MISC

Degree of operating leverage, DFL, DTL

% change in EBIT that results from 1% change in sales,(%change in operating income)/(%change in sales) DFL: sensitivity of earning per share to operating income

Calculate the value of a stock that paid a $1 dividend last year, if next year's dividend will be 5% higher and the stock will sell for $13.45 at year-end. The required return is 13.2%.

(d1/1+Ke)+(p/1+Ke) $12.81

Coefficient Variation of Stock A? Mean: 20% SD: 8%

0.4, CV=SD/mean

What is the seventh decile of the following data points? 81,84,91,97,102,108,110,112,115,121,128,135,138,141,142,147,153,155,159,162

141.7, decile: (n+1)(y)/100 seventh decile = 70% of observations lie below (20+1)70/100=14.7 go to 14 on chart and do 141+(0.7*(142-141)

Which of the following portfolios provides the best "safety first" ratio if the minimum acceptable return is 6%? Portfolio EReturn (%)SD 1, 13, 5 2, 11, 3 3, 9, 2 A)3 B)1 C)2

2, SF Ratio = (Er-Threshold return) / SD

The current price of Bosto shares is 50. Over the coming year, there is a 40% probability that share returns will be 10%, a 40% probability that share returns will be 12.5%, and a 20% probability that share returns will be 30%. Bosto's expected return and standard deviation of returns for the coming year are closest to: Expected returnStandard deviation A)15.0%7.58% B)17.5%5.75% C)17.5%7.58%

A

When individuals are unemployed because they do not have perfect information concerning available jobs, this is: A)frictional unemployment. B)natural unemployment. C)structural unemployment.

A

A decrease in the price of Good Y can result in a decrease of the quantity of Good Y demanded by consumers if the substitution effect: A)is positive and the income effect is negative and larger than the substitution effect. B)and the income effect are negative. C)is negative and larger than the positive income effect.

A,

In which of the following ways is an interest rate swap different from a series of forward rate agreements (FRAs)? A)The FRAs that replicate an interest rate swap may be off-market contracts. B)The fixed rate is known at initiation for an interest rate swap but not for a series of FRAs. C)An interest rate swap may have a nonzero value at initiation, while FRAs must have a value of zero at initiation.

A,

Stagflation refers to an environment of: A)High unemployment and high inflation. B)Low unemployment and high inflation. C)High unemployment and low inflation.

A,

Which of the following is an accurate formulation of null and alternative hypotheses? A)Equal to for the null and not equal to for the alternative. B)Less than for the null and greater than for the alternative. C)Greater than for the null and less than or equal to for the alternative.

A,

Which of the following statements about compounding and interest rates is least accurate? A)All else equal, the longer the term of a loan, the lower will be the total interest you pay. B)On monthly compounded loans, the effective annual rate (EAR) will exceed the annual percentage rate (APR). C)Present values and discount rates move in opposite directions.

A,

The type of economic market that features a large number of competitors offering differentiated products is best characterized as: A)monopolistic competition. B)oligopoly. C)perfect competition.

A, perfect competition all firms make same thing oligopoly, small number of firms

An example of a contractionary fiscal policy change is a(n): A)increase in a fiscal surplus. B)increase in a fiscal deficit. C)decrease in a fiscal surplus.

A, increase in fiscal deficit or decrease in fiscal surplus is expansionary

Melissa Cyprus, CFA, is conducting an analysis of inventory management practices in the retail industry. She assumes the population cross-sectional standard deviation of inventory turnover ratios is 20. How large a random sample should she gather in order to ensure a standard error of the sample mean of 4? A)25. B)80. C)20.

A, 4 = 20/√n denominator has to be 5 so n = 25

The cross price elasticity of demand for a substitute good and the income elasticity for an inferior good are: Cross elasticity, Income elasticity A)>0 < 0 B)< 0 < 0 C)< 0 > 0

A, cross price: QD of one good when price for another good changes income elasticity: responsiveness of QD to change in consumer income

A central bank that wants to increase short-term interest rates is most likely to: A)sell government securities. B)decrease bank reserve requirements. C)issue long-term bonds.

A, decreasing reserve requirement and buying gov sec would decrease money supply and interest rates

When additional or excess reserves are injected into the U.S. banking system, the money supply can potentially increase by an amount equal to the additional excess reserves multiplied by which of the following? A)Reciprocal of the required reserve ratio. B)Reciprocal of one minus the required reserve ratio. C)Required reserve ratio.

A, potential deposit expansion multiplier = 1 / (required reserve ratio) potential increase in money supply = potential deposit expansion multiplier x increase in excess reserves

Peter Wallace wants to deposit $10,000 in a bank certificate of deposit (CD). Wallace is considering the following banks: Bank A offers 5.85% annual interest compounded annually. Bank B offers 5.75% annual interest rate compounded monthly. Bank C offers 5.70% annual interest compounded daily. Which bank offers the highest effective interest rate and how much? A)Bank C, 5.87%. B)Bank B, 5.90%. C)Bank A, 5.85%.

A, (1+i/n)^n - 1

For the last four years, the returns for XYZ Corporation's stock have been 10.4%, 8.1%, 3.2%, and 15.0%. The equivalent compound annual rate is: A)9.1%. B)9.2%. C)8.9%.

A, (1.104 × 1.081 × 1.032 × 1.15)^0.25 - 1 = 9.1%

A stock portfolio has had a historical average annual return of 12% and a standard deviation of 20%. The returns are normally distributed. The range -27.2 to 51.2% describes a: A)95% confidence interval. B)99% confidence interval. C)68% confidence interval.

A, (51.2-12)/20=1.96

A bottler of iced tea wishes to ensure that an average of 16 ounces of tea is in each bottle. In order to analyze the accuracy of the bottling process, a random sample of 150 bottles is taken. Using a t-distributed test statistic of -1.09 and a 5% level of significance, the bottler should: A)not reject the null hypothesis and conclude that bottles contain an average 16 ounces of tea. B)not reject the null hypothesis and conclude that bottles do not contain an average of 16 ounces of tea. C)reject the null hypothesis and conclude that bottles contain an average 16 ounces of tea.

A, +-1.96,

A researcher is testing the hypothesis that a population mean is equal to zero. From a sample with 64 observations, the researcher calculates a sample mean of -2.5 and a sample standard deviation of 8.0. At which levels of significance should the researcher reject the hypothesis? 1% significance5% significance10% significance A)Fail to rejectRejectReject B)RejectFail to rejectFail to reject C)Fail to rejectFail to rejectReject

A, +2.58, 1.96, 1.645

For a linear demand curve, at the price where elasticity is -2.0, reducing prices will: A)increase total revenue and we are not at the point of maximum total revenue. B)increase total revenue and we are at the point of maximum total revenue. C)decrease total revenue and we are not at the point of maximum total revenue.

A, -2 price elasticity of demand means: % change in QD is twice the %change in price

If the probability of both a new Wal-Mart and a new Wendy's being built next month is 68% and the probability of a new Wal-Mart being built is 85%, what is the probability of a new Wendy's being built if a new Wal-Mart is built? A)0.80. B)0.60. C)0.70.

A, 0.68/0.85-0.80 P(AB) = P(A|B) × P(B)

The percentage changes in annual earnings for a company are approximately normally distributed with a mean of 5% and a standard deviation of 12%. The probability that the average change in earnings over the next five years will be greater than 15.5% is closest to: A)2.5%. B)5.0%. C)10.0%.

A, 12%/root5 > (15.5-5)/5.366 = 1.96

Approximately 95% of all observations for a normally distributed random variable fall in the interval: A)µ ± 2σ. B)µ ± σ. C)µ ± 3σ.

A, 68% is +-1

A cumulative distribution function for a random variable X is given as follows: x F(x) 5 0.14 10 0.25 15 0.86 20 1.00 A)25%. B)14%. C)39%. The probability of an outcome less than or equal to 10 is:

A, CDF gives probability of being less than or equal to specific value, the answer here is given

A snowmobile manufacturer that uses LIFO begins the year with an inventory of 3,000 snowmobiles, at a carrying cost of $4,000 each. In January, the company sells 2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000 snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual inventory system, using a periodic system for the firm's annual financial statements would: A)increase COGS by $2,000,000. B)leave ending inventory unchanged. C)decrease gross profit by $4,000,000.

A, Periodic inventory: Follows the same basic principle but it calculates ONE cost of goods sold amount at the end of the month for all items

Arguments against being concerned about the size of a fiscal deficit include: A)Ricardian equivalence. B)higher future taxes. C)the crowding-out effect.

A, Ricardian equivalence: does not matter if gov uses debt or tax increase because effect on total level of demand will be same arguments for being concerned with deficit is crowding-out effect: gov taking place of private sector

Because some input prices do not adjust rapidly to changes in the price level, the short-run aggregate supply curve: A)is more elastic than the long-run aggregate supply curve. B)exhibits a negative relationship between quantity supplied and the price level. C)may be interpreted as representing the economy's potential output.

