the
Answer: The sample correlation between the
exchange rate and sales is
4. Calculate the intercept and coefficient for an

estimated linear regression with the exchange rate
as the independent variable and sales as the
dependent variable.
Answer: We want to estimate a regression

equation of the form Yi = b0 + b1Xi + εi. Noting that
division by (n − 1) in the numerator cancels with
division by (n −1) in the denominator in the
expression for the slope coefficient, the estimates
of the slope coefficient and the intercept are
So the regression equation is Yi = 81.6 −

154.44Xi
QUESTION #7
Julie Moon is an energy analyst examining electricity,
oil, and natural gas consumption in different regions
over different seasons. She ran a regression
explaining the variation in energy consumption as a
function of temperature. The total variation of the
dependent variable was 140.58, the explained
variation was 60.16, and the unexplained variation
was 80.42. She had 60 monthly observations.
1. Compute the coefficient of determination.

Answer: The coefficient of determination is :
2. What was the sample correlation between

energy consumption and temperature?
Answer: For a linear regression with one

independent variable, the absolute value of
correlation between the independent variable and
the dependent variable equals the square root of
the coefficient of determination, so the correlation is
= 0.6542. (The correlation will have the

same sign as the slope coefficient.)
3. Compute the standard error of the estimate of
Moon's regression model.
Answer: The standard error of the estimate is
4. Compute the sample standard deviation of monthly

energy consumption.
Answer: The sample variance of the dependent
variable is
The sample standard deviation

is: .
QUESTION #8
You are examining the results of a regression
estimation that attempts to explain the unit sales growth
of a business you are researching. The analysis of
variance output for the regression is given in the table
below. The regression was based on five observations
(n = 5).
ANOVA
Df SS MSS F Significance
F
Regression 1 88.0 88.0 36.667 0.00904
Residual 3 7.2 2.4
Total 4 95.2
1. How many independent variables are in the

regression to which the ANOVA refers?
Answer: The degrees of freedom for the regression

is the number of slope parameters in the regression,
which is the same as the number of independent
variables in the regression. Because regression df
= 1, we conclude that there is one independent
variable in the regression.
2. Define Total SS.

Answer: Total SS is the sum of the squared
deviations of the dependent variable Y
about its mean.
3. Calculate the sample variance of the dependent

variable using information in the above table.
Answer: The sample variance of the dependent
variable is the total SS divided by its degrees of
freedom (n − 1 = 5 − 1 = 4 as given). Thus the
sample variance of the dependent variable is 95.2/4
= 23.8.
4. Define Regression SS and explain how its value of 88
is obtained in terms of other quantities reported in the
above table.
Answer: The Regression SS is the part of total sum

of squares explained by the regression. Regression
SS equals the sum of the squared differences
between predicted values of the Y and the sample
mean of Y: . In terms of other values

in the table, Regression SS is equal to Total SS
minus Residual SS: 95.2 − 7.2 = 88.
5. What hypothesis does the F-statistic test?

Answer: The F-statistic tests whether all the slope
coefficients in a linear regression are equal to 0.
6. Explain how the value of the F-statistic of 36.667

is obtained in terms of other quantities reported in
the above table.
Answer: The calculated value of F in the table is

equal to the Regression MSS divided by the Residual
MSS: 88/2.4 = 36.667.
7. Is the F-test significant at the 5 percent significance

level?
Answer: Yes. The significance of 0.00904 given in
the table is the p-value of the test (the smallest level
at which we can reject the null hypothesis). This
value of 0.00904 is less than the specified
significance level of 0.05, so we reject the null
hypothesis. The regression equation has significant
explanatory power.
QUESTION #9
The first table below contains the regression results for
a regression with monthly returns on a large-cap
mutual fund as the dependent variable and monthly
returns on a market index as the independent variable.
The analysis is performed using only 12 monthly
returns (in percent). The second table provides
summary statistics for the dependent and independent
variables.
1. What is the predicted return on the large-cap mutual

fund for a market index return of 8.00 percent?
Answer: For the large-cap fund, the predicted rate
of return, , is
2. Find a 95 percent prediction interval for the expected
mutual fund return.
Regression
Statistics
Multiple R 0.776
R-squared 0.602
Standard 4.243
error
Intercept –0.287 1.314 –0.219 0.831
Slope 0.802 0.206 3.890 0.003
coefficien
t
Statistic Market Large-Cap

