fin360 exam prep
What is the effective annual yield on an investment whose 30-day holding period yield is 1.534%?
(1+.01534)^(365/30)=1.20348 -1 = .20348
A money market security with 119 days to maturity and priced at 97.28 has a bond equivalent yield of
(100-97.28)/97.28 = .02796 *(365/119) = .08576
Ben Gupta bought a stock at the beginning of the year for $29.1 per share. The stock paid dividends of $0.8 per share for the year. If the stock is trading at $25.7 per share at the end of the year Ben's holding period return is closest to:
(25.7-29.1+.8)/29.1 = -.0893
If the degrees of freedom are 24 and the level of significance is 5 percent, the critical t-value is:
+/- 2.064
Suppose Joe Investor is adding another security to his portfolio. If Joe wants to achieve the most benefit from diversification, he should add, if possible, an investment that has which of the following correlation coefficients with the other investments in his portfolio?
-1.0 The most benefit is from adding securities that have the lowest correlation. The best diversification is achieved from securities that have a perfect negative correlation (that is, correlation coefficient = -1).
The Able Bank has paid interest on deposit accounts at a rate of 1 percent per year, compounded continuously. If Able Bank has $100 million of deposit accounts and raises interest on these accounts to 1.5 per year, compounded continuously, the amount of increased interest that Able Bank will pay in interest each year is closest to:
.51 million
Consider the sample statistics for two samples, Sample A and Sample B: Mean: A=4 B=4 std dev: A=1 B=6 # of observations: A=2 B=7 If we assume that the variances are unequal, the value of the test statistic to test whether the means of the two populations are the same is __________.
0
If the variation in an independent variable does not explain the variation in the dependent variable in a regression, we expect the slope coefficient on that variable to not differ from:
0
Willard Billingsley is valuing a call option for a stock. The exercise price is $45 and the option can be exercised in two years. The underlying stock has a current price of $40 per share. If the stock's price increases, it is expected to increase by 40%; if the stock's price decreases, it is expected to decrease by 30%. The risk free rate of interest is 5 percent. What is the value of the call in two years if the stock price goes up in the first period and down in the second?
0
Given the following statistics: Covariance of the returns of stocks A and B: 0.001 variance of the returns on stock A: 0.001 variance of the returns on stock B: 0.001 number of observations: 31 what is the correlation of the stock returns of A and B?
1
Of the following investments, which would a risk averse person prefer? 1. expected return of 12% and a standard deviation of 11% 2. expected return of 10% and a standard deviation of 11% 3. expected return of 12% and a standard deviation of 12%
1
The beta of a stock with average market risk will be _______ . Over time, market model betas of individual stocks tend to revert to ______ .
1. 1 2. 1
Stock X has a beta of 1.5 and Stock Y has a beta of 0.5. Which of the following statements is true regarding Stocks X and Y? Indicate all that are true.
1. A portfolio comprising 50% of Stock X and 50% of Stock Y will have a beta of 1.0 2. Stock Y has lower systematic risk than Stock X. 3. If the market's return increases by 1%, we expected the return of Stock X to increase by 1.5%.
The covariance of returns on Asset A and Asset B is negative. Which of the following statements is true?
1. As the returns on Asset A increase, the returns on Asset B tend to decline. 2. The correlation between Asset A's returns and those of Asset B is negative
Which of the following is considered a multifactor model?
1. Fundamental factor model 2. Macroeconomic factor model 3. Statistical factor model
Which of the following statements is correct regarding the following estimated regression (indicate all that apply): Y = 0.01 + .785 X
1. If X has a value of zero, the value of Y is 0.01. 2. If X has a value of -1, Y has a value of -0.775. 3. The elasticity of Y with respect to X is 0.785. 4. A one unit change in X will produce a 0.785 unit change in Y.
Which of the following is a correct statement?
1. If the p-value of a test statistic is less than the level of significance, we reject the null hypothesis. 2. The coefficient of determination is the ratio of the sum of squares regression (RSS or SSR) to the total sum of squares of the dependent variable (SST). 3. 1 -R^2 is the variation in the dependent variable that is not explained by the independent variable. 4. The t-statistic for the test of the correlation of X & Y is the same value as the t-statistic for the test of the slope in the regression of Y on X.
What are true assumptions of multiple regression?
1. Independent variables are uncorrelated. 2. The expected value of the residuals is zero. 3. The residuals are not related to any of the independent variables
Which of the following statements is true?
1. Investors are compensated for the market risk of their portfolio. 2. The risk of a portfolio declines as assets whose returns are not perfectly correlated with those of the assets already in the portfolio are added. 3. if the covariance of the returns of two securities is zero, the correlation of the returns of the two securities is also zero.
buying on margin
1. Optimistic about the stock's future price 2. Borrowing funds to purchase shares
Which of the following is an assumption of least squares, simple regression?
1. Residuals are homoskedastic 2. The relationship between the dependent and independent variable is linear 3. The mean of the residuals is zero. 4. The residual for one observation is uncorrelated with residuals of another observation.
Stock X has a beta of 1.5 and Stock Y has a beta of 0.5. Which of the following statements is true regarding Stocks X and Y?
1. Stock Y has lower systematic risk than Stock X. 2. If the market's return increases by 1%, we expected the return of Stock X to increase by 1.5%. 3. A portfolio comprising 50% of Stock X and 50% of Stock Y will have a beta of 1.0
Which of the following statements is correct?
1. The R-squared of the regression of Y on X is the square of the bivariate correlation of Y and X. 2. If two variables Y and X have a statistically significant Pearson correlation, the regression of Y on X will have a statistically significant slope. 3. The Spearman correlation coefficient is the correlation of the ranks of two variables.
An analyst is testing whether the mean debt-equity ratio of an industry is different from 1.0. She collects a sample of 42 companies in the industry and forms a 95% confidence interval using the sample data: {0.90, 0.98}. Based on this information, which of the following statements is correct?
1. The absolute value of calculated test statistic for a test of hypothesis is greater than 2.020 2. Reject the null hypothesis
Which of the following statements is correct regarding the linear time trend estimation of this data? T: 1, 2, 3, 4, 5, 6, 7, 8 Vari: 20, 21, 24, 23, 21, 24, 26, 27
1. The coefficient of determination is less than 84%. 2. The slope is different from zero at the 5% level of significance. 3. The intercept is different from zero at the five percent level of significance. 4. The slope is different from zero at the 1% level of significance. 5. If time is 9, the forecasted value of the dependent variable is greater than 27 but less than 28.
what is incorrect about the standard deviation of a portfolio
1. The greater the diversification of a portfolio, the greater the standard deviation of that portfolio 2. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. 3. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.
Which of the following will result in a rejection of the null hypothesis?
1. The p-value corresponding to the calculated test statistic that is less than the level of significance. 2. A calculated t-value of 2.3 and critical t-values of -2.2 and +2.2. 3. A calculated t-value of 1.75 and a critical t-value of 1.64.
what is true about regression analysis?
1. The standard error of the regression is related mathematically to the standard error of the coefficient. 2. The slope of the dummy variable indicates the incremental amount of the dependent variable attributed to the condition in which the dummy variable takes on a value of one 3. The null hypothesis for the F-statistic is that all slope coefficients are equal to zero.
Dave Jones, a portfolio manager, is optimistic about the prospects of the DEF Company's stock, believing that it will increase by 25% this coming year. Which of the following actions can Jones take now that are consistent with this belief?
1. Write a put on DEF stock 2. Buy DEF stock on margin 3. Buy DEF stock 4. Buy a call option on DEF stock
The error of rejecting a true null hypothesis is:
1. a type I error 2. the level of significance 3. 1 less the confidence level
We can break down the active risk squared of a portfolio into:
1. active specific risk 2. active factor risk 3. security selection risk
The probability that the test statistic will fall inside rejection region due to chance alone is equal to:
1. alpha 2. one minus the confidence level 3. the significance level
With 0 representing today (the end of period 0), this is a depiction of __________ . Using a calculator and the correct setting for this type of annuity (BEG or END), the present value is at the end of period __________ and the future value is at the end of period _________
1. an ordinary annuity 2. 0 3. 7
Which of the following is a correct statement? For a given sample of returns, the
1. arithmetic mean return is greater than the harmonic mean return. 2. geometric mean return is greater than the harmonic mean return. 3. variation of returns is greater than the variance of returns.
match each model to the best description of its model
1. autoregressive 𝑥𝑡=𝑏0+𝑏1𝑥𝑡−1 2. linear trend 𝑦𝑡=𝑏0+𝑏1𝑡 3. log-linear model Ln 𝑦𝑡=𝑏0+𝑏1𝑡 4. moving average 𝑥𝑡=𝜀𝑡+𝜃𝜀𝑡−1 5. random walk 𝑥𝑡=𝑥𝑡−1+𝜀𝑡
The power of the test is the
1. compliment to the probability of a Type II error 2. likelihood of rejecting a false hypothesis
The power of the test is the ______________.
1. compliment to the probability of a Type II error 2. likelihood of rejecting a false hypothesis
translating a value today into a value sometime in the future is __________ , whereas translating a value in the future to a value today is _________
1. compounding 2. discounting
If the annual percentage rate of 12%, _______________ compounding will produce the highest effective annual rate and __________ compounding will produce the lowest effective annual rate.
1. continuous 2. annual
Which of the following is a desirable quality of a time series' residuals?
1. covariance stationary 2. homoskeastic residuals
Select the correct completion(s) for the following statement: All else equal, the more debt a firm uses, the greater will be its ...
1. degree of total leverage 2. degree of financial leverage
match the decision to the related description:
1. failing to reject a true hypothesis + confidence level 2. rejecting a true hypothesis + type I error 3. failing to reject a false hypothesis + type II error 4. rejecting a false hypothesis + power of the test
The time-weighted return is to the ___________ as the money-weighted return is to the ____________.
1. geometric return 2. internal rate of return
the following are false for a given sample of returns...
1. harmonic mean return is greater than the geometric mean return. 2. harmonic mean return is greater than the arithmetic mean return. 3. semideviation of the returns is greater than the standard deviation of the returns. 4. standard deviation of returns is larger than the target semideviation if the target is greater than the mean.
The coefficient of determination
1. is maximized by ordinary least squares. 2. will generally increase if additional independent variables are added to the regression analysis. 3. has a value between zero and one.
For a regression of Y on X, which of the following is in terms of the measurement scale for Y? (e.g., if Y is in dollars, which of the following would also be in dollars?)
1. predicted value of y 2. change from a one unit change in x 3. intercept 4. residual 5. standard error of the estimate
Which of the following are components of an interest rate?
1. real risk free rate 2.inflation premium 3. liquidity premium 4. default risk premium
Which of the following is a known problem with the internal rate of return in investment decision making?
1. sensitive to the timing of cash flows 2. assumes reinvestment of cash flows at the internal rate of return 3. cannot be used if there is more than one change in sign of the cash flows
a frequency distribution is a ________ whereas a histogram is a __________
1. table of values 2. graph of values
The probability of making a Type I error when the null hypothesis is true is:
1. the compliment of the confidence level 2. alpha 3. the level of significance
The error of rejecting a true null hypothesis is
1. the level of significance 2. a type I error 3. 1 less the confidence level
Autocorrelation may be the result of:
1. the omission of an important explanatory variable. 2. the presence of a trend in the independent variable. 3. nonlinearities in the relationship between the dependent and independent variables.
Match each term and concept
1. time weighted return -> compounded return 2. money weighted return -> internal rate of return
Which of the following represent indebtedness on the part of the borrower?
1. us treasury bond 2. corporate bond 3. us treasury bill
The Pensioners' pension fund has four stocks in its portfolio, Stock A, Stock B, Stock C, and Stock D, investing equal dollar amounts in each stock. Stock A has a beta of 2.0, Stock B has a beta of 1.5, Stock C has a beta of 0.5, and Stock D has a beta of 1.25. The beta of the Pensioners' pension fund portfolio is closest to ...
1.3
Suppose your client invests $1 million in a bond fund. The bond fund is projected to earn 6 percent annually. What is the estimate of the value of your client's investment after ten years?
1.7908 million
Stella Jones invested funds that earned 6 percent the first year, 3 percent the following three years, and lost 5 percent in the last year. Jones' annual return on the investment over this five year period is best described as:
1.93%
The Elkton Bank wants to pay, effectively, 2 percent on its savings accounts. Elkton pays interest continuously. What is the nominal annual rate of interest that Elkton Bank would advertise for these accounts?
1.980%
Your client wants to double his money in seven years. What rate of return must he earn each year to achieve this goal?
10.409%
The Duke Company issues bonds that mature in five years. The bonds pay a semi-annual coupon of 8% for the first two years, 6% for the next two years, and then 4% for the last year. If these bonds are priced to yield 5.5%, their price is closest to:
104.35369
How long will it take for an investment to double in value if interest is paid at a rate of 6 percent per year, compounded continuously?
11.552 years
Consider two investments, Apples and Oranges, with the following characteristics: The correlation between the return to Apples and Oranges is -0.2. The standard deviation of the portfolio comprised of both investments falls into which of the following ranges? E(x): apples=5% oranges=20% stddev: apples=15% oranges=20% portfolio weight: apples=40% oranges=60%
12% < standard deviation < 12.5%
Suppose that the risk-free rate of interest is 5% and the expected return on the market is 15%. If a stock's beta is 0.90, the expected return on the stock is closest to ...
14%
Suppose you own a risky asset with an expected return of 12 percent and a standard deviation of 20 percent. If the returns are normally distributed, the approximate probability of receiving a return greater than 32 percent is closest to:
16%
There are two possible outcomes for the next period: (1) the investment will lose 10% of its value (a 40% probability), or the investment will return 30% (a 60% probability). The standard deviation of this probability distribution falls into which of the following ranges?
19.5% < standard deviation < 20%
Roberta Jones invested $1,000 in an investment that promises cash flows of $80.25 at the end of each quarter for five years. The anticipated return on this investment is closest to:
21.55%
If you save for a $25,000 car and can save $100 per week in an account that pays, effectively, 4 percent per year, the length of time it will take to reach your goal is closest to:
229.11 weeks
The Duke Company currently pays a dividend of $1.50 per share. Dividends are expected to increase at a rate of 20% per year for the next three years, 10% for the next three years, and then at a constant rate of 5% per year. If Duke's required rate of return is 15%, the value of a share of Duke stock is closest to:
25.244617
Suppose a stock's dividend is currently $1 per share and this dividend is expected to grow at a rate of 4 percent each year, forever. If investors require an 8 percent return on this stock, the value of a share of this stock is closest to:
26
Suppose you have two samples, Sample 1 with 101 observations and Sample 2 with 180 observations. Sample 1 has a mean of 50 and a standard deviation of 30. Sample 2 has a mean of 45 and a standard deviation of 35. In testing the difference in the means, using the Sample 1 and Sample 2 information, if we assume that the variances of the two populations are equal, the degrees of freedom for the test are
279
The First Bank quotes an annual interest of 3 percent on its accounts. What is the effective annual rate of interest on this account if First Bank compounds interest monthly?
3.0416%
Stephanie Plum wants to have saved $40,000 at the end of four years to buy her dream car. If she deposits funds in an account today that pays interest at the rate of 7 percent, compounded annually, how much must she deposit today in the account to enable her to buy her dream car?
30,515.81
Clyde's Title Loan will lend you $100 for two weeks. At the end of two weeks, you must repay Clyde's Title Loan the $100, plus $25 of interest. The effective annual rate of interest on a Clyde's Title Loan loan is closest to:
32,987%
Suppose you have two samples, Sample 1 with 189 observations and Sample 2 with 136 observations. Sample 1 has a mean of 50 and a standard deviation of 30. Sample 2 has a mean of 45 and a standard deviation of 35. In testing the difference in the means, using the Sample 1 and Sample 2 information, if we assume that the variances of the two populations are equal, the degrees of freedom for the test are
323
A regression model with 9 independent variables and 43 observations has a t-critical value for the significance of an independent variable's coefficient using degree of freedom of:
33
An analyst, John Hancock, is analyzing the revenues of the Wright Corporation. Wright's 2017 revenues are $300 million. Hancock estimates an annual growth in revenues of 3.5 percent for the Wright Corporation. What is Hancock's estimated revenues for Wright in 2020 based on his forecasts?
332.62
In a multiple regression, an R-squared of 0.35 is most consistent with:
35 percent of the variation in the dependent variable is explained by the independent variables.
The yield to maturity on a AAA-rated corporate bond is 4.75 percent. The yields to maturity on a similar-maturity BBB-rated corporate bond is 8.53 percent. The spread is closest to:
378 bp
If you buy a 91-day U.S. Treasury bill and for 99, your investment yield for holding this bill until maturity is closest to:
4.0515%
Kevin Wilhelm is a loan officer at the Abaco Bank. Abaco's board decided that the loan rate for 30-year mortgages should be, effectively, 4.35 percent. Because mortgages are repaid in monthly payment, the annual percentage rate, or stated rate, is closest to:
4.2656%
Clarence Booth bought a 5 percent coupon bond at par when it was issued on January 1, 2010. The bond matures at the end of 2019, but he plans to sell this bond at the end of 2017 when he expects rates to be 7 percent. If Booth can reinvest cash flows at 3 percent, his anticipated return on this bond investment is closest to:
4.4%
Sal Heinz deposited $1,000 in an account forty years ago. The accounts paid interest at a rate of 2 percent per year, compounded daily. If Heinz did not withdraw any funds during the entire forty-year period, the interest on interest that he earned is closest to:
425
Horace Williams invested $30,000 in an account that pays interest at a rate of 2 percent each year, compounded annually. How much will be in the account at the end of twenty years if Williams makes no additional deposits and no withdrawals from this account?
44,578.42
You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. Your total return is closest to:
45%
A simple regression with 52 observations has how many degrees of freedom?
52
If the coefficient of determination is 56%, which of the following statements is true? Indicate all true statements.
56 percent of the variation in the dependent variable is explained by the indpendent variable or variables.
Your client intends to invest $10,000 at the end of each year for the next five years into an investment that promises a return of 6 percent per year. What is the value of this investment at the end of five years?
56,370.93
Your client, Abilgail Wilson, wants to have $60,000 saved to send her child to college, with the goal of reaching these savings in eight years. Wilson can earn 5 percent on her investments, and wants to make annual payments into savings to reach this goal, with the first payment in one year from now. What must these payments be to reach this goal?
6,283.31
The effective annual rate of interest for a contract that has a stated annual rate of 6 percent, with interest compounding every five days is closest to:
6.181%
The Wilbur Fund is selling investment interests for $1 million each today and promises to earn 6 percent in the first year, 7 percent in the second year, and 8 percent in the third year. What is this fund's anticipated average annual return?
6.997%
A regression model with 5 independent variables and 68 observations has a t-critical value for the significance of an independent variable's coefficient using degree of freedom of:
62
Your client expects a settlement from a lawsuit such that he will receive $10,000 per year for ten years, with the first payment received four years from now. She can earn 5 percent on her investments. What is the value today of the expected lawsuit settlement?
66,703.25
If data is normally distributed, what percent of the observations will be contained within two standard deviations around the mean?
68.26
Devon Lane invested $10,000 in an investment that promises cash flows of $4,000 at the end of each of four periods, with the first cash flow occurring five years from today. The return on his investment is closest to:
7.5534%
Ace Production Inc. issued 10-year bond on January 1, 1997 with a coupon rate of 8%, paid semi-annually. If the market price on January 1, 2000 is 96, what is the annual yield to maturity (YTM) at this date?
8% - 9%
Eunice Quark invested $50,000 in an account that pays 5 percent interest, compounded quarterly. How much will be in this account at the end of ten years if she makes no more deposits and makes no withdrawals?
82,180.97
If the odds of the company beating analysts' expectations are 1 in 5, the probability of the company not beating expectations is closest to:
83%
The Earnest Fund had a market value of $5 billion at the end of 2015. At the end of 2017 it had a market value of $6 billion. If there were no withdrawals or deposits in the account during these two years, what is the fund's average annual return over 2016-17?
9.545%
The Sketchy Company has reached a settlement with its customers in a class action lawsuit in which each customer in the lawsuit receives $1 million, to be paid out in two years from today. If the appropriate discount rate is 5 percent, with continuous compounding, the value of the settlement per customer today is closest to:
904,837
Which of the following statements is not correct regarding regression analysis? A. The coefficient of determination ranges in value from -1 to +1. B. The null hypothesis for the F-statistic is that all slope coefficients are equal to zero. C. The standard error of the regression is related mathematically to the standard error of the coefficient. D. The slope of the dummy variable indicates the incremental amount of the dependent variable attributed to the condition in which the dummy variable takes on a value of one?
A
When comparing portfolios, the portfolio with the ______ safety-first ratio minimizes the probability that the portfolio returns will be less than the shortfall level.
All the following are acceptable: highest, higher, larger, largest
Which of the following considers both risk and return?
Both the Sharpe Ratio and Roy's Safety-first Criterion
All the following statements are correct except: A. A Type I error is rejecting the null when it is true. B. Finding a guilty person innocent is an example of a Type II error C. The probability of committing a Type I error is the significance level of the test. D. Rejecting the null and wrongly accepting the alternative is an example of a Type II error.
D
The effective annual rate when the stated rate is 5% and interest is continuously compounded is
EAR continuous compounding: e^.05 = 1.05127 1.05127 - 1 = .05127
For a given price and maturity (in days), rank order the following yields from highest to lowest: Bank discount yield CD equivalent yield (Money Market Yield) Effective annual yield investment yield
Effective annual yield > Investment yield > CD equivalent yield > Bank discount yield
which of the following is a continuous distribution?
F, Normal, Chi-square
The self-regulatory body that monitors brokers and dealers is:
FINRA
You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, the amount you will have 4 years from today is closest to:
FV of an annuity due TVM solver N = 4 I% = 5.7 PV = 0 PMT = 3500 change end to begin solve for FV = 16111.99
If the APR for an account is 8% with interest compounded continuously, what is the future value of $568 invested for 5 years?
FV with continuous compounding 568e^(.08*5) =847.36
VAR, or value at risk, is a monetary measure of the maximum amount of losses anticipated over a specified period of time.
False -> its a measure of the MINIMUM amount
Which of the following statements about hypothesis testing are correct statements? I. The null hypothesis is a statement about the value of a population parameter. II. The alternative hypothesis is accepted if the null is rejected. III. A Type II error is rejecting the null when it is actually true. IV. If the alternative hypothesis says y > x, then you are performing a two-tailed test.
I and II only
Which of the following statements are correct? I. A Type I error occurs when the null hypothesis is rejected when it is, in fact, false. II. A Type II error occurs when the null is rejected when in fact it is true. III. A Type I error occurs when the null hypothesis is rejected when it is, in fact, true. IV. A Type II error occurs when the null hypothesis is rejected when, in fact, it is false.
III only
An inverted yield curve implies that
Long-term interest rates are lower than short-term interest rates.
Lifeboat Products issued 10-year bond on January 1, 1995 with a coupon rate of 8%, paid semi-annually. If the market price on January 1, 2000 is 95, what is the annual yield to maturity (YTM) at this date?
N= 5*2 = 10 PV=-65 FV=100 PMT = 8/2 = 4 solve for I%= 4.636 and multiply by 2 to annualize =9.272%
Valuing a bond uses which of the following built-in functions?
PRICE
The value of a perpetuity today that pays $192 per year with an interest rate of 4.98% is what?
PV of a perpetuity 192/.0498 = 3855.42
Suppose you expect a periodic stream of $65 each year, forever. If the appropriate discount rate is 9.6%, what is the value of this cash flow stream today?
PV of a perpetuity 65/.096 = 677.08
Which of the following function be best to use when calculating a sample's standard deviation?
STD.S
The present value of $19,224 to be received in 12 years if the discount rate is 6.09 percent APR, compounded quarterly is
TVM solver N = 12*4 = 48 I% = 6.09/4 = 1.5225 FV = 19224 solve for PV = 9307.93
What is the future value of $9,455 invested 13 years at an interest rate of 6 percent per year if interest is compounded semiannually? (report no fewer than 2 decimal places)
TVM solver N = 2*13 = 26 I% = 6/2 = 3 PV = -9455 PMT = 0 FV = 20390. 57
Consider an investment that requires $832 today, but promised to pay $1,082 35 years from now. The effective annual rate of return on this investment is
TVM solver N = 35 PV = -832 FV = 1082 PMT = 0 solve for I% = .7534 *must convert I% to decimal bc its input as an integer .7534/100 = .0075
A zero coupon bond that has four years remaining to maturity and is currently quoted with a price of 65 is price to yield:
TVM solver N = 4*2 = 8 PV = -65 FV = 100 solve for I% = 5.5324 then annualize by 5.5324*2 = 11.0648%
Consider an investment that pays $37 every six months and then, at the end of this investment in 5 years it pays an additional lump-sum of $1,029. If the appropriate discount rate is 7%, what is the value today of this cash flow stream?
TVM solver part 1: N = 5*2 = 10 I% = 7/2 = 3.5 PMT = 37 FV = 0 solve for PV = 307.714 part 2: N, I% stay the same PMT = 0 FV = 1029 solve for PV = 729.477 part 3: 307.714 + 729.477 = 1037.19
Suppose you invest $545 in an account that pays interest of 7% the first year and 9.5% the second year. If you make no withdrawals, what is the balance in the account at the end of the two years?
TVM solver part 1: N=1 I% = 7 PV = 545 PMT = 0 solve for FV = 583.15 part 2: N = 1 I% = 9.5 PV = 583.15 PMT = 0 solve for FV = 638.549
How long does it take to double your money if the interest rate is 8.5%, compounded annually?
TVM solver: I% = 8.5 PV = -1 FV = 2 solve for N=8.496
What is the present value of the following series of cash flows if the discount rate is 11%? Period has End of Period CF 1 has 1824 2 has 1960 3 has 1564
TVM solver: part 1: N=1 I%=11 FV=1824 solve for PV= 1643.243 part 2: N=2 I%=11 FV=1960 solve for PV= 1590.7799 part 3: N=3 I% = 11 FV = 1564 solve for PV= 1143.5833 part 4: 1643.243 + 1590.7799 = 4377.6062
Suppose you are calculating the value of a bond for a 10-year bond and the yield curve is upward sloping. If you calculate the arbitrage-free value of the bond and the value of the bond using the 10- year spot rate, which of the following is correct?
The arbitrage-free value of the bond will be greater than the value of the bond using the 10-year spot rate.
Francine Stepford calculated the geometric mean return of a sample of 30 stock returns as 3.25%. Which of the following statements is true?
The arithmetic mean return for the sample is greater than 3.25%
Which of the following statements is NOT correct regarding regression analysis?
The coefficient of determination ranges in value from -1 to +1.
Archer Daniel estimated a model of wheat sales over 40 years, using three indicators, one for the first quarter of the year (Q1), one for the second quarter of the year (Q2), and one for the third quarter of the year (Q3). What does the coefficient on Q2 mean?
The incremental wheat sales relative to the fourth quarter.
Consider the following Projects X and Y. What is correct considering the internal rate of return? Project X Cash Flows per period are: 0 = (100,000) 1 = 22,000 2 = 22,000 3 = 22,000 4 = 22,000 5 = 45,000 Project Y CFs per period are: 0 = (120,000) periods 1,2,3,4 CF = 0 period 5 = 175,000
The internal rate of return of Project X is greater than the internal rate of return of Project Y.
power of the test
The power of the test, the probability or rate at which we correctly reject the false null hypotheses. The power of the test increases as sample size increases. Sometimes, we call the power of the test as 1- Beta, where beta is the probability of type II error. Power is the probability of rejecting the null hypothesis when, in fact, it is false. Power is the probability of making a correct decision (to reject the null hypothesis) when the null hypothesis is false. Power is the probability that a test of significance will pick up on an effect that is present. Power is the probability that a test of significance will detect a deviation from the null hypothesis, should such a deviation exist. Power is the probability of avoiding a Type II error.
Which of the following is NOT an assumption of multiple regression?
The residuals are heteroskedastic.
Which one of the following statements is CORRECT concerning the standard deviation of a portfolio?
The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
Which of the following random variables would be considered continuous?
The time it takes for a randomly chosen women to run 100 yards.
A variable or characteristics with which asset returns are correlated is best described as:
a factor
The time-weighted return on a portfolio is
a geometric mean
12b-1 fees are best described as:
a mutual fund fee
Arbitrage pricing theory relates expected returns to:
a number of factors
A portfolio that has a factor sensitivity of 1.0 to factor j, yet has a factor sensitivity of 0.0 to all other factors, is best described as:
a pure factor portfolio
If the coefficient on a lagged value of a time series is equal to 1.0, the series is best described as having:
a unit root
I. Pessimistic about the stock's future price II. Optimistic about the stock's future price III. Selling shares not owned by the seller IV. Borrowing funds to purchase shares
a. buying on margin = II and IV b. short selling = I and III c. buying a put option = I
( Σ { Portfolio sensitivity k − Benchmark sensitivity k } x Factor return k ) + Security selection is best described as the:
active return
RP − RB is best described as the:
active return
A regression model in which the value of a variable in one period is related to the value of the same variable but in a previous period is best described as ____________.
an autoregressive model
The yield to maturity on a bond is the same as its
annualized internal rate of return
If three annuities have the same number of payments and the same discount rate that is greater than 0%, which annuity will have the largest present value?
annuity due
flat yield curve
arbitrage free value of bond = naive value
downward sloping yield curve
arbitrage free value of the bond < naive value of the bond
upward sloping yield curve
arbitrage free value of the bond > naive value of the bond
Proponents of the efficient markets hypothesis believe that technical analysts:
are wasting their time
Which of the following are measures of location?
arithmetic mean, median, mode, geometric mean
The correlation of returns on Asset A and Asset B is positive. This means that:
as the returns on Asset A increase, the returns on Asset B tend to increase.
If a series' values are correlated with its own past values, we describe this series as:
autocorrelated
Which of the following are problems that may arise in multiple regression? Indicate all that apply.
autocorrelation multicollinearity heteroskedascticity
The probability associated with an upward movement in a binomial option pricing tree is affected by all except which of the following?
backward movement (doesnt exist)
The revision of probabilities based on new information is derived from:
bayes' theorem
if you graph a normally distributed set of data (one without obvious irregularities or biases, such as the height of all people in your school), what will the shape of that graph be?
bell shaped
Consider the following regression estimation results, estimated using 1,000 cross-section sample firms: (first number is coefficient, second is standard error) Intercept 18.25 4.85 Size -9.43 1.60 Leverage -4.50 2.68 Beta -1.50 0.54 Political risk -2.10 1.76 Transparency -0.14 0.10 Geographic diversification 0.01 0.03
beta size
Tim has two bonds to choose from. Both of them have $1,000 face values. Bond A has a 9% coupon, 10 years remaining to maturity, and is priced to yield 7%. Bond B has a 10% coupon, 10 years remaining to maturity, and is priced to yield 6%. Both bonds pay interest semi-annually. Which bond has a higher value?
bond B
Consider two bonds, A and B. Both bonds presently are selling at their par value. Each pays interest of 12% semianually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, _________.
both bonds will increase in value, but bond b will increase more than bond A
Match the trade with the appropriate sentiment about a stock
buy a call option = optimistic buy a put option = pessimistic buy stock on margin = optimistic short sell = pessimistic
Which of the following increases the risk of buying a stock?
buying it on margin
Stocks are traded in the:
capital markets
The model: E(Rp) = Rf + βp,1RMRF + βp,2SMB + βp,3HML + βp,4WML is best described as the:
carhart model
which of the following can be used to examine the fit of a multiple regression equation?
coefficient of determination f-statistic
two series are said to be ___________________ if the series do not diverge from each other without bound in the long-term.
cointegrated
The number of ways in which r objects can be chosen from a set of n objects, when the order does not matter is determined using the:
combination formula
If regression errors' variance is correlated with independent variables in the regression, we refer to this as:
conditional heteroskedasticity
Growth that is exponential is growth that is consistent with:
continuous compounding
If the mean and standard deviation of a time series do not change over time, the series is referred to as:
covariance stationary
We must assume that a time series is ___________________ in order to make appropriate statistical inference from the estimated values.
covariance stationary
An analyst used S&P's Capital IQ database to select the net profit margin of a sample of firms for the fiscal year 2019. This sample is best described as a:
cross sectional sample
Determining a model by searching through a dataset for statistically significant patterns is best described as:
data mining
Consider a bond with a coupon rate of 10% that is currently trading to yield 5%. If the yield remains at 5%, the price of the bond, as the bond approaches maturity, will:
decrease (this is a premium bond)
In the case of a confidence interval, the term 1-α is the:
degree of confidence
In regression models, the variable that is being predicted is best described as the:
dependent variable
Heteroskedasticity refers to a situation in which the error terms from a regression analysis
do not have equal variance
if the target is the mean, then the target semivariance is
equal to the semivariance
The model y t = e^(b0 + b1t) is an example of:
exponential growth
A study is conducted to determine whether the mean monthly maintenance cost of an aircraft was less than $3,000. The level of significance is chosen to be 5 percent. A sample of 36 aircraft of this type had a mean monthly maintenance cost of $3,025 and a standard deviation of $325. we should:
fail to reject the null hypothesis
An analyst conducted a test for a sample mean of returns on equity for 100 companies. The p-value corresponding to the test statistic is 18%. If the analyst uses a 10% level of significance, what should be the conclusion?
fail to reject the null hypothesis
Suppose that you are testing the hypothesis: H0: mu= 6%Ha: mu ≠ 6% You draw a sample of 50 stock monthly returns and calculate the sample mean and standard deviation. The mean is 4% and the standard deviation is 8%. If the level of significance is 5%, what is your conclusion?
fail to reject the null hypothesis
You are testing the null hypothesis that the population mean is less than or equal to 45. A random sample of 25 observations selected from this population produced a mean of 46.3. The sample has a standard deviation of 4.5. The decision should be to:
fail to reject the null hypothesis
A coefficient of determination has a range from -1 to +1.
false
A correlation between variables X and Y of 0.25 indicates that 25% of the relationship between the two variables is explained.
false
A pooled variance, sp^2, is used when the population variances are assumed to be unequal.
false
A sample of book-to-market ratios as of the end of 2014 for all NYSE-traded companies is best considered a time-series sample.
false
For any given sample, the harmonic mean is larger than the geometric mean.
false
If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
false
If a market is weak form efficient, it is necessarily semi-strong form efficient.
false
If a slope coefficient is different from zero at the 5% level of significance, it is also different from zero at the 1% level of significance.
false
If the analysts chosen level of significance is 5 percent and the p-value on an estimated slope coefficient is 4 percent, we fail to reject the null hypothesis H0: b1=0 .
false
If the market is semi-strong efficient, there would be no abnormal returns to insider trading.
false
If you own a stock on the day before the ex-dividend date and then sell the stock on the ex-dividend date, you do not get the forthcoming dividend.
false
The basic idea behind diversification is to reduce risk by combining securities whose returns are perfectly positively correlated.
false
The correlation of the returns on Asset M and Asset N is positive. This means that as the returns of Asset M go up, the returns on Asset N tend to go down.
false
The standard deviation of a portfolio is the weighted average of the standard deviation of the stocks in the portfolio.
false
A model that includes attributes of a company to explain stock returns is best described as a:
fundamental factor model
The BARRA models are an example of:
fundamental factor models
the BARRA models are an example of
fundamental factor models
Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. The growth rate in earnings per share (EPS) over the 5-year period is closest to:
geometric mean 1) (3.2 - 1.5)/1.5 = 1.133 2) 1.1333 + 1 = 2.1333 3) 2.1333 ^ (1/5) = 1.1636 4) 1.1636 - 1 = .1636
Which of the following considers compounding in its calculation? A. Harmonic mean return B. Geometric mean return C. Arithmetic mean return
geometric mean return
If the target is greater than the mean of a sample, the target standard deviation will be _______ than the semi-standard deviation.
greater than
Consider a sample of 100 returns that has a mean of 5%, a standard deviation of 20%, and the semi-standard deviation is 15%. If the target return is greater than 5%, is the target standard deviation likely greater than or less than 15%?
greater than 15% The semi-standard deviation is the dispersion below a 5% return (the mean). Therefore, the target standard deviation is most likely greater than the semi-standard deviation if there are any observations from 5% up to 6%. The target standard deviation could not be less than the semi-standard deviation if the target is greater than the mean.
If you bought a 30-year bond in 2015 at par when the yield was 7 percent and the yield for this same bond in 2018 is 5 percent, the value the bond in 2018 should be trading at:
greater than par value
The difference between the arithmetic average return and the geometric average return is __________ for stocks with a high variance of returns, compared to stocks with a low variance of returns.
higher
Mortgage backed securities are:
interests in the cash flows of a pool of mortgages.
The DropBox initial public offering in March 2018 is an example of which function?
investment banking
Consider an investment of $100 million that is expected to generate $20 million in one year and then $110 million in the second year. What is the money-weighted rate of return on this two-year investment?
irr(-100, (20,110)) = 15.3565% 15.3536/100 = .1536
The difference between the arithmetic average return and the geometric average return __________ for stocks with a high variance of returns, compared to stocks with a low variance of returns
is higher
If the covariance of the returns between two stocks is positive, the correlation of the returns of the two stocks:
is positive
Suppose that two portfolios have the same average return, the same standard deviation of returns, but portfolio M has a higher beta than portfolio N. According to the Sharpe measure, the performance of portfolio M:
is same as the performance of portfolio N.
The random variable has a lognormal distribution if
its natural logarithm is normally distributed
Suppose the return on the market is expected to increase 5%. According to the capital asset pricing model, the expected return of a stock with a security beta of 0.9 is expected to increase by ...
less than 5%
If a bond is trading at a discount from its face value, its coupon rate must be
less than its yield to maturity
Suppose you earned an arithmetic return on a stock of exactly 10% every year for 10 years. The geometric average return on the stock will be:
less than the arithmetic average return.
The value of α is generally known as the:
level of significance
characteristics of a good market include
liquidity, price continuity, informational efficiency
Which of the following is a model with a qualitative dependent variable?
logit model probit model
Joe Researcher created a model to describe stocks' returns. He used annual stock returns for 2014 as the dependent variable, and used 2014 earnings per share to explain these returns. The bias that this best describes is:
look ahead bias
Selecting observations on companies' book value of stockholders' equity for fiscal year 2019, comparing these book values to the market capitalization as of December 31, 2019.
look ahead bias
Using a variable in a model that has information that is not known at the date of the testing is a problem best described as:
look ahead bias
using data that is not available on the test date is referred to as
look ahead bias
The Capital Asset Pricing Model (CAPM) describes returns on individual stocks as being comprised of two elements: the return on a risk-free asset and the return which compensates the investor for ...
market risk
The risk that cannot be diversified away by adding additional assets is referred to as the asset's ...
market risk systematic risk nondiversifiable risk
If a times series tends to fall when its values are above its mean and increase when its values are below its mean, we refer to this as a series that is:
mean reverting
US Treasury Bills are traded in the:
money markets
In a multiple regression, the correlation among independent variables is best described as:
multicollinearity
Suppose you calculate the standard deviation of the continuous compounded monthly returns on a stock. The annualized volatility is determined by:
multiplying the standard deviation of monthly returns by the square root of 12.
Consider three portfolios: Is there an arbitrage opportunity? If so, what is the opportunity? P1 e(x)=4% factor sensitivity=1.0 P2 e(x)=5% factor sensitivity=1.2 P3 e(x)=6.5% factor sensitivity=1.5
no arbitrage opportunity
The Central Limit Theorem states that the distribution of sample means from samples of a given sample size from a population will have a distribution that is approximately
normal
End of year cash flows: Y0- (116,310) Y1- 33,439 Y2- 30,267 Y3- 38,629 if the discount rate is 5%, the net present value is
npv(5,-116310,(33439,30267,38629) = -23.641.0895
If the F test statistic for a regression is greater than the critical value from the F distribution, it implies that
one or more of the independent variables in the regression model have a significant effect on the dependent variable.
Which of the following is a discrete distribution? (F, binomial, chisquare, normal)
only binomial
You would buy a stock on margin if you are _________ about the stock's price movement.
optimistic
Susan Eller, an analyst, rates stock investments using stars, from 1 to 5 based on their risk and return performance. This is an example of what type of scale?
ordinal
Which of the following is(are) a scale of measurement for a variable?
ordinal, ratio, interval
Stocks represent interests of _______, whereas bonds represent interests of _______.
owners; lenders
A money market security with 30 days to maturity and priced at 98.72 has a money market yield of
part 1: (100 - 98.72)/98.72 = .012965 part 2: .012965*(360/30) = .15559
At the end of 2011, the company's stock price was $24 per share. At the end of 2013, the stock price was $28. The company paid no dividends during this period. What is the annual growth rate for this stock?
part 1: (28-24)/24 = .16666666 part 2: .1666666 + 1 = 1.166666666 part 3: 1.1666666 ^ (1/2) = 1.080123 part 4: 1.080123 - 1 = .0801
Consider a security with a bank discount yield of 3.339%. If this security has a maturity of 90 days, what is its money market yield?
part one solve for bond price: .03339*90 = 3.0051 3.0051/360 = .0083475*100 = .83475 100-.83475 = 99.16525 part 2: (100-99.16525)/99.16525 = .0084177 * (360/90) = .03367
the central limit theorem...
permits us to make precise probability statements about the population mean by using the sample mean, no matter the distribution of the population.
The number of ways in which r objects can be chosen from a set of n objects, when the order matters is determined using the:
permutation formula
You sell a stock short if you are __________ about the stock's price.
pessimistic
confidence interval is formed by the following:
point estimate +/- reliability factor * standard error
If the hypothesized value of a parameter under the null hypothesis lies outside the confidence interval, researcher should:
reject the null hypothesis
In a hypothesis test, the null hypothesis is that the population mean is equal to 90; and the alternative hypothesis is that the population mean is not equal to 90. The test is performed at the 5 percent significance level. A sample of 100 elements selected from this population produced a mean of 84 and a standard deviation of 10. The correct decision is to:
reject the null hypothesis
The level of significance is the probability of:
rejecting a true hypothesis
we compare forecasting performance of models by comparing the models'
root mean square error
Consider two distributions: Sample 1: mean= 19 variance= 10 Sample 2: mean= 10 variance= 19 Which sample has the greater dispersion?
sample 2
Selecting a sample of betas from companies currently trading on the NYSE to test hypotheses related to market risk.
sample selection bias
The model: xt = b0 + b1xt-1 +b1xt-4 + et estimated on quarterly data is designed to capture:
seasonality
The semi-strong form of the efficient market hypothesis states that:
security prices reflect all publicly-available information.
Investors who placed market orders for Apple Computer stock after watching Apple's announcement regarding the new iPhone, and believed that they could earn abnormal profits from the content of the announcement believe that the markets are not:
semi-strong form efficient
safety-first rules focus on
short fall risk
If the t ratio for the slope of a simple linear regression equation is -2.48 and the critical values of the t distribution at the 1% and 5% levels, respectively, are 3.499 and 2.365, then the slope is
significantly different from zero at the 5% level but not at the 1% level.
tracking error (tracking risk or active risk) is best described as the
standard deviation of the active return
Which of the following are measures of dispersion?
standard deviation, mean square error, variance, range, mean absolute deviation
Examining scenarios and estimating losses under extremely unfavorable conditions is referred to as:
stress testing
Autocorrelation refers to a situation in which
successive error terms derived from the application of regression analysis to time series data are correlated
The coefficient of determination is the ratio of the __________________ to the sum-of-squares total.
sum-of-squares regression
Risk that cannot be diversified away is described as
systematic risk
Which of the following is most appropriate in testing the role of an individual independent variable in a multiple regression?
t-statistic
We use the Chi-square test to test which of the following?
test of a variance
The short-fall risk of a portfolio is the risk:
that the value of the portfolio will fall below a minimum, acceptable level over some time horizon.
The yield to maturity of a bond will equal the bonds coupon yield when
the bond is selling at its face value
The Sharpe Ratio is the
the difference between the mean portfolio return and the mean return to the risk-free asset, divided by the standard deviation of the portfolio's returns.
A researcher collected P/E ratios for two industries, Electronics and Transportation. He wants to test whether there is a difference in P/Es for these two industries. The most appropriate test is a test of:
the difference in means
We use the F-distributed test statistic to test:
the equality of variances
Consider the 3 observations: 3, 7, 11 for which the mean is 7 and the standard deviation is 4. If we add 2 to each value, what are the new mean and standard deviation?
the mean is 9 and the standard deviation is 4
Beta is a measure of
the sensitivity of a stock's return to changes in the return on the market.
In a simple regression, the F-statistic is equal to:
the square of the calculated t-statistic on the correlation of the dependent and independent variables
The yield-to-maturity calculation assumes that interest on a bond is reinvested at:
the yield to maturity
when computing yield to maturity the implicit reinvestment assumption is that the interest payments will be reinvested at
the yield to maturity at the time of the investment
Multicollinearity refers to a situation in which
there is a high degree of correlation between the independent variables included in a multiple regression model.
Evaluating US banks' capital adequacy over the period 2000-2019 to test hypotheses regarding banks' downside risk.
time period bias
Which method of calculating a portfolio return is most appropriate for evaluating the performance of a portfolio manager?
time weighted rate of return
Evaluating portfolios managers so that you do not penalize the manager for withdrawals that are not under her control requires using the:
time weighted return
Afton Meyers manages a portfolio for his client, Sam Jones. Jones invested $100,000 at the beginning of 2014. The fund was worth $120,000 at the end of 2014 and $110,000 at the end of 2015. He withdrew $10,000 at the end of 2015, so that $100,000 remained in the account at the end of 2015. The fund only paid dividends at the end of 2016; Jones withdrew the $20,000 dividends at the end of 2016. The remaining balance in the account at the end of 2016, after these dividends were withdrawn, was $100,000.
time weighted return = 9.7% money weighted return = 9.4%
s(RP−RB) is best described as the:
tracking error
A binomial random variable can take on one of two values.
true
A frequency distribution is the distribution of a sample that represents the number of observations within selected intervals, whereas a histogram is a graphical representation of the number of observations within selected intervals.
true
A sample consisting of monthly observations on GDP over 30 years is considered a time series sample.
true
An assumption of regression models is that the regression errors are not correlated across observations.
true
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.
true
Excess kurtosis is a measure of peakedness relative to a normal distribution.
true
For a times series that is a random walk, the best predictor of next period's value is the current value.
true
For any given sample, the arithmetic mean is larger than the harmonic mean.
true
If a market is semi-strong efficient, it is necessarily weak form efficient
true
If a market is semi-strong efficient, it is necessarily weak form efficient.
true
If a market is semi-strong efficient, there would be no abnormal profits from technical trading.
true
If a market is weak form efficient, there would be no abnormal profits from technical trading.
true
If the payment stream is of the same amount, and the interval of time between payments is the same, the future value of the annuity due will be larger than that of the future value of the ordinary annuity.
true
If the payment stream is of the same amount, and the interval of time between payments is the same, the present value of the annuity due will be larger than that of the present value of the ordinary annuity.
true
If the slope coefficient in a simple regression is different from zero at the 5 percent level, the correlation coefficient between the independent and dependent variables is different from zero at the 5 percent level as well.
true
If the target return is greater than the mean return, for a given sample of returns the target semi-variance will be greater than the semi-variance.
true
In a time trend model, the slope is the change in the dependent variable for the passage of one unit of time.
true
In stratified sampling, we divide the population into subpopulations, and then sample from each of the stratum.
true
In the arbitrage pricing model, the return you should expect on a well-diversified portfolio is linearly related to the factor sensitives of that portfolio.
true
The basic idea behind diversification is to reduce risk by combining securities whose returns are not perfectly positively correlated.
true
The covariance and the correlation must always be the same sign.
true
The residual is the difference between the observed value of the dependent variable and the predicted value of the dependent variable.
true
With respect to a normally distributed random variable, approximately 95 percent of the observations fall within two standard deviations of the mean.
true
The level of significance is the risk of a:
type I error rejecting a true hypothesis
A macroeconomic model includes __________ of economic variables.
unexpected components
In describing the built-in function FV as: =FV(RATE,NPER,PMT,PV,TYPE) the TYPE is used to indicate:
whether ordinary annuity or annuity due
A risk averse investor ...
will take on risk if he/she is adequately compensated for the risk borne.
a risk averse person...
will take on risk, but must be compensated to do so.
Consider the following pricing of a stock in two different markets: Market A Market B Ask price A$5.00 B $5.10 Bid price A $4.95 B $5.02 If commissions are $0.01 per share traded, is there an arbitrage opportunity?
yes
Select the test statistic to use to test the mean if the population sampled is normally distributed with a known variance.
z = (xbar minus mu null) / (sigma/sqrrt n)