A, SRAS slopes upward (but is not perfectly inelastic),

Which of the following sets of numbers does NOT meet the requirements for a set of probabilities? A)(0.10, 0.20, 0.30, 0.40, 0.50). B)(0.10, 0.20, 0.30, 0.40). C)(0.50, 0.50).

A, a set of probabilities must sum to 1

Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually: A)rise at an increasing rate. B)fall at a decreasing rate. C)rise at a decreasing rate.

A, as quantity produced rises, costs rise at an increasing rate

An article in a trade journal suggests that a strategy of buying the seven stocks in the S&P 500 with the highest earnings-to-price ratio at the end of the calendar year and holding them until March 20 of the following year produces significant trading profits. Upon reading further, you discover that the study is based on data from 1993 to 1997, and the earnings-to-price ratio is calculated using the stock price on December 31 of each year and the annual reported earnings per share for that year. Which of the following biases is least likely to influence the reported results? A)Survivorship bias. B)Look-ahead bias. C)Time-period bias.

A, authors looked at stocks at beginning of years and measured performance over three months, look-ahead: relying on data/info not available during time period studied

Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote: A)a budget deficit during a recession and a budget surplus during an inflationary expansion. B)a budget surplus during a recession and a budget deficit during an inflationary expansion. C)a budget deficit during a recession but do not promote a budget surplus during an inflationary expansion.

A, automatic stabilizers: unemployment compensation, corporate profits tax, progressive income tax these create deficit during recessions and surpluses during inflationary periods to counteract what's going on

On January 1, Orange Computers issued employee stock options for 400,000 shares. Options on 200,000 shares have an exercise price of $18, and options on the other 200,000 shares have an exercise price of $22. The year-end stock price was $24, and the average stock price over the year was $20. The change in the number of shares used to calculate diluted earnings per share for the year due to these options is closest to: A)20,000 shares. B)67,000 shares. C)100,000 shares

A, avg price is $20 so only the $18 options were executed, [(20-18)/20]*200,000 = 20,000 shares

An analyst wants to compare the cash flows of two United States companies, one that reports cash flow using the direct method and one that reports it using the indirect method. The analyst is most likely to: A)convert the indirect statement to the direct method to compare the firms' cash expenditures. B)adjust the reported CFO of the firm that reports under the direct method for depreciation and amortization expense. C)increase CFI for any dividends reported as investing cash flows by the firm reporting cash flow by the direct method.

A, breaks down into individual cash expenses

If a firm's management wishes to use its discretion to increase operating cash flows, it is most likely to: A)capitalize an expense. B)decrease the allowance for uncollectible accounts. C)change delivery terms from FOB destination to FOB shipping point.

A, by capitalizing, the expense is recognized as a CFI instead of CFO (which increases CFO).

A normal distribution is completely described by its: A)variance and mean. B)median and mode. C)mean, mode, and skewness.

A, by definition

Which of the following provisions would most likely increase the required yield to maturity on a debt security? A)Call option. B)Put option. C)Floor on a floating-rate security.

A, call options favor the issuer and increase required YTM

Ron Jacobi, manager with the Toulee Department of Natural Resources, is responsible for setting catch-and-release limits for Lake Norby, a large and popular fishing lake. He takes a sample to determine whether the mean length of Northern Pike in the lake exceeds 18 inches. If the sample t-statistic indicates that the mean length of the fish is significantly greater than 18 inches, when the population mean is actually 17.8 inches, the t-test resulted in: A) a Type I error only. B) a Type II error only. C) both a Type I and a Type II error.

A, can't test type I and type II, type I: null is true type II: null is false

Which of the following is least likely to result in low-quality financial statements? A)Unsustainable cash flows. B)Activities that manage earnings. C)Conservative accounting choices.

A, conservative accounting is considered to be biased, earnings mgmt is viewed as reducing the quality of firm's financial statements

Monte Carlo simulation is necessary to: A)approximate solutions to complex problems. B)reduce sampling error. C)compute continuously compounded returns.

A, constructs distributions using complex combinations of hypothesized parameters

A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease: A)GDP growth in the short run. B)short-term interest rates. C)the foreign exchange value of the country's currency.

A, decrease money supply, increase interest rates and slow gdp growth

Central banks pursuing expansionary policies may: A)decrease the policy rate and make open market purchases of securities. B)decrease the policy rate and make open market sales of securities. C)increase the policy rate and make open market purchases of securities.

A, decreasing policy rate, decreasing reserve requirements, and purchasing securities in open market are all expansionary monetary policy actions

An analyst should use a t-test with n - 1 degrees of freedom to test a null hypothesis that two variables have: A)equal means. B)equal variances. C)no linear relationship.

A, difference in means hypothesis tests are t-tests with n-1 dof, correlation tests are t-tests with n-2 dof, equality of variances are f-tests

An estimate of the increase in an option-free bond's price, based only on its duration: A)will be too small. B)will be too large. C)may be either too small or too large.

A, duration is a linear measure, relationship between bond price and yield for option-free bond is convex, for a decrease in yield, the estimated price based on duration alone will be smaller than actual duration: bond's interest rate risk, sensitivity to bond's full price to change in yield

The variance of 100 daily stock returns for Stock A is 0.0078. The variance of 90 daily stock returns for Stock B is 0.0083. Using a 5% level of significance, the critical value for this test is 1.61. The most appropriate conclusion regarding whether the variance of Stock A is different from the variance of Stock B is that the: A)variances are equal. B)variance of Stock B is significantly greater than the variance of Stock A. C)variances are not equal.

A, equality of variances requires an f-stat: larger sample variance/smaller sample variance since f-stat is less than critical value you cannot reject null

Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A)Exports increase. B)Domestic currency appreciates. C)Interest rates increase.

A, expansionary decreases interest rates and causes domestic currency to DEPRECIATE... which increases foreign demand for country's exports

Which of the following is least likely a common form of external credit enhancement? A)Overcollateralization. B)A corporate guarantee. C)A letter of credit from a bank.

A, external credit enhancements: financial guarantees from third parties that support performance of the bond

Silvano Jimenez, an analyst at Banco del Rey, is reviewing recent actions taken by the U.S. Federal Reserve (the Fed) in setting monetary policy. Recently, the Fed decided to increase the money supply, which has resulted in a decrease in real interest rates. At a staff meeting, Jimenez brings this matter to the attention of his colleagues and makes the following statements: Statement 1: Although the money supply increase has led to a decrease in real interest rates, we should begin to see U.S. investors decrease their investments abroad and the U.S. dollar will appreciate in the foreign exchange market. Statement 2: The Fed's increase in the money supply will increase the amount of imports into the U.S. Are Statement 1 and Statement 2 as made by Jimenez CORRECT? Statement 1, Statement 2 A)Incorrect, Incorrect B)Incorrect, Correct C)Correct, Incorrect

A, fed increases money supply and real interest rates decline, the currency and depreciate and people will move towards foreign investment, exports will increase because goods will be cheaper in u.s

A grant writer for a local school district is trying to justify an application for funding an after-school program for low-income families. Census information for the school district shows an average household income of $26,200 with a standard deviation of $8,960. Assuming that the household income is normally distributed, what is the percentage of households in the school district with incomes of less than $12,000? A)5.71%. B)15.87%. C)9.92%.

A, find z value, (x-mu)/sd

A client will move his investment account unless the portfolio manager earns at least a 10% rate of return on his account. The rate of return for the portfolio that the portfolio manager has chosen has a normal probability distribution with an expected return of 19% and a standard deviation of 4.5%. What is the probability that the portfolio manager will keep this account? A)0.977. B)0.950. C)0.750.

A, first find z so do the (x-mu)/sd find -2 on z table 0.0228 do 1-0.0228 = 0.9772 as the answer

For a two-tailed test of hypothesis involving a z-distributed test statistic and a 5% level of significance, a calculated z-statistic of 1.5 indicates that: A)the null hypothesis cannot be rejected. B)the null hypothesis is rejected. C)the test is inconclusive.

A, for 5% sig lvl, the z-stat must be greater than 1.96 to reject null

Which of the following statements about sample statistics is least accurate? A)There is no sample statistic for non-normal distributions with unknown variance for either small or large samples. B)The z-statistic is used to test normally distributed data with a known variance, whether testing a large or a small sample. C)The z-statistic is used for nonnormal distributions with known variance, but only for large samples.

A, for large samples you can use the t-stat, but if you don't know variance and it's small you ****ed

Cash flows related to futures margin least likely include: A)interest on the margin loan. B)deposits to meet margin calls. C)interest received on collateral.

A, futures margin does not involve a loan,

Which of the following statements about the relationship between interest rates and the demand for and supply of money is most accurate? Interest rates affect: A)both the demand for and supply of money. B)the demand for money only. C)the supply of money only.