Index Fund Return
Return
Mean 2.30% 1.56%
Standard 6.21% 6.41%
deviation
Variance 38.51 41.13
Count 12 12
Answer: The estimated variance of the prediction
error, S2f of Y, given X, is
The standard deviation of the error is the square root of

this number: 4.57. For 10 degrees of freedom, the
critical t-value is 2.228. A 95 percent prediction interval
is Y ±tcSf, or 6.129 ± 2.228(4.57), or 6.129 ± 10.182.
Prob(−4.053 < Y < 16.311) = 0.95
QUESTION #10
Industry automobile sales should be related to
consumer sentiment. The following table provides a
regression analysis in which sales of automobiles and
light trucks (in millions of vehicles) are estimated as a
function of a consumer sentiment index.
Regression
Statistics
Multiple R 0.80113
R-squared 0.64181
Standard 0.81325
error
Observation 120
s
Intercept 6.071 10.389 0
0.58432
Slope 0.09251 14.541 0
coefficien 0.00636
t
For the independent variable and dependent variable,

the means, standard deviations, and variances are as
follows:
Sentiment Automobile
Index Sales
X (Millions of
Units) Y
Mean 91.0983 14.4981
Standard 11.7178 1.35312
deviation
Variance 137.3068 1.83094

Answer: For a sentiment index of 90, predicted auto
sales, , are = 6.071 + 0.09251(90) =

14.397 (about 14.4 million vehicles). The estimated
variance of the prediction error, S2f of Y, given X, is
The standard deviation of the prediction error is the

square root of this number: 0.8167. For 118 degrees of
freedom and a 0.05 level of significance, the critical t-
value is approximately 1.98. The 95 percent prediction
interval for X = 90 is , or 14.397 ±

1.98(0.8167), or 14.397 ± 1.617. Prob(12.780 < Y <
16.014) = 0.95

Answer: For a sentiment index of 100, predicted auto
sales, , are
The estimated variance of the prediction error, S2f
of Y, given X, is
The standard deviation of the prediction error

is the square root of this number: 0.81859. For 118
degrees of freedom, the critical t-value is approximately
1.98. A 95 percent prediction interval would be 15.322
± 1.98(0.81859), or 15.322 ± 1.621. Prob(13.701 < Y <
16.943) = 0.95
QUESTION #11
Use the following information to create a regression
model:
1. Calculate the sample mean, variance, and
standard deviation for X and for Y.
Answer: The sample size is n = 9.
2. Calculate the sample covariance and the

Answer: The sample covariance is
The sample correlation between X and Y is

3. Calculate and for a regression of the form
. For the remaining three parts of
this question, assume that the calculations shown
above already incorporate the correct values for

and
.
Answer:
4. - Find the total variation, explained variation, and

unexplained variation.
Answer:
Total variation :
and the unexplained variation is
So the explained variation is 144 − 26.4 =117.6.
5. - Find the coefficient of determination.
Answer: The coefficient of variation, the R-squared, is
6. - Find the standard error of the estimate.

Answer: The standard error of the estimate is
QUESTION #12
The bid–ask spread for stocks depends on the market
liquidity for stocks. One measure of liquidity is a
stock's trading volume. Below are the results of a
regression analysis using the bid–ask spread at the
end of 2002 for a sample of 1,819 NASDAQ-listed
stocks as the dependent variable and the natural log
of trading volume during December 2002 as the
independent variable. Several items in the regression
output have been intentionally omitted. Use the
reported information to fill in the missing values.
Regression
Statistics
Multiple R X2
R-squared X1
Standard X3
error
Observation 1819
s
ANOVA df SS MSS F
Significance
F
Regression X5 14.246 X7 X9 0
Residual X6 45.893 X8
Total X4 60.139
Coefficients Standard t- p- Lo
Error Statistic Value 95
Intercept 0.55851 0.018707 29.85540 0 0.52
Slope -0.04375 0.001842 X10 0 X
coefficient
Answer: The R-squared (X1) is Explained

variation/Total variation = 14.246/60.139 = 0.2369.
The Multiple R (X2) is the correlation between the two
variables, which is the negative square root of the R-
squared, or = −0.4867 because the

estimated slope coefficient is negative. The standard
error (X3) is the square root of unexplained variation
divided by (n−2), which is =

