Quantitative Methods Questions

1 Basic Precalculus Questions

1. What is the effective annual rate if the quarterly APR (also known as
the stated annual rate) is 12%?

2. How many years will it take for an initial investment of £100 to double
in size if the effective annual rate (EAR) is equal to 10%?

3. You plan to save for your retirement. Define today as t=0 and your
first cash flows into your savings account will be £1000 at time t=2
years. You will make payments into your savings account every year
thereafter but you will increase your payment by 5% each year i.e. the
second payment at t=3 years will be £1050. In total you will make 30
annual payments into your saving account. If the relevant rate for the
savings is a monthly APR of 12% what is the present value of these
cashflows at t=0?

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2 Basic Calculus Questions

1. Consider an economy with only two risky assets, namely asset 1 and
asset 2. You are required to solve for the weights in each asset for the
minimum variance portfolio. The assets have the following character-
istics:

E[r1 ] = 0.1
E[r2 ] = 0.2
σ12 = (0.15)2
σ22 = (0.25)2
ρ12 = 0.4

Hint: Remember the formula for the variance of returns for a portfolio
consisting of 2 assets is given by:

σr2 = w12 σ12 + w22 σ22 + 2w1 w2 ρ12 σ1 σ2

Replace the w1 = 1 − w2 determine the derivative function, set to zero

for a minimum and solve for the weights.

3 Basic Statistics and Econometrics Questions

1. What is the variance of X given the following information:

E[X 2 ] = 100
E[X] = 5