A, higher rates, higher cost of holding money, and people hold less money and purchase interest-earning assets, Supply of money is independent of interest rates!

Total investment is one of the components of a country's GDP. Which of the following is least likely to be considered a source of funds for investment? A)Household expenditures. B)National savings. C)Foreign borrowing.

A, household expenditures would not be a source of funds for investment things like national savings, foreign borrowing, and gov savings would be

Which of the following statements about hypothesis testing is least accurate? A)If the alternative hypothesis is Ha: µ > µ0, a two-tailed test is appropriate. B)A Type II error is failing to reject a false null hypothesis. C)The null hypothesis is a statement about the value of a population parameter.

A, hypotheses are always states in terms of population parameter

Which one of the following is most likely to experience loss of wealth from an increase in the inflation rate? A)A commercial bank that has a large quantity of fixed-rate mortgages in its loan portfolio. B)An individual investor who recently purchased a substantial amount of variable rate bonds. C)An individual investor who financed the purchase of a home with a 30-year fixed rate

A, if inflation occurs... the losers are the ones who hold long-term contracts in which they are to receive fixed payments,

Can an economy that is at long-run equilibrium adjust to produce real GDP which is greater than full-employment real GDP in the short run? A)Yes, if aggregate demand increases. B)No. C)Yes, if wages increase.

A, increase in AD when economy is operating a long-run equilibrium will increase both prices and real GDP in short run

A decrease in the target U.S. federal funds rate is least likely to result in: A)a proportionate decrease in long-term interest rates. B)an increase in consumer spending on durable goods. C)depreciation of the U.S. dollar on the foreign exchange market.

A, increase in consumer spending and depreciation of U.S. dollar on foreign exchange is supposed to happen

Robert Patterson, an options trader, believes that the return on options trading is higher on Mondays than on other days. In order to test his theory, he formulates a null hypothesis. Which of the following would be an appropriate null hypothesis? Returns on Mondays are: A)not greater than returns on other days. B)greater than returns on other days. C)less than returns on other days.

A, just choose the opposite

According to real business cycle theory, business cycles result from: A)rational responses to external shocks. B)inappropriate changes in monetary policy. C)increases and decreases in business confidence.

A, keynesian cycle is changes in business confidence, monetarist is changes in monetary policy

Banks choose to hold a higher percentage of deposits as reserves because they believe general business conditions in the economy are subject to greater uncertainty. If all else is held constant, what is the most likely impact of this action? A)The money supply will decrease. B)There will be no effect on the money supply. C)The money supply will increase during a period of inflation, but will decrease if the economy goes into a recession.

A, less money for lending

Given a holding period return of R, the continuously compounded rate of return is: A)ln(1 + R). B)eR - 1. C)ln(1 - R) - 1.

A, ln(1+r) is formula for continuously compounded rate of return

Assume the Federal Reserve purchases $1 billion of securities in the open market. What is the maximum increase in the money supply that can result from this action, if the required reserve ratio is 15%? A)$6.67 billion. B)$850 million. C)$1.00 billion.

A, money multiplier is 1/required reserve ratio

Which of the following statements about a normal distribution is least accurate? A)A normal distribution has excess kurtosis of three. B)The mean and variance completely define a normal distribution. C)Approximately 68% of the observations lie within +/- 1 standard deviation of the mean.

A, normal distribution is 3, mean and variance define normal distribution

Coyote Corporation has an issuer credit rating of AA, but its most recently issued bonds have an issue credit rating of AA-. This difference is most likely due to the newly issued bonds having: A)been issued as senior subordinated debt. B)been affected by restricted subsidiary status. C)additional covenants that protect the bondholders.

A, notching difference can be that bond might have lower seniority ranking

Which of the following is least likely to be considered a feature that is common to both monopolistic competition and perfect competition? A)Extensive advertising to differentiate products. B)Zero economic profits in the long run. C)Low or no barriers to entry.

A, only monopolistic competition uses extreme advertising to difference products

an investor in longer-term coupon bonds who has a short investment horizon is most likely: A)more concerned with market price risk than reinvestment risk. B)more concerned with reinvestment risk than market price risk. C)equally concerned about market price risk and reinvestment risk.

A, over short horizon an increase in interest rates decreases return on coupon bond because decrease in price offsets increase in reinvestment income short horizon = market price risk long horizon = reinvestment risk

Which of the following is an example of a parameter? A)Population variance. B)Sample standard deviation. C)Sample mean.

A, parameter is a descriptive measure of a population characteristic (not sample)

If a two-tailed hypothesis test has a 5% probability of rejecting the null hypothesis when the null is true, it is most likely that the: A)significance level of the test is 5%. B)power of the test is 95%. C)probability of a Type I error is 2.5%.

A, power of test is 1-type II error, this is a type I error,

When a regulatory agency requires a monopolist to use average cost pricing, the intent is to produce the quantity where the: A)the market demand curve intersects the average total cost curve. B)marginal revenue curve intersects the marginal cost curve. C)average total cost curve intersects the marginal revenue curve.

A, price a product where ATC intersects demand curve, they would not be concerned with companies revenue really

Which of the following is least accurate regarding the allocative efficiency associated with price discrimination? Price discrimination: A)leads to a decrease in allocative efficiency. B)leads to production where the sum of consumer surplus and producer surplus is greater than it would be otherwise. C)results in gains to the discriminating firm by selling to consumers with relatively inelastic demand.

A, price discrimination reduces allocative efficiency allocative efficiency is when quantity produces maximizes sum of consumer and producer surplus, where marginal benefit=marginal cost

The long-run aggregate supply curve is: A)inelastic because all input prices can vary. B)elastic because input prices are sticky. C)perfectly elastic because input prices are fixed.

A, price level has no effect on LRAS

Price-to-book value ratios are most appropriate for measuring the relative value of: A)a bank. B)a manufacturing company. C)a mature technology company.

A, price-to-book value is for companies with very liquid assets, book value: historical cost - depreciation

Which of the following statements about the defining properties of probability is least accurate? A)To state a probability, a set of mutually exclusive and exhaustive events must be defined. B)The sum of the probabilities of events equals one if the events are mutually exclusive and exhaustive. C)The probability of an event may be equal to zero or equal to one.

A, probabilities must be greater than or equal to zero and less than or equal to one, and a set of mutually exclusive and exhaustive sum to one

In the notes to its financial statements, Gilbert Company discloses a €400,000 reversal of an earlier write-down of inventory values, which increases this inventory's carrying value to €2,000,000. It is most likely that: A)the reasons for this reversal are also disclosed. B)a gain of €400,000 appears on the income statement. C)the net realizable value of this inventory is €2,000,000.

A, required disclosures related to inventories include amount of any reversal of write-downs are circumstances under IFRS, reversal of inventory write-down is a reduction in cogs for the period

To test a hypothesis that the population correlation coefficient of two variables is equal to zero, an analyst collects a sample of 24 observations and calculates a sample correlation coefficient of 0.37. Can the analyst test this hypothesis using only these two inputs? A)Yes. B)No, because the sample means of the two variables are also required. C)No, because the sample standard deviations of the two variables are also required.

A, t-stat for test of correlation coefficient is (r√n-1)/√1-r² r: correlation coefficient

Central banks that are able to define how inflation is computed and determine its desired level are best described as having: A)target independence. B)transparency. C)operational independence.

A, target independence: central bank defines how inflation is computed and sets target inflation operational independence: determine policy rate transparency: degree to which central banks report public on state of economic environment

Which of the following statements regarding skewness is least accurate? A)In a skewed distribution, 95% of all values will lie within plus or minus two standard deviations of the mean. B)A distribution that is not symmetrical has skew not equal to zero. C)A positively skewed distribution is characterized by many small losses and a few extreme gains.

A, the statement would be correct if it was a normal distribution

Monthly Gross Domestic Product (GDP) figures from 1990-2000 are an example of: A)time-series data. B)systematic data. C)cross-sectional data.

A, time-series is group taken specific and equally spaced points, cross-sectional observations are taken at a single point in time

Which of the following statements about hypothesis testing is least accurate? A)A Type I error is the probability of rejecting the null hypothesis when the null hypothesis is false. B)The significance level is the probability of making a Type I error. C)A Type II error is the probability of failing to reject a null hypothesis that is not true.

A, type I is rejecting when true

Balfour Corp. is in the food distribution business and has a beta of 1.1, a marginal tax rate of 34%, and a debt-to-assets ratio of 40%. Balfour management is evaluating an entry into the fast-casual restaurant business. They have identified a publicly traded company in the fast-casual restaurant industry that has an equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity ratio of 40%. The appropriate beta for Balfour to use in calculating the cost of equity capital for the analysis of the potential entry into the restaurant business is closest to: A)1.15. B)1.30. C)1.45.

A, unconventional cash flows patters will have multiple or no IRRs,

If money wages increase, other things equal, the most likely result is a: A)short-run recessionary gap. B)long-run inflationary gap. C)short-run inflationary gap.