0.1589.
The Total df, X4, is the sample size minus 1, or n − 1 =
1,819 − 1 = 1,818. The Regression df (X5) is equal to
the number of independent variables, which is 1. The
Residual df (X6) is the difference between the Total df
and Regression df, which is also n−(k + 1) where n is
the sample size (1,819) and k is the number of
independent variables (1). X6 is 1,819 − (1 + 1) =
1,817. MSS is the “mean square,” which is the sum of
squares divided by the degrees of freedom. For X7, the
MSS regression is 14.246/1 = 14.246. For X8, the MSS
residual is 45.893/1,817 = 0.025258. The F (X9) is
testing the hypothesis that the regression coefficient
equals zero, and it is equal to MSS regression/MSS
residual, or 14.246/0.025258 = 564.02. This F has 1 df
in the numerator and 1,817 df in the denominator. This
value for F is extremely large, and the probability of an
F this large is practically zero.
X10, the calculated t-value for the slope coefficient, is
the coefficient divided by its standard error: t =
−0.04375/0.00184 = −23.75. This is an extremely large
negative t, with a probability of practically zero. (Notice
that the square root of the F is equal to the t for a
regression with one independent variable.) Finally, X11
and X12 are the upper and lower bounds for a 95
percent confidence interval for the slope coefficient. The
critical t for a two- tailed test at the 5 percent
significance level with 1,817 degrees of freedom is
approximately 1.96
The lower bound, X11, is: b1 - tcSb1 =−0.04375 −
1.96(0.001842) = −0.04736. The upper bound, X12, is
b1 + tcSb1=-0.04375 + 1.96(0.001842) = −0.04014
QUESTION #13
An economist collected the monthly returns for KDL's
portfolio and a diversified stock index. The data
collected are shown below:
Portfolio Return Index Return

Month (%) (%)
1 1.11 −0.59
2 64.90
72.10
3 5.12 4.81
4 1.01 1.68
5 −4.97
−1.72
6 4.06 −2.06
The economist calculated the correlation between the
two returns and found it to be 0.996. The regression
results with the KDL return as the dependent variable
and the index return as the independent variable are
given as follows:
Regression
Statistics
Multiple R 0.996
R-squared 0.992
Standard
error 2.861
Observation 6
s
Coefficients Standard t-Statistic p-Value
Error
Intercep 2.252 1.274 1.768 0.1518
t
Slope 1.069 0.0477 22.379 0
When reviewing the results, Andrea Fusilier suspected

that they were unreliable. She found that the returns for
Month 2 should have been 7.21 percent and 6.49
percent, instead of the large values shown in the first
table. Correcting these values resulted in a revised
correlation of 0.824 and the revised regression results
shown as follows:
Regression
Statistics
Multiple R 0.824
R-squared 0.678
Standard 2.062
error
Observation 6
s
ANOVA df SS MSS F
Significance
F
Regressio 1 35.89 35.89 8.44 0.044
n
Residual 4 17.01 4.25
Total 5 52.91
Intercep 2.242 0.863 2.597 0.060
t
Slope 0.623 0.214 2.905 0.044
Explain how the bad data affected the results.
Answer: The Month 2 data point is an outlier, lying far

away from the other data values. Because this outlier
was caused by a data entry error, correcting the outlier
improves the validity and reliability of the regression.
In this case, the true correlation is reduced from 0.996
to 0.824. The revised R-squared is substantially lower
(0.678 versus 0.992). The significance of the
regression is also lower, as can be seen in the decline
of the F-value from 500.79 to 8.44 and the decline in
the t-statistic of the slope coefficient from 22.379 to
2.905.
The total sum of squares and regression sum of
squares were greatly exaggerated in the incorrect
analysis. With the correction, the slope coefficient
changes from 1.069 to 0.623. This change is important.
When the index moves up or down, the original model
indicates that the portfolio return goes up or down by
1.069 times as much, while the revised model
indicates that the portfolio return goes up or down by
only 0.623 times as much. In this example, incorrect
data entry caused the outlier. Had it been a valid
observation, not caused by a data error, then the
analyst would have had to decide whether the results
were more reliable including or excluding the outlier.
QUESTION #14
Diet Partners charges its clients a small management
fee plus a percentage of gains whenever portfolio
returns are positive. Cleo Smith believes that strong
incentives for portfolio managers produce superior
returns for clients. In order to demonstrate this, Smith
runs a regression with the Diet Partners' portfolio
return (in percent) as the dependent variable and its
management fee (in percent) as the independent
variable. The estimated regression for a 60-month
period is
The calculated t-values are given in parentheses