A, wage up -> SRAS down ->SR recessionary gap

Compared to an asset with no net cost of carry, holding costs that are greater than benefits: A)increase the no-arbitrage price of the forward contract. B)decrease the no-arbitrage price of the forward contract. C)have no effect on the no-arbitrage price of the forward contract.

A, when costs of holding underlying asset are greater than benefits, the no-arbitrage price of forward contract increases

A firm operating under perfect competition will experience economic losses when which of the following conditions exists? A)Marginal cost is less than average total cost. B)Market price is less than average total cost. C)Marginal revenue is greater than average total cost.

B

A scatter plot is best interpreted as displaying the: A)relationship of a dependent variable with an independent variable. B)paired observations of two variables. C)behavior of a variable over time.

B

Compared to a passive investment strategy, active management, on average: A)cannot outperform if markets are weak-form efficient. B)can outperform if markets are weak-form efficient but not semistrong-form efficient. C)can outperform if markets are semistrong-form efficient but not strong-form efficient.

B

If a smooth curve is to represent a probability density function, what two requirements must be satisfied? The area under the curve must be: A)one and the curve must not rise above the horizontal axis. B)one and the curve must not fall below the horizontal axis. C)zero and the curve must not fall below the horizontal axis.

B,

Multivariate distributions can describe: A)continuous random variables only. B)either discrete or continuous random variables. C)discrete random variables only.

B,

Which of the following fiscal and monetary policy scenarios is most likely to increase the size of the public sector relative to the private sector? A)Contractionary fiscal and monetary policy. B)Expansionary fiscal policy and contractionary monetary policy. C)Expansionary monetary policy and contractionary fiscal policy.

B,

Which of the following is least likely to be an example of a discrete random variable? A)The number of days of sunshine in the month of May 2006 in a particular city. B)The rate of return on a real estate investment. C)Quoted stock prices on the NASDAQ.

B,

Which one of the following alternatives best describes the primary use of inferential statistics? Inferential statistics are used to: A)make forecasts based on large data sets. B)make forecasts, estimates or judgments about a large set of data based on statistical characteristics of a smaller sample. C)summarize the important characteristics of a large data set based on statistical characteristics of a smaller sample.

B,

An analyst is testing to see if the mean of a population is less than 133. A random sample of 50 observations had a mean of 130. Assume a standard deviation of 5. The test is to be made at the 1% level of significance. The analyst should: A)fail to reject the null hypothesis. B)reject the null hypothesis. C)accept the null hypothesis.

B, t-stat= (sample mean - hypothesis mean) / (sample sd/√n (4.24) is less than your 2.33 so reject null

Random sample of 25 farms, mean of 27 cows per farm, sample sd 5, normally distributed, 95% CI for cows? A)23 to 31. B)25 to 29. C)22 to 32.

B, standard error = 5/√25 = 1 DOF = 25-1=24 t-table= 2.064 CI: 27+-2.064(1)

The Night Raiders, an expansion team in the National Indoor Football League, is having a challenging first season with a current win loss record of 0 and 4. However, the team recently signed four new defensive players and one of the team sponsors (who also happens to hold a CFA charter) calculates the probability of the team winning a game at 0.40. Assuming that whether the team wins a game is independent of whether it wins any other game, the probability that the team will win 6 out of the next 10 games is closest to: A)0.417. B)0.112. C)0.350.

B, 10!/(10-4)!*6! * 0.4⁶*(1-0.4)¹⁰-⁶ = 0.112

The covariance of the returns on investments X and Y is 18.17. The standard deviation of returns on X is 7%, and the standard deviation of returns on Y is 4%. What is the value of the correlation coefficient for returns on investments X and Y? A)+0.65. B)+0.85. C)+0.32.

B, 18.17/28 = 0.65

Which of the following statements about biases that affect the consumer price index (CPI) is least accurate? A)The basket of goods on which the CPI is based becomes a less accurate measure of household costs as new goods appear on the market. B)The net effect of built-in biases in the CPI is to underestimate inflation. C)Price increases that result from quality improvements are reflected as increases in the CPI.

B, CPI is overestimate inflation by about 1% a year, upward biases, quality improvements, new expensive goods replacing old ones,

Consider a random variable X that follows a continuous uniform distribution: 7 ≤ X ≤ 20. Which of the following statements is least accurate? A)F(12 ≤ X ≤ 16) = 0.307. B)F(21) = 0.00. C)F(10) = 0.23.

B, F(21)=0 would mean that the probability of the outcome being less than or equal to 21 is 0, but all the outcomes are between 7 and 20... so the probability that the outcomes are less than or equal to 21 is 100% or 1

A firm that purchases a building that it intends to rent out for income would report this asset as investment property under: A)U.S. GAAP only. B)IFRS only. C)both U.S. GAAP and IFRS. Explanation Under IFRS, the building is classified as investment property. U.S. GAAP does not distinguish investment property from other types of long-lived assets. (Study Session 8, Module 26.4, LOS 26.n)

B, GAAP does not distinguish investment property from other long lives assets.

Nominal GDP for the year 20X7 is $784 billion and real GDP is $617 billion. If the base period for the GDP deflator is 20X1, the annual rate of increase in the GDP deflator since the base year is closest to: A)4.5%. B)4.0%. C)3.5%.

B, GDP deflator = $784 billion / $617 billion × 100 = 127.07. Annual rate of increase = (127.07 / 100)^1/6 - 1 = 0.0407 = 4.07%. must raise to 1/n!!!

A nursery sells trees of different types and heights. Suppose that 75 trees chosen at random are sold for planting at City Hall. These 75 trees average 60 inches in height with a standard deviation of 16 inches. Using this information, construct a 95% confidence interval for the mean height of all trees in the nursery. A)0.8 ± 1.96(16). B)60 ± 1.96(1.85). C)60 ± 1.96(16).

B, MEAN+-1.96(SE)

What is the standard deviation of a portfolio if you invest 30% in stock one (standard deviation of 4.6%) and 70% in stock two (standard deviation of 7.8%) if the correlation coefficient for the two stocks is 0.45? A)6.83%. B)6.20%. C)0.38%.

B, SD port. (w1²sd1²+w2²sd2²*2*w1*w2*sd1*sd2*r12)²

If the null hypothesis is innocence, then the statement "It is better that the guilty go free, than the innocent are punished" is an example of preferring a: A)higher level of significance. B)type II error over a type I error. C)type I error over a type II error.

B, accept null when false over reject when true

X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability of Y is 40%, and the probability of Z is 20%. Which of the following is closest to the probability that either X or Y will occur? A)70%. B)58%. C)12%.

B, adding probabilities

Which of the following statements regarding money demand and supply is least accurate? A)The supply of money is determined by the monetary authority and is not affected by changes in interest rates. B)As the Fed reduces the money supply, short-term interest rates decrease. C)The supply curve for money is vertical.

B, as fed reduces money supply, short-term interest rate INCREASES

Which of the following terms from the extended DuPont equation would an analyst least likely be able to obtain, given only a company's common-size income statement and common-size balance sheet? The company's: A)EBIT margin. B)asset turnover. C)financial leverage.

B, asset turnover: revenue/assets EBIT Margin: EBIT/Sales Financial Leverage: Assets/Equity (which is reciprocal of equity/assets shown on common size balance sheet

Natural monopolies exist because they can produce at lower costs with greater output, which means there are economies of scale. Which of the following industries is typically a natural monopoly? A)Oil. B)Utilities. C)Technology.

B, avg cost of production lowest when single large firm produces entire output demanded as utility

Which of the following is most likely to cause an increase in aggregate demand? A)An increase in the general price level. B)High capacity utilization rates. C)Relative appreciation in the country's currency.

B, capacity utilization: business investment in PPE change in price would indicate a movement, not shift, currency increase would increase cost of exports and decrease cost of imports, this would shift AD to the left

Brandy Clark, CFA, has forecast that Aceler, Inc., will pay its first dividend two years from now in the amount of $1.25. For the following year, she forecasts a dividend of $2.00 and expects dividends to increase at an average rate of 7% for the foreseeable future after that. If the risk-free rate is 4.5%, the expected market risk premium is 7.5%, and Aceler's beta is 0.9, Clark would estimate the current value of Aceler shares as being closest to: A)$37. B)$39. C)$47.

B, capm > 2nd year div/capm-growth rate>(47+d1)/(1+capm²)

The central limit theorem concerns the sampling distribution of the: A)population mean. B)sample mean. C)sample standard deviation.

B, central limit theorem: avg of random sample will more closely resemble that of whole population as sample size increases regardless of distribution

Which of the following statements about the variance of a normally distributed population is least accurate? A)A test of whether the variance of a normally distributed population is equal to some value σ02, the hypotheses are: H0: σ2 = σ02, versus Ha: σ2 ≠ σ02. B)The Chi-squared distribution is a symmetric distribution. C)The test of whether the population variance equals σ02 requires the use of a Chi-squared distributed test statistic, [(n − 1)s2] / σ02. Explanation The Chi-squared distribution is not symmetrical, which means that the critical values will not be numerically equidistant from the center of the distribution, though the probability on either side of the critical values will be equal (that is, if there is a 5% level of significance and a two-sided test, 2.5% will lie outside each of the two critical values).

B, chi-squared distribution is not symmetrical

If the economy is in short-run disequilibrium below full employment, the most likely explanation is that: A)money wage rates have decreased. B)aggregate demand has decreased. C)long-run aggregate supply has decreased.

B, decrease in demand reduces output below full-employment level

Which one of the following Federal Reserve monetary policies, when pursued in line with the U.S. government's fiscal policies, would help increase aggregate demand during a period of high unemployment? A)An increase in the reserve requirements for financial institutions. B)A decrease in the discount rate. C)The sale of bonds by the Fed.

B, decrease in fed lending rate (discount rate or rate used to lend to banks) would increase the money supply and increase aggregate demand the other two options would reduce aggregate demand

Which of the following random variables would be most likely to follow a discrete uniform distribution? A)The outcome of the roll of two standard, six-sided dice where X is the sum of the numbers facing up. B)The outcome of a roll of a standard, six-sided die where X equals the number facing up on the die. C)The number of heads on the flip of two coins.

B, discrete uniform distribution has equal probability for each outcome

An analyst decides to select 10 stocks for her portfolio by placing the ticker symbols for all the stocks traded on the New York Stock Exchange in a large bowl. She randomly selects 20 stocks and will put every other one chosen into her 10-stock portfolio. The analyst used: A)dual random sampling. B)simple random sampling. C)stratified random sampling.

B, each item has equal chance of being selected

If the demand curve for a given product is a straight line with a slope of -5, this indicates that: A)demand is unit elastic. B)demand is more elastic at higher prices. C)elasticity is constant along the demand curve.

B, elasticities will be greater (in absolute value) at higher prices

According to the quantity theory of money, if nominal GDP is $7 trillion, the price index is 150, and the money supply is $1 trillion, then the velocity of the money supply is closest to: A)10.5. B)7.0. C)4.7.

B, equation of exchange in MV=PY nominal GDP = PY, the equation here would be... (1.0T)(V)=$7 trillion

Which type of unemployment describes situations where qualified workers are not immediately matched with existing job openings? A)Cyclical. B)Frictional. C)Structural.

B, fictional prevents qualified workers from being immediately matched with existing job openings causes are imperfect information

Firms in a perfectly competitive industry will increase their output until which of the following conditions is met? A)Total revenue equals price. B)Marginal cost equals price. C)Marginal revenue equals average total cost.

B, for perfect competition, MC=P perfect competition, price is a horizontal line so MR is constant

A bank loan department is trying to determine the correct rate for a 2-year loan to be made two years from now. If current implied Treasury effective annual spot rates are 1-year = 2%, 2-year = 3%, 3-year = 3.5%, and 4-year = 4.5%, the base (risk-free) forward rate for the loan before adding a risk premium is closest to: A)4.5%. B)6.0%. C)9.0%.

B, forward rate is (1.045⁴/1.03²)^0.5 - 1 = 6.02% or... (4.5(4-3(2))/2 = 6 spot rate is geometric mean of forward rates

Which of the following risk management strategies is most accurately described as shifting a risk? A)A retail store owner buys a fire insurance policy on the building. B)A farmer takes a short position in a futures contract to deliver wheat. C)A portfolio manager diversifies her investments across different industries.

B, hedging price risk with derivatives contract would be shifting risk

Which of the following statements regarding confidence intervals is most accurate? A)The higher the significance level, the wider the confidence interval. B)The lower the significance level, the wider the confidence interval. C)The lower the degree of confidence, the wider the confidence interval.

B, higher degrees of confidence means a wider confidence interval, degree of confidence= 1 - significance level the higher the DOC the lower the significance level

Which of the following bonds would appreciate the most if the yield curve shifts down by 50 basis points at all maturities? A)4-year 8%, 8% YTM. B)5-year 8%, 7.5% YTM. C)5-year 8.5%, 8% YTM.

B, higher duration will benefit most from decreases in rates, lower coupon+lower YTM+longer maturity=higher duration

The most effective way to assess the impact of a potential merger on the market structure of an industry is to: A)calculate the n-firm concentration ratio. B)calculate the Hirfindahl-Hirschman Index. C)analyze barriers to entry.

B, hirf-hirsch index (mergers): firm1%² + firm2%² + firm3%² n-firm concentration: sum/% market shares of largest n firms in market

Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it is probable that $2,000,000 of the deferred tax asset's value will never be realized because of the uncertainty about future income. Under U.S. GAAP, Graphics, Inc. should: A)reduce the deferred tax asset account by $2,000,000. B)establish a valuation allowance of $2,000,000. C)establish an offsetting deferred tax liability of $2,000,000.

B, if portion of DTA will not be realized then valuation allowance should be created,

Inflation resulting from a decrease in taxes is most likely: A)stagflation. B)demand-pull inflation. C)cost-push inflation.

B, increase in aggregate demand from a higher disposable income from decrease in taxes is demand-pull inflation cost-push: decrease in supply of goods/services stemming from increase in cost of production demand-pull: increase in demand from households, business, gov, and or foreign buyers

If X and Y are independent events, which of the following is most accurate? A)P(X or Y) = (P(X)) × (P(Y)). B)P(X | Y) = P(X). C)P(X or Y) = P(X) + P(Y).

B, independent means no influence on each other

Over a period of one year, an investor's portfolio has declined in value from 127,350 to 108,427. What is the continuously compounded rate of return? A)-13.84%. B)-16.09%. C)-14.86%.

B, ln(108,427/127,350) or ln(1+r)

Which of the following statements about the arithmetic mean is least accurate? A)The arithmetic mean is the only measure of central tendency where the sum of the deviations of each observation from the mean is always zero. B)If the distribution is skewed to the left then the mean will be greater than the median. C)The arithmetic mean of a frequency distribution is equal to the sum of the class frequency times the midpoint of the frequency class all divided by the number of observations.

B, mean will be LESS than median

A hedge fund with a 2 and 20 fee structure has a hard hurdle rate of 5%. If the incentive fee and management fee are calculated independently and the management fee is based on beginning-of-period asset values, an investor's net return over a period during which the gross value of the fund has increased 22% is closest to: A)16.4%. B)16.6%. C)17.0%.

B, mgmt fee is 2% of beg. assets so... 22% return moves to 20%, 20% incentive fee is of excess gross return over hurdle rate, 22%-5%=.17%*20%=3.4%. 20%-3.4%=16.6% HWM: incentive fee calculated based on gains in value above beg. bal,

If the money interest rate is measured on the y-axis and the quantity of money is measured on the x-axis, the money supply curve is: A)upward sloping to the upper right. B)vertical. C)downward sloping to the lower right.

B, money supply is not affected by changes in interest rate (only determined by monetary authorities)

The demand curves faced by monopolistic competitors is: A)not sensitive to price due to absence of close substitutes. B)elastic due to the availability of many close substitutes. C)inelastic due to the availability of many complementary goods.

B, monopolistic competitors have MANY close substitutes

Many analysts prefer to use Monte Carlo simulation rather than historical simulation because: A)computers can manipulate theoretical data much more quickly than historical data. B)past distributions cannot address changes in correlations or events that have not happened before. C)it is much easier to generate the required variables.

B, monte carlo can model based on parameters not limited to past experiences

Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand. He makes the following assertions: Statement 1: For most goods, demand is more elastic in the long run than the short run. Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market. With respect to Bawerk's statements: A)only statement 1 is correct. B)both are correct. C)only statement 2 is correct.

B, more elastic in long run than short run because individuals can make long-term decisions that require different quantities of a good

Which of the following statements about parametric and nonparametric tests is least accurate? A)The test of the difference in means is used when you are comparing means from two independent samples. B)Nonparametric tests rely on population parameters. C)The test of the mean of the differences is used when performing a paired comparison.

B, nonparametric is not concerned with parameters, they make minimal assumptions about the population where sample is from, difference of means: means of differences: parametric tests: distributional assumptions

Which of the following statements describes a limitation of Monte Carlo simulation? A)Simulations do not consider possible input values that lie outside historical experience. B)Outcomes of a simulation can only be as accurate as the inputs to the model. C)Variables are assumed to be normally distributed but may actually have non-normal distributions.

B, output can only be as accurate as assumptions the analyst makes about range and distribution

If the price elasticity of demand for a good is -4.0, then a 10% increase in price would result in a: A)10% decrease in the quantity demanded. B)40% decrease in the quantity demanded. C)4% decrease in the quantity demanded.

B, price elasticity of demand = (%change in QD/% change in price)

An investor purchased 550 shares of Akley common stock for $38,500 in a margin account and posted initial margin of 50%. The maintenance margin requirement is 35%. The price of Akley, below which the investor would get a margin call, is closest to: A)$45.00. B)$54.00. C)$59.50.

B, price for margin call: P0*(1-initial margin/1-maintenance margin)

Which of the following is an a priori probability? A)For a stock, based on prior patterns of up and down days, the probability of the stock having a down day tomorrow. B)On a random draw, the probability of choosing a stock of a particular industry from the S&P 500. C)The probability the Fed will lower interest rates prior to the end of the year.

B, priori probability is based on formal reasoning and inspection, specific sp500 industry

The probability density function of a continuous uniform distribution is best described by a: A)line segment with a curvilinear slope. B)horizontal line segment. C)line segment with a 45-degree slope.

B, probability density function of a continuous uniform distribution is a horizontal line segment

The IS curve illustrates the: A)direct relationship between investment and savings. B)inverse relationship between real interest rates and income. C)inverse relationship between income and the price level.

B, slopes downward and shows inverse relationship between real interest rate and income equilibrium

Consumer price indexes are least likely to: A)compare current prices to prices in a base year. B)be calculated for stages of processing. C)reflect the typical purchasing patterns of consumers.

B, stages of processing are components of producer price indexes CPI compares current prices of typical consumption basket to a base year

Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement. He believes he will need $37,000 at the beginning of each year for 25 years of retirement, with the first withdrawal on the day he retires. Ralph assumes that his investment account will return 8%. The amount he needs to deposit at the beginning of this year and each of the following 14 years (15 deposits in all) is closest to: A)$1,350. B)$1,450. C)$1,550.

B, switch to BGN mode, 1. find out how much you need 2. set that as FV and calculate PMT

Depreciation of a country's currency is most likely to narrow its trade deficit when: A)its imports are greater in value than its exports. B)price elasticity of import demand is greater than one. C)investment increases relative to private and government savings.

B, the more elastic import/export demand are, the more likely currency depreciation narrows trade defecit

If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time? Exports relative to imports, Savings relative to investment A)exports < imports, private savings < private investment B)exports > imports, private savings < private investment C)exports < imports, private savings > private investment

B, trade deficit must be finance by one or both of these things

An individual has just purchased a home by taking on a 30-year fixed rate mortgage. She would benefit most from this transaction if future inflation rates are: A)lower than anticipated. B)higher than anticipated. C)exactly as anticipated.

B, transfer of wealth from lender to borrower (you), you locked in at fixed rate but money gets more valuable so you pay less

A local bank advertises that it will pay interest at the rate of 4.5%, compounded monthly, on regular savings accounts. What is the effective rate of interest that the bank is paying on these accounts? A)4.50%. B)4.59%. C)4.65%.

C

Colonia has only two political parties, the Wigs and the Wags. If the Wags are elected, there is a 32% probability of a tax increase over the next four years. If the Wigs are elected, there is a 60% probability of a tax increase. Based on the current polls, there is a 20% probability that the Wags will be elected. The sum of the (unconditional) probability of a tax increase and the joint probability that the Wigs will be elected and there will be no tax increase are closest to: A)55%. B)70%. C)85%.

C

Given the following hypothesis: The null hypothesis is H0 : µ = 5 The alternative is H1 : µ ≠ 5 The mean of a sample of 17 is 7 The population standard deviation is 2.0 What is the calculated z-statistic? A)4.00. B)8.00. C)4.12.

C

Michael Philizaire is studying for the Level I CFA examination. During his review of measures of central tendency, he decides to calculate the geometric average of the appreciation/deprecation of his home over the last five years. Using comparable sales and market data he obtains from a local real estate appraiser, Philizaire calculates the year-to-year percentage change in the value of his home as follows: 20, 15, 0, -5, -5. The geometric return is closest to: A)0.00%. B)11.60%. C)4.49%.

C

Sources of long-run economic growth most likely include increases in: A)government spending, labor supply, and physical capital. B)human capital, money supply, and natural resources. C)labor supply, physical capital, and technology.

C

If the price elasticity of demand is -2 and the price of the product decreases by 5%, the quantity demanded will: A)decrease 2%. B)increase 5%. C)increase 10%.

C,

The unconditional probability of an event, given conditional probabilities, is determined by using the: A)multiplication rule of probability. B)addition rule of probability. C)total probability rule.

C,

Which of the following is determined by the equilibrium between the demand for money and the supply of money? A)Inflation rate. B)Money supply. C)Interest rate.

C,

Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to: A)help the government achieve a balanced budget. B)enable the government to control the money supply. C)exert a stabilizing influence on an economy.

C,

A stock price decreases in one period and then increases by an equal amount in the next period. The investor calculates a holding period return for each period and calculates their arithmetic mean. The investor also calculates the continuously compounded rate of return for each period and calculates the arithmetic mean of these. Which of the arithmetic means will be greater? A)Neither, because both will equal zero. B)The mean of the continuously compounded returns. C)The mean of the holding period returns.

C, HPR: 100-90 is (10%), but 90-100 is 11.11% Continuously: ln(90/100) = -10.54% ln(100/90) = 10.54%

An analyst wants to determine whether the monthly returns on two stocks over the last year were the same or not. What test should she use, assuming returns are normally distributed? A)Difference in means test. B)Chi-square test. C)Paired comparisons test.

C, difference in means test: requires samples to be independent (they are in same time period) chi-square test: compares variances of two samples

The average amount of snow that falls during January in Frostbite Falls is normally distributed with a mean of 35 inches and a standard deviation of 5 inches. The probability that the snowfall amount in January of next year will be between 40 inches and 26.75 inches is closest to: A)68%. B)87%. C)79%.

C, 1. z value = (observation-mean)/sd 2. 45 right of mean +34 left of mean = 79%

95% CI, sample 40, sample mean 4%, sample sd 15%, what's the CI? A)1.261% to 6.739%. B)-0.851% to 8.851%. C)-0.794% to 8.794%.

C, SE: .15/√40 = 0.02372 t table: 2.021 .04+-2.021(0.02372)

If X has a normal distribution with μ = 100 and σ = 5, then there is approximately a 90% probability that: A)P(90.2 < X < 109.8). B)P(93.4 < X < 106.7). C)P(91.8 < X < 108.3).

C, 100+- 1.65(5) = 91.75 to 108.25

An analyst has a list of 20 bonds of which 14 are callable, and five have warrants attached to them. Two of the callable bonds have warrants attached to them. If a single bond is chosen at random, what is the probability of choosing a callable bond or a bond with a warrant? A)0.55. B)0.70. C)0.85.

C, 14/20 + 5/20 - 2/20

A casual laborer has a 70% chance of finding work on each day that she reports to the day labor marketplace. What is the probability that she will work three days out of five? A)0.6045. B)0.3192. C)0.3087.

C, 5nd nCr 3 x .7³ x .3² .7³ is prob of finding work .3² is prob of not finding work

An analyst is comparing two firms, one that reports under IFRS and one that reports under U.S. GAAP. An analyst is least likely to do which of the following to facilitate a comparison of the companies? A)Add the LIFO reserve to inventory for a United States-based firm that uses LIFO. B)Adjust the values of assets reported using the revaluation model. C)Adjust the income statement of one of the firms if both have significant unrealized gains or losses from changes in the fair values of trading securities.

C, LIFO is not permitted under IFRS, revaluation is permitted under IFRS but not GAAP (revaluation is asset value to fair value), unrealized gains and losses are reported on the income statement for both IFRS and GAAP so it would be the same

The following information is summarized from Famous, Inc.'s financial statements for the year, which ended December 31, 20X0: Sales were $800,000. Net profit margin was 20%. Sales to assets was 50%. Equity multiplier was 1.6. Interest expense was $30,000. Dividends declared were $32,000. Famous, Inc.'s sustainable growth rate based on results from this period is closest to: A)3.2%. B)8.0%. C)12.8%.

C, ROE=16% Retention rate=0.8 retention rate= 1-div payout ratio Retention rate × Return on equity

Cameron Ryan wants to make an offer on the condominium he is renting. He takes a sample of prices of condominiums in his development that closed in the last five months. Sample prices are as follows (amounts are in thousands of dollars): $125, $175, $150, $155 and $135. The sample standard deviation is closest to: A)370.00. B)38.47. C)19.24.

C, [(x1-avg)² + (x2-avg)²] / n-1 but MAKE SURE TO TAKE SQRT OF VARIANCE TO GET SD

Jo Su believes that there should be a negative relation between returns and systematic risk. She intends to collect data on returns and systematic risk to test this theory. What is the appropriate alternative hypothesis? A)Ha: ρ > 0. B)Ha: ρ ≠ 0. C)Ha: ρ < 0.

C, alternative is opposite of null, the null is positive...so...

An asset's tax base is most accurately described as the: A)tax-deductible expense that appears in the tax return in a given period. B)amount of the asset that will not be expensed through the tax return in the future as the economic benefits of the asset are realized. C)amount of the asset to be expensed through the tax return in the future as the economic benefits of the asset are realized.

C, amounts that will be expensed through tax return in future periods

Balfour Corp. is in the food distribution business and has a beta of 1.1, a marginal tax rate of 34%, and a debt-to-assets ratio of 40%. Balfour management is evaluating an entry into the fast-casual restaurant business. They have identified a publicly traded company in the fast-casual restaurant industry that has an equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity ratio of 40%. The appropriate beta for Balfour to use in calculating the cost of equity capital for the analysis of the potential entry into the restaurant business is closest to: A)1.15. B)1.30. C)1.45.

C, basset and bproject, basset: bequity(1/1+(1-t)(d/e) bproject: basset[1+(1-t)(D/E)] d/a to d/e = d/e / (1-d/e)

An analyst has compiled stock returns for the first 10 days of the year for a sample of firms and estimated the correlation between these returns and changes in book value for these firms over the just ended year. What objection could be raised to such a correlation being used as a trading strategy? A)Use of year-end values causes a time-period bias. B)Use of year-end values causes a sample selection bias. C)The study suffers from look-ahead bias.

C, because traders in beginning of year would not know the book value changes

Which of the following could be the set of all possible outcomes for a random variable that follows a binomial distribution? A)(1, 2). B)(-1, 0, 1). C)(0, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11).

C, binomial distributions must start at zero and go up to upper limit

If a central bank's targeted inflation rate is above the current rate, the central bank is most likely to: A)increase the overnight lending rate. B)increase the reserve requirement. C)buy government securities.

C, buy gov securities increases money supply and allows inflation to increase to targeted range buying gov securities is an expansionary action

Which of the following statements about achieving proper timing in fiscal policy is least accurate? A)Policy errors are inevitable due to unpredictable events. B)There is usually a time lag between when a change in policy is needed and when the need is recognized by policy makers. C)Improvements in quantitative methods have made the occurrence of recessions or expansions quite predictable.

C, can't really predict recessions or expansions

The covariance of returns on two investments over a 10-year period is 0.009. If the variance of returns for investment A is 0.020 and the variance of returns for investment B is 0.033, what is the correlation coefficient for the returns? A)0.687. B)0.444. C)0.350.

C, cc=Cov(A,B,)/sdA*sdB

A conditional expectation involves: A)calculating the conditional variance. B)determining the expected joint probability. C)refining a forecast because of the occurrence of some other event.

C, conditional expectation values are contingent upon the occurrence of another event, expectation changes with new information

Contractionary monetary policy is least likely to decrease consumption spending by decreasing: A)expectations for economic growth. B)securities prices. C)the foreign exchange value of the currency.

C, contractionary monetary policy leads to increase in interest rates which increases the value of the dollar which decreases foreign investment

A multivariate normal distribution that includes three random variables can be completely described by the means and variances of each of the random variables and the: A)conditional probabilities among the three random variables. B)correlation coefficient of the three random variables. C)correlations between each pair of random variables.

C, correlation measures the strength between a pair of random variables

An economy with a consistently negative inflation rate is best described as experiencing: A)hyperinflation. B)disinflation. C)deflation.

C, deflation: sustained decline in price level, disinflation: decrease in inflation rate over time but does NOT imply NEGATIVE hyperinflation is brazy high accelerating inflation

If both aggregate demand and short-run aggregate supply decrease, the price level: A)will increase. B)will decrease. C)may increase or decrease.

C, depends on sizes of decrease

When the economy enters an expansion phase, the most likely effect on external trade is a(n): A)increase in exports. B)decrease in exports. C)increase in imports.

C, domestic incomes will increase so they will import more stuff, exports tend to be independent of domestic economic growth

Gross domestic product includes the value of all goods: A)purchased during the measurement period. B)produced and purchased during the measurement period. C)produced during the measurement period.

C, everything produced in the period is in GDP, purchases may be from good previously produced so that's no good

Which of the following factors is most likely to increase long-run aggregate supply? A)Wage rates increase. B)Aggregate demand decreases. C)The average rate of labor productivity increases.

C, factors that shift LAS to right are technology and productivity improvements wage rate changes shit in SAS but NOT LAS decline in demand would move down LAS but not shift

An analyst conducts a two-tailed test to determine if mean earnings estimates are significantly different from reported earnings. The sample size is greater than 25 and the computed test statistic is 1.25. Using a 5% significance level, which of the following statements is most accurate? A)The analyst should reject the null hypothesis and conclude that the earnings estimates are significantly different from reported earnings. B)To test the null hypothesis, the analyst must determine the exact sample size and calculate the degrees of freedom for the test.

C, fail to reject null because t-stat of 1.25 falls inbetween +-1.96

Given the following probability distribution, find the covariance of the expected returns for stocks A and B. EventP(Ri)RARB Recession 0.10,-5%,4% Below Average 0.30,2%,8% Normal 0.50,10%,10% Boom 0.10,31%,12% A)0.00032. B)0.00109. C)0.00174.

C, finding covariance is the aids one 1. avg weighted returns 2. subtract each event return for A and B by the weighted avg return, multiply these and also multiply by weight, sum all the events up

For a normal distribution, what approximate percentage of the observations fall within ±3 standard deviation of the mean? A)66%. B)95%. C)99%.

C, for normal distributions, 99% of observations fall within +-3 SD of the mean

The relationship between savings (S), investment (I), government spending (G), government tax revenue (T), exports (X), and imports (M) is: A)(G - T) = (S - I) + (X - M). B)(X - M) = (S - I) + (G - T). C)(S - I) = (G - T) + (X - M).

C, fundamental relationship between savings to investment, fiscal balance, and trade balance fiscal balance = (G-T)=(S-I)-(X-M) trade balance = (X-M)=(S-I)-(G-T)

Train Company paid $8,000,000 to acquire a franchise at the beginning of 20X5 that was expensed in 20X5. If Train had elected to capitalize the franchise as an intangible asset and amortize the cost of the franchise over eight years, what effect would this decision have on Train's 20X5 cash flow from operations (CFO) and 20X6 debt-to-assets ratio? A)Both would be higher with capitalization. B)Both would be lower with capitalization. C)One would be higher and one would be lower with capitalization.

C, if amortized the $8M would be as CFI instead of CFO, the asset created by capitalizing the cost would increase asset to debt-to-assets would decrease

Firms' initial responses to an emerging economic contraction are most likely to be: A)laying off workers. B)deferring maintenance of machinery. C)reducing overtime hours.

C, in contraction, initially firms start by giving less OT hours but later if it's worse progress to layoffs and deferring maintenance of machinery

If both aggregate demand and short-run aggregate supply increase, real GDP: A)may increase or decrease. B)will decrease. C)will increase.

C, increase or decrease in overall price level but gdp would still rise

Which of the following amounts is least likely to be subtracted from gross domestic product in order to calculate national income? A)Capital consumption allowance. B)Statistical discrepancy. C)Indirect business taxes.

C, indirect business taxes is INCLUDED in the calculation of national income

There is a 40% chance that an investment will earn 10%, a 40% chance that the investment will earn 12.5%, and a 20% chance that the investment will earn 30%. What is the mean expected return and the standard deviation of expected returns, respectively? A)17.5%; 5.75%. B)15.0%; 7.58%. C)15.0%; 5.75%.

C, mean>use mean to find var>make sure to use weights when finding var .4(10-15)², make sure to sqrt

Compared to a competitive market, a monopoly situation will produce: A)more output, and the sum of the consumer surplus and the producer surplus will be reduced. B)less output, and the sum of the consumer surplus and the producer surplus will be increased. C)less output, and the sum of the consumer surplus and the producer surplus will be reduced.

C, monopolist will decrease output to the point that MR=MC and surpluses will be reduced

For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one bond defaults is independent of whether another bond defaults. For a portfolio of five of these junk bonds, what is the probability that zero or one bond of the five defaults in the year ahead? A)0.0819. B)0.4096. C)0.7373.

C, n=5, p=.2 we want P(0) and P(1) P(0): 0.8⁵=0.32768 P(1): 5*0.8⁴*0.2=0.40960 0.327+0.4096=0.73728

An analyst is evaluating the degree of competition in an industry and compiles the following information: Few significant barriers to entry or exit exist. Firms in the industry produce slightly differentiated products. Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the industry. The analyst should characterize the competitive structure of this industry as: A)oligopoly. B)monopoly. C)monopolistic competition.

C, oligopoly: firms highly dependent on each others decisions

Which of the following changes in a firm's working capital management is most likely to result in a shorter operating cycle? A)Reducing stock-outs by carrying greater quantities of inventory. B)Stretching its payables by paying on the last permitted date. C)Changing its credit terms for customers from 2/10, net 60 to 2/10, net 30.

C, operating cycle=avg days of receivables + avg days of inventory. 2/10 net 60 means 2% discount if paid in 10 days, if not everything is due in 60 days

The industry that is classified the more cyclical sector under a commercial industry classification scheme is: A)personal care products. B)food. C)apparel.

C, personal care and food are consumer staples, while apparel is consumer discretionary and more cyclical

Which of the following statements about hypothesis testing is most accurate? A)If you can disprove the null hypothesis, then you have proven the alternative hypothesis. B)The power of a test is one minus the probability of a Type I error. C)The probability of a Type I error is equal to the significance level of the test.

C, power of test is 1-type II error, hypothesis testing does not prove a hypothesis but actually rejects or fails to reject a null

Steve Walker, CFA, is attending an economics lecture, during which the lecturer makes the following two statements about consumer price inflation: Statement 1: High-definition televisions are considerably more expensive than traditional models. This means consumers are spending more money per television unit, which represents a form of inflation. Statement 2: Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages as much as the increase in the cost of living because of biases in the price index. Should Walker agree or disagree with these statements? Statement 1, Statement 2 A)Agree, Agree B)Disagree, Agree C)Disagree, Disagree

C, price change from quality of good does not mean inflation,

If the price elasticity of demand is -1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price? A)-0.375%. B)-6.000%. C)-2.667%.

C, price elasticity of demand is %changeQD/%changeprice so do the algebra

Which of the following market indexes is likely to be rebalanced most frequently? An index that is: A)price weighted. B)value weighted. C)equal weighted.

C, price weighted: avg of prices, equal weighted: avg return, value weighted: new mkt cap - old/old

The least appropriate measure of risk for alternative investments is: A)value at risk (VaR). B)the Sortino ratio. C)variance of returns.

C, returns are not normal and are leptokurtic, returns are smoothed by appraisal models so sd is understated

An analyst has estimated that the returns for an asset, conditional on the performance of the overall economy, are: ReturnProbabilityEconomic Growth5%20%Poor10%40%Average14%40%Good The conditional expected returns on the market portfolio are: ReturnProbabilityEconomic Growth2%20%Poor10%40%Average15%40%Good According to the CAPM, if the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to the market portfolio, the analyst should: A)sell (or sell short) the risky asset because its expected return is less than equilibrium expected return on the market portfolio. B)buy the risky asset because the analyst expects the return on it to be higher than its required return in equilibrium. C)sell (or sell short) the risky asset because its expected return is not sufficient to compensate for its systematic risk.

C, risky asset return: 10.6% market return : 10.4 capm return: 10.94 since risky asset is less than required return you should sell... because return is not sufficient to compensate for risk

As an economic expansion approaches its peak, the economy is most likely to show: A)a decrease in inventory levels. B)accelerating sales growth. C)an increase in the inventory-to-sales ratio.

C, sales growth begins to slow and unsold inventories accumulate

Which of the following statements about probability distributions is least accurate? A)Continuous uniform distributions have cumulative distribution functions that are straight lines from zero to one. B)The probability that a continuously distributed random variable will take on a specific value is always zero. C)A normally distributed random variable divided by its standard deviation will follow a standard normal probability distribution.

C, standard normal distribution has mean of zero,

Adams owns 100 shares of Brikley stock, which is trading at $86 per share, and Brown is short 200 shares of Brikley. Adams wants to buy 100 more shares if the price rises to $90, and Brown wants to cover his short position and take profits if the price falls to $75. The orders Adams and Brown should enter to accomplish their stated objectives are: AdamsBrown A)Limit buy @ 90Limit buy @ 75 B)Limit buy @ 90Stop buy @ 75 C)Stop buy @ 90Limit buy @ 75

C, stop buy: executed only if price rises to certain amount, limit buy: executed at or below certain price

When the economy is operating at the natural rate of unemployment, it is most likely that: A)inflation is accelerating. B)frictional unemployment is absent. C)structural unemployment is present.

C, structural and frictional unemployment are always present

Policies that can be used as tools for redistribution of wealth and income include: A)both fiscal policy and monetary policy. B)monetary policy only. C)fiscal policy only.

C, they use taxation and spending policies

One way in which monopolistic competition can be distinguished from perfect competition is that in monopolistic competition: A)marginal revenue is greater than marginal cost at the quantity produced. B)each firm faces a perfectly elastic demand curve. C)price is greater than marginal cost.

C, under perfect competition price=MC, firms in monopolistic competition are price searchers

The difference between a convertible bond and a bond with warrants is that a bondholder who exercises warrants: A)does not pay cash for the common stock. B)obtains common stock at a lower price per share. C)continues to hold the bond after exercising the warrants.

C, warrants let you buy shares at predetermined price,

The open market sale of Treasury securities by the Federal Reserve is least likely to result in: A)increased longer-term interest rates. B)a decreased rate of inflation. C)increased exports of U.S. goods.

C, when fed sells treasuries interest rates increase and cause dollar to appreciate, this reduces foreign demand for goods and exports decline

Capital consumption allowance and Statistical discrepency

CCA: estimate of depreciation during measurement period Statistical Discrepancy: adjustment to GDP when measured using income approach

FCFE

CFO - capex plus/minus net borrowing

Core inflation and Headline inflation

Core: excludes food and energy prices because too volatile Headline: all goods and services

Current, Capital and Financial

Current: merchandise/services/income receipts/unilateral transfers Capital: capital transfers/sales and purchases of non-financial assets Financial Account: gov.-owned assets abroad, foreign-owned assets in country

Direct vs. Indirect

Direct: cash inflow/outflow related to cash receipts and payments shown Indirect: reconciles net income (starting point) with cfo and shows reasons for differences (cash is king so you want to look at cash flow more than net income)

Aggregate demand curve shows

GDP plotted against price level,

Giffen & Vablen

Giffen: demand to good rises when price rises and falls when price falls, non-luxury w/ few substitutes Veblen: demand increases as price increases, so does QD, high-quality, coveted product, exclusive products, BOGO

Kurtosis and Skewness

Kurtosis: measure of peakedness and probability of extreme outcomes Skewness: degree to which a distribution is not symmetric about its mean

Changes in price level represent a ________ along short-run aggregate supply curve, while something like the rising price of steel will cause the SRAS to shift ____

Movement, Shift

FCFF

Net Income + Non Cash Charges + [Interest Expense * (1 - Tax rate)] - Fixed capital Investment - Working Capital Investment CFO + Interest(1-tax) - Capex

Addition Rule of Probability

P(A or B) = P(A) + P(B) - P(AB)

A stock recently paid a dividend of $1.50 which is expected to grow at 8% per year. The required rate of return of 12%. Calculate the value of this stock assuming that it will be priced at $51.00 three years from now.

PV of divs (4.19)>+51/1.12³

Sharpe, Treynor

Sharpe: investment's return compared to its risk (Rp-Rf/sd port), slope of CAL, Treynor: excess returns generated for each unit of risk beta/systematic risk (Rp-Rf/beta)

Level of Sig 10%, 5%, 1%

Two Tailed: 1.65, 1.96, 2.58 One Tailed: 1.28, 1.65, 2.33

Downside risk measures for alternative investments

Value at risk (VaR): estimate of size of potential decline over a period Sortino Ratio: measures downside deviation rather than standard deviation

Production function

Y = A × ƒ(L, K) y: output L: labor quantity K: amount of capital available A: total factor productivity

Forward to Spot

approx. 2y2y s2=6% and s4=8% 4x8%-2x6%=20/2=10%

how do we treat flotation costs?

attribute to project and treat as part of initial cash outflow, one-time expense

Harmonic Mean

avg price per share (n)/[(1/x1)+(1/x2)+(1/x3)]

Inventory Turnover Ratio

cost of goods sold/average inventory

IRR and NPV

discount rate that equates project's initial cost with pv of future expected cash flows difference between PV of cash inflows and outflows

Spot to Forward

geometric mean 2+3+4/3 = 3

Which NPV do you choose

higher NPV

what will happen to economy if both gov spending and taxes are increased by the same amount?

real GDP will increase because the multiplier effect is stronger for gov expenditures vs. gov taxes. Excess money from gov will be used as increased expenditure and only a portion of tax increase will result in lessened expenditure.

IFRS R&D

research costs are expensed as incurred, dev costs may be capitalized under GAAP they're both expensed as incurred

m²

risk adjusted return of portfolio Sharpe ratio * sd benchmark + rf

What does it say about a firm when they use secondary financing?

signal that the company's financial position is deteriorating, examples are: renegotiating debt contracts, liquidating assets, filing for bankruptcy

AI

systems that can be programmed to stimulate human cognition (neural networks)

non-normal, 0.75, n=100 normal, 5.6, 75 non-normal, n/a, 15 normal, n/a, 18 non-normal, 14.5, 15

z, z, none, t, none