below the intercept and slope coefficients. The
coefficient of determination for the regression model
is 0.794.
1. What is the predicted RETURN if FEE is 0 percent?
If FEE is 1 percent?
Answer:
If FEE = 0%, RETURN = −3.021 + 7.062(0) =
−3.021%.
If FEE = 1%, RETURN = −3.021 + 7.062(1) =
4.041%.
2. Using a two-tailed test, is the relationship between

RETURN and FEE significant at the 5 percent
level?
Answer: The calculated t-value for the coefficient of

FEE is 14.95. The critical t- value for 58 degrees of
freedom, a two-tailed test, and a 5 percent
significance level is 2.00. Because the calculated t
exceeds the critical t, we may conclude that the
coefficient of FEE is not equal to zero and that the
relationship between RETURN and FEE is
significant.
3. Would Smith be justified in concluding that high

fees are good for clients?
Answer: Smith's analysis is inadequate to conclude

that high fees are good. Clearly, high returns cause
high fees (because of the compensation contract that
Diet Partners has with its clients). The regression
may be recognizing this relationship. Unfortunately,
the reverse may not be true—that fees cause
returns. As an analogy, assume that income taxes
are a function of income. A regression of income as a
function of income taxes would find a strong positive
relationship. Does this mean that taxes cause
income, or the reverse? Smith's experiment is too
simplistic to address the issue of whether a particular
compensation contract is good or bad for client
returns.
The following information relates to Questions 15–

20
Kenneth McCoin, CFA, is a fairly tough interviewer.
Last year, he handed each job applicant a sheet of
paper with the information in the following table, and
he then asked several questions about regression
analysis. Some of McCoin's questions, along with a
sample of the answers he received to each, are given
below. McCoin told the applicants that the
independent variable is the ratio of net income to
sales for restaurants with a market cap of more than
$100 million and the dependent variable is the ratio of
cash flow from operations to sales for those
restaurants. Which of the choices provided is the best
answer to each of McCoin's questions?
Regression
Statistics
Multiple R 0.8623
R-squared 0.7436
Standard 0.0213
error
Observation 24
s
ANOVA df SS MSS F
Significance
F
Regression 1 0.029 0.029000 63.81 0
Residual 22 0.010 0.000455
Total 23 0.040
Intercep 0.077 0.007 11.328 0
t
Slope 0.826 0.103 7.988 0
QUESTION #15
What is the value of the coefficient of determination?
A. 0.8261.
B. 0.7436.
C. 0.8623.
Answer: B is correct. The coefficient of
determination is the same as R-squared
QUESTION #16
Suppose that you deleted several of the observations
that had small residual values. If you re-estimated the
regression equation using this reduced sample, what
would likely happen to the standard error of the
estimate and the R-squared?
Standard Error of R-
the Estimate Squared
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
Answer: C is correct. Deleting observations with

small residuals will degrade the strength of the
regression, resulting in an increase in the standard
error and a decrease in R-squared.
QUESTION #17
What is the correlation between X and Y?
A. -0.7436.
B. 0.7436.
C. 0.8623.
Answer: C is correct. For a regression with one
independent variable, the correlation is the same as
the Multiple R with the sign of the slope coefficient.
Because the slope coefficient is positive, the
correlation is 0.8623.
QUESTION #18
Where did the F-value in the ANOVA table come from?
A. You look up the F-value in a table. The F

depends on the numerator and denominator
degrees of freedom.
B. Divide the “Mean Square” for the regression by
the “Mean Square” of the residuals.
C. The F-value is equal to the reciprocal of the t-value
for the slope coefficient.
Answer: B is correct. This answer describes the

calculation of the F-statistic.
QUESTION #19
If the ratio of net income to sales for a
restaurant is 5 percent, what is the predicted
ratio of cash flow from operations to sales?
A. 0.007 + 0.103(5.0) = 0.524.

B. 0.077 − 0.826(5.0) = −4.054.
C. 0.077 + 0.826(5.0) = 4.207.
Answer: C is correct. To make a prediction using the
regression model, multiply the slope coefficient by the
forecast of the independent variable and add the
result to the intercept.
QUESTION #20
Is the relationship between the ratio of cash flow to
operations and the ratio of net income to sales
significant at the 5 percent level?
A. No, because the R-squared is greater than 0.05.

B. No, because the p-values of the intercept and slope
are less than 0.05.
C. Yes, because the p-values for F and t for the slope
coefficient are less than 0.05.
Answer: C is correct. The p-value reflects the

strength of the relationship between the two
variables. In this case the p-value is less than 0.05,
and thus the regression of the ratio of cash flow from
operations to sales on the ratio of net income to
sales is significant at the 5 percent level.

Quantitative Methods Cfa Level - 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Quantitative Methods Cfa Level - 1

Uploaded by

Copyright:

Available Formats

QUANTITATIVE METHODS

Chartered Financial Analyst

300 PRACTICE QUESTIONS includes:

The difficulty level of this book is similar to the

Use the following information to answer Questions 2 through 3.

9.- An investor wants to receive $1,000 at the beginning of each of

14.- A perpetual preferred stock position pays quarterly dividends of

15.- A client plans to send a child to college for 4 years starting 18

17.- John Smith borrows a sum of $ 5,000 from one of his

18. -A business owner is considering purchasing mechanical

Loan amount $ 10,000

20.- An amount of $ 1,000 is invested for 5 years at 12% capitalized

23.- Shelly Madore is choosing between two one-year investment

A. the savings plan with a quoted rate of 8%

25. A perpetuity paying 1 at the beginning of each 6-month period

26. Consider the investment in the following table:

Start of Year 1 One share purchased at $100

Assuming dividends are not reinvested, compared with the time-

27. An analyst gathers the following information about the performance

Quarter Value at Cash Inflow Value at

The portfolio’s annual time-weighted rate of return is closest to:

28.-The investment performance of Gamma Fund for the year 2019 is

The time-weighted return computed by the manager is closest to:

30.- Henry wants to borrow $100,000 to finance his business. He is

31.- An analyst gathered the following information for Delta stock:

-11,89% -11,07% -8,69% -6,61% -5,52%

A. Q25 =-6.10% Q50=2.89% Q75=6.74%

33.-Some statistics regarding the distribution of returns of two

Mean Standard Skewness Excess

Asset Class Returns Standard

A. Small Cap, Composite, Government Bond, Corporate Universe,

The relative frequency for Interval III is closest to:

Use the following information to answer Questions 37 through 38

Portfolio Alpha Beta Gamma Zetha

Funds Funds Beta

The portfolio's standard deviation of return is closest to:

40. An analyst has established the following prior probabilities

Several days before releasing its earnings statement, the company

Probabilities the Company Cuts Dividends,

The analyst thus determines that the unconditional probability for a

41. An economist states that the probability of having the gross

The covariance of the returns between Securities Alpha and Bet is

If there are 1,200 potential investments, the number expected to

48. An analyst calculated the expected value of Delta Inc.’s EPS as

Stock Alpha Beta

The correlation between Alpha and Beta is closed to

50. Compute the standard deviation of a two-stock portfolio if stock A

Use the following information to answer Questions 51 through

Use the following information to answer Questions 54 through

54. In how many ways can 3 novels, 2 mathematics books, and 1

55. In how many ways can 3 novels, 2 mathematics books, and 1

56. A dance class consists of 22 students, of which 10 are women

57. A committee of 7, consisting of 2 Republicans, 2 Democrats, and

58. If 8 new teachers are to be divided among 4 schools, how many

59. A retail establishment accepts either the American Express or the

Use the following information to answer Questions 60 through

62. If a die is rolled 4 times, what is the probability that 6 comes up at

63. A group of 6 men and 6 women is randomly divided into 2 groups

65. An entrepreneur has two businesses in operation N1 and N2. The

Use the following information to answer Questions 66 through

A committee of 5 persons is to be selected randomly from a group of

Use the following information to answer Questions 68 through

Either the following events: