CFA Level 1 Prep 2022 (Maximillian)

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

100 +/- 1.65 (5) = 91.75 to 108.25 or P ( P(91.75 < X < 108.25).

A researcher estimates a simple linear regression for two variables using 47 observations. The regression sum of squares is 0.0182 and the sum of squared errors is 0.0375. The coefficient of determination for the regression is closest to:

32.6% SSR/SST = 0.0182/(0.0182+.0372) = .32%

Use the results from the following survey of 500 firms to answer the question. Number of Employees Frequency300 up to 40040 400 up to 50062 500 up to 60078 600 up to 700101 700 up to 800131 800 up to 90088 The cumulative relative frequency of the second interval (400 to 500) is:

62 + 40 = 102, 102 / 500 = 0.204 or 20.4%

A 5% trimmed mean ignores the:

A 5% trimmed means discards the highest 2.5% and lowest 2.5% of observations and is the arithmetic average of the remaining 95% of observations.

A stock portfolio's returns are normally distributed. It has had a mean annual return of 25% with a standard deviation of 40%. The probability of a return between -41% and 91% is closest to: A. 65%. B. 95%. C. 90%.

A 90% confidence level includes the range between plus and minus 1.65 standard deviations from the mean. (91 − 25) / 40 = 1.65 and (-41 − 25) / 40 = -1.65.

A price index that is calculated using the current consumption weights of the index's basket of goods and services is known as a:

A Paasche index uses the current consumption weights for each good and service in its market basket. A Laspeyres index is calculated using base period consumption weights for each good and service in the market basket. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket. (Module 11.2, LOS 11.i)

Given the following set of data: 17, 3, 13 , 3, 5, 9, 8 The value 8 is most accurately described as the:

Median = middle of distribution = 8 (middle number); Mean = (3 + 3 + 5 + 8 + 9 + 13 + 17) / 7 = 8.28; Mode = most frequent observation = 3.

Which of the following statements concerning a distribution with positive skewness and positive excess kurtosis is least accurate?

A distribution with positive excess kurtosis has a higher percentage of small deviations from the mean than normal. So it is more "peaked" than a normal distribution. A distribution with positive skew has a mean > mode.

International Accounting Standard (IAS) No. 1 least likely requires which of the following?

According to IAS No. 1, financial statements must be presented at least annually. Fair presentation is one of the IAS No. 1 principles for preparing financial statements. The ban against offsetting is one of the IAS No. 1 principles for presenting financial statements. (Module 17.2, LOS 17.d)

Other things equal, a real exchange rate (stated as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the:

An increase in the domestic price level, other things equal, will decrease a real exchange rate. Increases in the nominal exchange rate or the foreign price level, other things equal, will increase a real exchange rate.

An investment manager has a pool of five security analysts he can choose from to cover three different industries. In how many different ways can the manager assign one analyst to each industry?

An investment manager has a pool of five security analysts he can choose from to cover three different industries. In how many different ways can the manager assign one analyst to each industry?

A company reports its past six years' earnings growth at 10%, 14%, 12%, 10%, -10%, and 12%. The company's average compound annual growth rate of earnings is closest to:

Geometric mean = [(1.10)(1.14)(1.12)(1.10)(0.90)(1.12)]1/6 − 1 = 0.0766, or 7.66% (Module 2.3, LOS 2.g)

The central limit theorem states that, for any distribution, as n gets larger, the sampling distribution: A. becomes larger. B. approaches a normal distribution. C. approaches the mean.

As n gets larger, the variance of the distribution of sample means is reduced, and the distribution of sample means approximates a normal distribution.

In a test of whether a population mean is equal to zero, a researcher calculates a t-statistic of -2.090 based on a sample of 20 observations. If you choose a 5% significance level, you should:

At a 5% significance level, the critical t-statistic using the Student's t distribution table for a two-tailed test and 19 degrees of freedom (sample size of 20 less 1) is ± 2.093. Because the critical t-statistic of -2.093 is to the left of the calculated t-statistic of -2.090, meaning that the calculated t-statistic is not in the rejection range, we fail to reject the null hypothesis that the population mean is not significantly different from zero.

Gross domestic product includes the value of all goods:

Gross domestic product (GDP) is the sum of the market values of all goods and services produced during a measurement period. Goods purchased during the measurement period that were produced earlier are not included in GDP. Goods produced during the measurement period but not purchased, such as goods produced for inventory, are included in GDP.

Which of the following most accurately lists a required reporting element that is used to measure a company's financial position and one that is used to measure a company's performance? PositionPerformance

Balance sheet reporting elements (assets, liabilities, and owners' equity) measure a company's financial position. Income statement reporting elements (income, expenses) measure its financial performance. (Module 17.2, LOS 17.c)

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms?

Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY.

In which of the following inflation scenarios does short-run aggregate supply decrease due to increasing wage demands?

Both inflation scenarios can involve a decrease in short-run aggregate supply due to increasing wage demands. In a wage-push scenario, which is a form of cost-push inflation, the decrease in aggregate supply causes real GDP to fall below full employment. In a demand-pull inflation scenario, an increase in aggregate demand causes real GDP to increase beyond full employment, which creates wage pressure that results in a decrease in short-run aggregate supply. (Module 11.2, LOS 11.j)

Which of the following statements about the demand and supply of money is most accurate? People who are:

Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities.

If a central bank's targeted inflation rate is above the current rate, the central bank is most likely to:

Buying government securities is an expansionary policy that would increase the money supply and allow the inflation rate to increase to the targeted range. Increasing reserve requirements and overnight lending rates are contractionary and would have the opposite effects.

What is the coefficient of variation for a distribution with a mean of 10 and a variance of 4?

Coefficient of variation, CV = standard deviation / mean. The standard deviation is the square root of the variance, or 4½ = 2. So, CV = 2 / 10 = 20%.

What is the compound annual growth rate for stock A which has annual returns of 5.60%, 22.67%, and -5.23%?

Compound annual growth rate is the geometric mean. (1.056 × 1.2267 × 0.9477)1/3 - 1 = 7.08% (Module 2.3, LOS 2.g)

Compute the present value of a perpetuity with $100 payments beginning four years from now. Assume the appropriate annual interest rate is 10%.A. $751.B. $683.C. $1000.

Compute the present value of the perpetuity at (t = 3). Recall, the present value of a perpetuity or annuity is valued one period before the first payment. So, the present value at t = 3 is 100 / 0.10 = 1,000. Now it is necessary to discount this lump sum to t = 0. Therefore, present value at t = 0 is 1,000 / (1.10)3 = 751.

A conditional expectation involves:

Conditional expected values are contingent upon the occurrence of some other event. The expectation changes as new information is revealed.

The continuously compounded rate of return that will generate a one-year holding period return of -6.5% is closest to:

Continuously compounded rate of return = ln(1 - 0.065) = -6.72%.

Core inflation is best described as an inflation rate:

Core inflation is measured using a price index that excludes food and energy prices. (Module 11.2, LOS 11.h)

Which of the following statements regarding frequency distributions is least accurate? Frequency distributions:

Data in a frequency distribution must belong to only one group or interval. Intervals are mutually exclusive and non-overlapping.

A statistical estimator is unbiased if:

Desirable properties of an estimator are unbiasedness, efficiency, and consistency. An estimator is unbiased if its expected value is equal to the population parameter it is estimating. An estimator is efficient if the variance of its sampling distribution is smaller than that of all other unbiased estimators. An estimator is consistent if an increase in sample size decreases the standard error.

In the presence of tight monetary policy and loose fiscal policy, the most likely effect on interest rates and the private sector share in GDP are:

Explanation Tight monetary policy and loose fiscal policy both lead to higher interest rates. Tight monetary policy decreases private sector growth, while loose fiscal policy expands the public sector, reducing the overall share of private sector in the GDP. (Module 12.3, LOS 12.t)

If an analyst concludes that the distribution of a large sample of returns is positively skewed, which of the following relationships involving the mean, median, and mode is most likely?

For the positively skewed distribution, the mode is less than the median, which is less than the mean. (Module 2.5, LOS 2.l)

issued 5,000 shares of preferred stock for land with a fair value of $4.8 million. Purchased a patent for $3.3 million cash. Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank. Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade. Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million. Calculate gremlin's cash flow from investing activities and cash flow from financing activities for the year ended december 31, 2007. Cash flow from investing activities =================cash flow from financing activities a) $1.7 million inflow $1.3 million outflow b) $6.0 million outflow $2.7 million inflow c) $2.7 million outflow $6.0 million inflow

For the year ended december 31, 2007, gremlin corporation reported the following transactions: B only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement.

A distinction between Giffen goods and Veblen goods is that:

Giffen goods are inferior goods for which the quantity demanded decreases when the price decreases, because the negative income effect is larger than the positive substitution effect. Veblen goods are goods for which the quantity demand increases when the price increases, such as a high-status good for which the consumer gains utility from being seen to consume the good. Giffen goods and Veblen goods, if they exist, have demand curves that slope upward over at least some range of prices. The substitution effect is positive for all goods.

A parking lot has 100 red and blue cars in it. 40% of the cars are red. 70% of the red cars have radios. 80% of the blue cars have radios. What is the probability that the car is red given that it has a radio?

Given a set of prior probabilities for an event of interest, Bayes' formula is used to update the probability of the event, in this case that the car we already know has a radio is red. Bayes' formula says to divide the Probability of New Information given Event by the Unconditional Probability of New Information and multiply that result by the Prior Probability of the Event. In this case, P(red car has a radio) = 0.70 is divided by 0.76 (which is the Unconditional Probability of a car having a radio (40% are red of which 70% have radios) plus (60% are blue of which 80% have radios) or ((0.40) × (0.70)) + ((0.60) × (0.80)) = 0.76.) This result is then multiplied by the Prior Probability of a car being red, 0.40. The result is (0.70 / 0.76) × (0.40) = 0.37 or 37%.

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) 1450. C) 1550.

I first calculated the amount required by at the beginning of 25 => N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = -394,966 id then multiply the PV by 1.08 = $426,564 (This is just a habit and want to increase my understanding probably 50% right now) I assume that when going the other way to FV you'd divide by 1.08? PV = -121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = -$1,573.78 then have to divide this by 1.08 (don't understand the reason to divide which gives PMT = -$1,457.21

Firms in an industry characterized by perfect competition exit the market because they are experiencing economic losses. What will be the effect on the equilibrium market price and the effect on the total revenue of a firm that remains in the industry in the short run?

If firms in an industry are experiencing losses, some will exit. This will decrease industry supply and increase equilibrium market price. The remaining firms in the industry will increase production along their individual supply curves (short-run marginal cost curves) and increase production at the higher price. The combination of a higher price and greater quantity produced will cause total revenues to increase for the remaining firms. (Module 9.4, LOS 9.f)

A stated interest rate of 9% compounded semiannually results in an effective annual rate closest to

If the stated rate is 9% then the effective six month (period) rate is 9% / 2 = 4.5% The effective annual rate is, therefore, (1 + period rate)# Periods in a year - 1 EAR = (1 + 4.5%)2 - 1 = 9.2% (Module 1.1, LOS 1.f)

The probability that tomorrow's high temperature will be below 32 degrees F is 20%. The probability that tomorrow's high temperature will be above 40 degrees F is 10%. These two events are:

If two events cannot occur simultaneously, the events are mutually exclusive. The high temperature tomorrow cannot be both below 32 and above 40. If two events are independent, the occurrence of one event does not affect the probability of occurrence of the other. Because these events are mutually exclusive, they cannot be independent; if one of them occurs, the probability of the other is zero. For two events to be exhaustive, they must encompass the entire range of possible outcomes (that is, their probabilities sum to 100%). Here this is not the case as there are possible outcomes where the high temperature is between 32 and 40. (Module 3.1, LOS 3.b)

According to Keynesian school theory, business cycles are caused by:

In Keynesian business cycle theory, business cycles are caused primarily by changes in expectations about economic growth. Business managers overinvest when they are excessively optimistic and underinvest when they are excessively pessimistic.

Which of the following indicates the frequency of an interval in a frequency distribution histogram?

In a histogram, intervals are placed on horizontal axis, and frequencies are placed on the vertical axis. The frequency of the particular interval is given by the value on the vertical axis, or the height of the corresponding bar.

Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No. 1? A. A summary of accounting policies. B. Disclosures of material events. C. Statement of changes in owners' equity.

International Accounting Standard (IAS) No. 1 defines which financial statements are required and how they must be presented. The required financial statements are: • Balance sheet. • Statement of comprehensive income. • Cash flow statement. • Statement of changes in equity. • Explanatory notes, including a summary of accounting policies. Disclosures of material events that affect the company are required by the Securities and Exchange Commission (Form 8-K) for firms that are publicly traded in the United States.

When forward currency exchange-rate contracts are available, the difference between the spot and forward exchange rates for a pair of currencies is most likely to reflect the difference between the two countries':

Investing the domestic currency at the domestic interest rate should earn the same return as buying a foreign currency at the spot exchange rate, investing at the foreign interest rate, and selling the foreign currency proceeds at the forward exchange rate. If both currencies trade freely and participants can enter forward contracts, arbitrage trading will cause the percentage difference between the forward and spot exchange rates to be approximately equal to the difference between interest rates in the two countries. (Module 15.2, LOS 15.f)

An economic indicator that has turning points which tend to occur after the turning points in the business cycle is classified as:

Lagging indicators have turning points that occur after business cycle turning points. (Module 11.2, LOS 11.e)

Which of the following most accurately describes the Monetarist school of macroeconomic thought in relation to aggregate demand and aggregate supply? Monetarists believe that the money supply should be:

Monetarists believe that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. Furthermore, monetarists believe that recessions are caused by inappropriate decreases in the money supply.

The probability that the DJIA will increase tomorrow is 2/3. The probability of an increase in the DJIA stated as odds is:

Odds for ​E = P(E)/[1−P(E)]=(2/3)/(1/3)=2/1 two-to-one (Module 3.1, LOS 3.c)

There is an 80% chance of rain on each of the next six days. What is the probability that it will rain on exactly two of those days? A. 0.01536. B. 0.24327. C. 0.15364.

P(2) = 6! / [(6 - 2)! × 2!] × (0.82) × (0.24) = 0.01536 = 6 nCr 2 × (0.8)2 × (0.2)4

A firm is evaluating an investment that promises to generate the following annual cash flows: End of Year Cash Flows 1$5,000 2$5,000 3$5,000 4$5,000 5$5,000 6-0 7-0 8$2,000 9$2,000 Given BBC uses an 8% discount rate, this investment should be valued at: A. $19,963.B. $22,043.C. $23,529.

PV(1 - 5): N = 5; I/Y = 8; PMT = -5,000; FV = 0; CPT → PV = 19,963 PV(6 - 7): 0 PV(8): N = 8; I/Y = 8; FV = -2,000; PMT = 0; CPT → PV = 1,080 PV(9): N = 9; I/Y = 8; FV = -2,000; PMT = 0; CPT → PV = 1,000 Total PV = 19,963 + 0 + 1,080 + 1,000 = 22,043. (Module 1.2, LOS 1.c)

The dividend yields for several stocks over each of the last five years are best characterized as:

Panel data are a combination of time series and cross-sectional data. Dividend yields for several stocks are cross-sectional data, and data for each stock over the last five years are time series.

Which of the following portfolios provides the optimal "safety first" return if the minimum acceptable return is 9%?

Roy's safety-first criterion requires the maximization of the SF Ratio:SF Ratio = (expected return - threshold return) / standard deviation Portfolio #1 has the highest safety-first ratio at 0.80.

Personal Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio returns for two portfolios for their client under each scenario. Personal's economist has estimated the probability of each scenario as shown in the table below. Given this information, what is the covariance of the returns on Portfolio A and Portfolio B? ScenarioProbabilityReturn on Portfolio AReturn on Portfolio BA15%18%19%B20%17%18%C25%11%10%D40%7%9%

SP (S)Return on Portfolio ARA - E(RA)Return on Portfolio BRB - E(RB)[RA - E(RA)] × [RB - E(RB)] × P(S)A15%18%6.35%19%6.45%0.000614B20%17%5.35%18%5.45%0.000583C25%11%-0.65%10%-2.55%0.000041D40%7%-4.65%9%-3.55%0.000660E(RA) = 11.65%E(RB) = 12.55%Cov(RA,RB) = 0.001898

Wei Zhang has funds on deposit with Iron Range bank. The funds are currently earning 6% interest. If he withdraws $15,000 to purchase an automobile, the 6% interest rate can be best thought of as a(n):A. opportunity cost.B. financing cost.C. discount rate.

Since Wei will be foregoing interest on the withdrawn funds, the 6% interest can be best characterized as an opportunity cost — the return he could earn by postponing his auto purchase until the future.

An investment has a mean return of 15% and a standard deviation of returns equal to 10%. If returns are normally distributed, which of the following statements is least accurate? The probability of obtaining a return: A. greater than 25% is 0.32. B. between 5% and 25% is 0.68. C. greater than 35% is 0.025

Sixty-eight percent of all observations fall within +/- one standard deviation of the mean of a normal distribution. Given a mean of 15 and a standard deviation of 10, the probability of having an actual observation fall within one standard deviation, between 5 and 25, is 68%. The probability of an observation greater than 25 is half of the remaining 32%, or 16%. This is the same probability as an observation less than 5. Because 95% of all observations will fall within 20 of the mean, the probability of an actual observation being greater than 35 is half of the remaining 5%, or 2.5%.

Nikki Ali and Donald Ankard borrowed $15,000 to help finance their wedding and reception. The annual payment loan carries a term of seven years and an 11% interest rate. Respectively, the amount of the first payment that is interest and the amount of the second payment that is principal are approximately: A. $1,468; $1,702. B. $1,650; $1,468. C. $1,650; $1,702.

Step 1: Calculate the annual payment. Using a financial calculator (remember to clear your registers): PV = 15,000; FV = 0; I/Y = 11; N = 7; PMT = $3,183 Step 2: Calculate the portion of the first payment that is interest. Interest1 = Principal × Interest rate = (15,000 × 0.11) = 1,650 Step 3: Calculate the portion of the second payment that is principal. Principal1 = Payment − Interest1 = 3,183 − 1,650 = 1,533 (interest calculation is from Step 2) Interest2 = Principal remaining × Interest rate = [(15,000 − 1.533) × 0.11] = 1,481 Principal2 = Payment − Interest1 = 3,183 − 1,481 = 1,702

If the historical mean return on an investment is 2.0%, the standard deviation is 8.8%, and the risk free rate is 0.5%, what is the coefficient of variation (CV)?

The CV = the standard deviation of returns / mean return = 8.8% / 2.0% = 4.4. The CV is a measure of risk per unit of mean return. When ranking portfolios based on the CV, a lower value is preferred to higher. (Module 2.4, LOS 2.j)

In order to test if Stock A is more volatile than Stock B, prices of both stocks are observed to construct the sample variance of the two stocks. The appropriate test statistics to carry out the test is the:

The F test is used to test the differences of variance between two samples.

Jill Woodall believes that the average return on equity in the retail industry, µ, is less than 15%. If Woodall wants to examine the data statistically, what are the appropriate null (H0) and alternative (Ha) hypotheses for her study?

The alternative hypothesis may be thought of as what the analyst is trying to establish with statistical evidence, in this case that µ < 0.15. The opposite of the alternative will be the null hypothesis, in this case that µ ≥ 0.15. Remember that the null hypothesis always includes the "equal to" condition: ≥, ≤, =. The alternative hypothesis can only have one of these signs: <, >, ≠.

The mean monthly return on a security is 0.42% with a standard deviation of 0.25%. What is the coefficient of variation?

The coefficient of variation expresses how much dispersion exists relative to the mean of a distribution and is found by CV = s / mean, or 0.25 / 0.42 = 0.595, or 60%.

Books Fast, Inc., prides itself on shipping customer orders quickly. Downs Shipping Service has promised that mean delivery time will be less than 72 hours. Books Fast sampled 27 of its customers and found a mean delivery time of 76 hours, with a sample standard deviation of 6 hours. Based on this sample and assuming a normal distribution of delivery times, what is the confidence interval at 5% significance? A. 73.63 to 78.37 hours. B. 68.50 to 83.50 hours. C. 65.75 to 86.25 hours.

The confidence interval is equal to 76 + or − (2.056)(6 / √27) = 73.63 to 78.37 hours.Because the sample size is small, we use the t-distribution with (27 − 1) degrees of freedom.

For two random variables, P(X = 20, Y = 0) = 0.4, and P(X = 30, Y = 50) = 0.6. Given that E(X) is 26 and E(Y) is 30, the covariance of X and Y is:

The covariance is COV(XY) = (0.4 × ((20 - 26) × (0 - 30))) + ((0.6 × (30 - 26) × (50 - 30))) = 120

Which of the following statements about the frequency distribution shown below is least accurate? Return Interval Frequency 0% to 5% 10 > 5% to 10% 20 > 10% to 15% 30 > 15% to 20% 20

The cumulative absolute frequency of the fourth interval is 80, which is the sum of the absolute frequencies from the first to the fourth intervals. (Module 2.1, LOS 2.c)

The owner of a bowling alley determined that the average weight for a bowling ball is 12 pounds with a standard deviation of 1.5 pounds. A ball denoted "heavy" should be one of the top 2% based on weight. Assuming the weights of bowling balls are normally distributed, at what weight (in pounds) should the "heavy" designation be used? A. 14.22 pounds. B. 15.08 pounds. C. 14.00 pounds.

The first step is to determine the z-score that corresponds to the top 2%. Since we are only concerned with the top 2%, we only consider the right hand of the normal distribution. Looking on the cumulative table for 0.9800 (or close to it) we find a z-score of 2.05. To answer the question, we need to use the normal distribution given: 98 percentile = sample mean + (z-score)(standard deviation) = 12 + 2.05(1.5) = 15.08.

The first step in the revenue recognition process is to:

The five steps in revenue recognition are: Identify the contract or contracts with the customer. Identify the performance obligations in the contract(s). Determine a transaction price. Allocate the transaction price to the performance obligations. Recognize revenue when/as the performance obligations have been satisfied.

Michael Philizaire 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:

The geometric return is calculated as follows: [(1 + 0.20) × (1 + 0.15) × (1 + 0.0) (1 - 0.05) (1 - 0.05)]1/5 - 1, or [1.20 × 1.15 × 1.0 × 0.95 × 0.95]0.2 - 1 = 0.449, or 4.49%.

Trina Romel, mutual fund manager, is taking over a poor-performing fund from a colleague. Romel wants to calculate the return on the portfolio. Over the last five years, the fund's annual percentage returns were: 25, 15, 12, -8, and -14. Determine if the geometric return of the fund will be less than or greater than the arithmetic return and calculate the fund's geometric return: Geometric Return Geometric compared to Arithmetic

The geometric return is calculated as follows: [(1 + 0.25)(1 + 0.15)(1 + 0.12)(1 - 0.08)(1 - 0.14)]1/5 - 1, or [1.25 × 1.15 × 1.12 × 0.92 × 0.86]0.2 - 1 = 0.4960, or 4.96%. The geometric return will always be less than or equal to the arithmetic return. In this case the arithmetic return was 6%.

Twenty students take an exam. The percentages of questions they answer correctly are ranked from lowest to highest as follows: 32 49 57 58 61 62 64 66 67 67 68 69 71 72 72 74 76 80 82 83 In a frequency distribution from 30% to 90% that is divided into six equal-sized intervals, the absolute frequency of the sixth interval is: A) 2.

The intervals are 30% ≤ x < 40%, 40% ≤ x < 50%, 50% ≤ x < 60%, 60% ≤ x < 70%, 70% ≤ x < 80%, and 80% ≤ x ≤ 90%. There are 3 scores in the range 80% ≤ x ≤ 90%.

In the currency market, traders quote the:

The nominal exchange rate is quite simply the price of one currency relative to another. It is the quote observed in currency markets.

Which of the following is least likely a condition of a perfectly competitive market?

The only item listed that is NOT a condition of a perfectly competitive market is that sellers make economic profits. In fact, sellers do not make economic profit after taking into account their opportunity costs.

If Stock X has a standard deviation of returns of 18.9% and Stock Y has a standard deviation of returns equal to 14.73% and returns on the stocks are perfectly positively correlated, the standard deviation of an equally weighted portfolio of the two is:

The standard deviation of two stocks that are perfectly positively correlated is the weighted average of the standard deviations: 0.5(18.9) + 0.5(14.73) = 16.82%. This relationship is true only when the correlation is one. Otherwise, you must use the formula: σp=√w21σ21+w22σ22+2w1w2σ1σ2ρ1,2σp=w12σ12+w22σ22+2w1w2σ1σ2ρ1,2 (Module 3.3, LOS 3.k) Related Material

The sustainable growth rate of an economy is best viewed as the sum of the growth rates of:

The sustainable rate of economic growth can be estimated as the sum of the growth rate of the labor force and the growth rate of labor productivity.

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?

The t-statistic for a test of the population correlation coefficient is r√n−2√1−r2rn−21−r2, where r is the sample correlation coefficient and n is the sample size.

Consider the following set of stock returns: 12%, 23%, 27%, 10%, 7%, 20%,15%. The third quartile is:

The third quartile is calculated as: Ly = (7 + 1) (75/100) = 6. When we order the observations in ascending order: 7%, 10%, 12%, 15%, 20%, 23%, 27%, "23%" is the sixth observation from the left.

The government is reducing its spending to balance the budget, while the central bank is lowering its official policy rate. What will most likely be the combined effect on the economy?

The private sector will expand as a percentage of GDP because (1) the public sector will decrease as a percentage of GDP due to government spending cuts and (2) lower interest rates should cause the private sector to expand.

A sample of returns for four randomly selected assets in a portfolio is shown below: Asset Return (%) A 1.3 B 1.4 C 2.2 D 3.4 What is the sample standard deviation of asset returns?

The sample standard deviation equals the square root of the sum of the squares of the position returns less the mean return, divided by the number of observations in the sample minus one. Position Return (%) (Return - Mean)2 A 1.30 .60 B 1.40 .46 C 2.2 0.02 D 3.4 1.76 Mean 8.3/4 = 2.075 Sum = 2.83 Std. Dev. = [2.83 / (4 - 1)]0.5 = 0.97

In a perfectly competitive industry, the short-run supply curve for the market is the:

The short-run supply curve for a firm is its marginal cost curve above the average variable cost curve. The short-run supply curve of the market is the sum of the supply curves for all firms in the industry. (Module 9.4, LOS 9.c)

The primary factors that influence the price elasticity of demand for a product are:

The three primary factors influencing the price elasticity of demand for a good are the availability of substitute goods, the proportions of consumers' budgets spent on the good, and the time since the price change. If there are good substitutes, when the price of the good goes up, some customers will switch to substitute goods. For goods that represent a relatively small proportion of consumers' budgets, a change in price will have little effect on the quantity demanded. For most goods, the price elasticity of demand is greater in the long run than in the short run.

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are: A. historical cost and going concern. B. accrual accounting and historical cost. C. going concern and accrual accounting

The two underlying assumptions of financial statements according to the conceptual framework are accrual accounting and the going concern assumption. Historical cost is one of several measurement bases that may be used for financial reporting.

An analyst calculates that the mean of a sample of 200 observations is 5. The analyst wants to determine whether the calculated mean, which has a standard error of the sample statistic of 1, is significantly different from 7 at the 5% level of significance. Which of the following statements is least accurate?:

The way the question is worded, this is a two tailed test. The alternative hypothesis is not Ha: M > 7 because in a two-tailed test the alternative is =, while < and > indicate one-tailed tests. A test statistic is calculated by subtracting the hypothesized parameter from the parameter that has been estimated and dividing the difference by the standard error of the sample statistic. Here, the test statistic = (sample mean - hypothesized mean) / (standard error of the sample statistic) = (5 - 7) / (1) = -2. The calculated Z is -2, while the critical value is -1.96. The calculated test statistic of -2 falls to the left of the critical Z-statistic of -1.96, and is in the rejection region. Thus, the null hypothesis is rejected and the conclusion is that the sample mean of 5 is significantly different than 7. What the negative sign shows is that the mean is less than 7; a positive sign would indicate that the mean is more than 7. The way the null hypothesis is written, it makes no difference whether the mean is more or less than 7, just that it is not 7.

An analyst calculates a winsorized mean return of 3.2% for an investment fund. This measure most likely:

The winsorized mean is a technique for dealing with outliers. For example, a 90% winsorized mean replaces the lowest 5% of values with the fifth percentile, and replaces the highest 5% of values with the 95th percentile. The arithmetic mean weights all observations equally. The geometric mean captures the compounded growth rate of the fund.

A country's year-end consumer price index over a 5-year period is as follows: Year 1 106.5 Year 2 114.2 Year 3 119.9 Year 4 124.8 Year 5 128.1 The behavior of inflation as measured by this index is best described as:

The yearly inflation rate is as follows: Year 2 (114.2 - 106.5) / 106.5 = 7.2% Year 3 (119.9 - 114.2) / 114.2 = 5.0% Year 4 (124.8 - 119.9) / 119.9 = 4.1% Year 5 (128.1 - 124.8) / 124.8 = 2.6% The inflation rate is decreasing, but the price level is still increasing. This is best described as disinflation. (Module 11.2, LOS 11.g)

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?

The z-statistic is calculated by subtracting the hypothesized parameter from the parameter that has been estimated and dividing the difference by the standard error of the sample statistic. Here, the test statistic = (sample mean − hypothesized mean) / (population standard deviation / (sample size)1/2 = (X − μ) / (σ / n1/2) = (7 − 5) / (2 / 171/2) = (2) / (2 / 4.1231) = 4.12.

The monetary authority of The Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S. dollars in transactions. This exchange rate regime is best described as:

This exchange rate regime is a currency board arrangement. The country has not formally dollarized because it continues to issue a domestic currency. A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate. (Module 15.3, LOS 15.i)

A country's central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country's exchange rate regime is best described as a:

This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling bands allows the percentage deviation from the pegged exchange rate to increase over time.

Elise Corrs, hedge fund manager and avid downhill skier, was recently granted permission to take a 4 month sabbatical. During the sabbatical, (scheduled to start in 11 months), Corrs will ski at approximately 12 resorts located in the Austrian, Italian, and Swiss Alps. Corrs estimates that she will need $6,000 at the beginning of each month for expenses that month. (She has already financed her initial travel and equipment costs.) Her financial planner estimates that she will earn an annual rate of 8.5% during her savings period and an annual rate of return during her sabbatical of 9.5%. How much does she need to put in her savings account at the end of each month for the next 11 months to ensure the cash flow she needs over her sabbatical? Each month, Corrs should save approximately: A. $2,080.B. $2,065.C. $2,070.

This is a two-step problem. First, we need to calculate the present value of the amount she needs over her sabbatical. (This amount will be in the form of an annuity due since she requires the payment at the beginning of the month.) Then, we will use future value formulas to determine how much she needs to save each month. Step 1: Calculate present value of amount required during the sabbatical Using a financial calculator: Set to BEGIN Mode, then N = 4; I/Y = 9.5 / 12 = 0.79167; PMT = 6,000; FV = 0; CPT → PV = -23,719. Step 2: Calculate amount to save each month Using a financial calculator: Make sure it is set to END mode, then N = 11; I/Y = 8.5 / 12.0 = 0.70833; PV = 0; FV = 23,719; CPT → PMT= -2,081, or approximately $2,080. (Module 1.3, LOS 1.d)

An investor wants to receive $1,000 at the beginning of each of the next ten years with the first payment starting today. If the investor can earn 10 percent interest, what must the investor put into the account today in order to receive this $1,000 cash flow stream?A. $6,145.B. $7,145.C. $6,759.

This is an annuity due problem. There are several ways to solve this problem. Method 1: PV of first $1,000 = $1,000PV of next 9 payments at 10% = 5,759.02Sum of payments = $6,759.02 Method 2: Put calculator in BGN mode.N = 10; I = 10; PMT = -1,000; CPT → PV = 6,759.02Note: make PMT negative to get a positive PV. Don't forget to take your calculator out of BGN mode. Method 3: You can also find the present value of the ordinary annuity $6,144.57 and multiply by 1 + k to add one year of interest to each cash flow. $6,144.57 × 1.1 = $6,759.02.

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?

This requires the addition formula, P(callable) + P(warrants) - P(callable and warrants) = P(callable or warrants) = 14/20 + 5/20 - 2/20 = 17/20 = 0.85. (Module 3.1, LOS 3.e)

An analyst is asked to calculate standard deviation using monthly returns over the last five years. These data are best described as:

Time series data are taken at equally spaced intervals, such as monthly, quarterly, or annual. Cross sectional data are taken at a single point in time. An example of cross-sectional data is dividend yields on 500 stocks as of the end of a year.

The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800 five years ago and is 1.6300 today. The percent change in the Australian dollar relative to the British pound is closest to:

To correctly calculate the percentage change in AUD relative to GBP, convert the exchange rates so that AUD is the base currency: 1 / 1.4800 = 0.6757 GBP/AUD five years ago and 1 / 1.6300 = 0.6135 GBP/AUD today. The percentage change in the Australian dollar against the British pound is 0.6135 / 0.6757 − 1 = -9.2%. Note that the GBP has appreciated against the AUD by 1.6300 / 1.4800 − 1 = 10.1% over the same period.

In which of the following industry structures is a firm least likely able to increase its total revenue by decreasing the price of its output? Monopolistic, Oligopoly, or Perfect Competition

Under perfect competition each firm is selling all of its output at the market price. Therefore any firm that sells its output at less than the market price will decrease its total revenue. Under monopolistic competition or oligopoly, firms are price searchers. Decreasing the price will increase the quantity a firm sells and may increase or decrease total revenue.

Determine the cash flow from operations given the following table: ItemAmountCash payment of dividends$30 Sale of equipment$25 Net income$25 Purchase of land$15 Increase in accounts payable$20 Sale of preferred stock$25 Increase in deferred taxes$5 A. -$5.B. $10.C. -$10.

Using the indirect method, CFO = Net income 25 + increase in accounts payable 20 + increase in deferred taxes 5 - profit on sale of equipment 15 = $35. Increases in accounts payable and deferred taxes are sources of operating cash that are not included in net income and must be added. Profit on sale of equipment is a CFI item that must be removed from net income. No adjustment needs to be made for cash payment of dividends (CFF), sale of preferred stock (CFF), or purchase of land (CFI) because they are not included in net income. Only the profit on sale of equipment, not the full proceeds from sale, is included in net income. (Module 20.2, LOS 20.f)

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?

Walker should disagree with both statements. Price changes resulting from increases in the quality of goods, do not represent inflation. However, the Consumer Price Index is affected by biases from product quality, as well as new goods and substitution, causing it to overstate the rate of inflation. As a result, increases in wages that are based on CPI will more than compensate for actual increases in the cost of living.

An investment experienced the following returns over the last 10 years: Year Return 1 2% 2 9% 3 8% 4 -5% 5 6% 6 8% 7 9% 8 -3% 9 10% 10 3% Using a target return of 4%, the target semideviation of returns over the period is closest to:

Year Return Deviations below 4% Squared deviations12.00%-2.00%0.000429.00%38.00%4-5.00%-9.00%0.008156.00%68.00%79.00%8-3.00%-7.00%0.0049910.00%103.00%-1.00%0.0001 TOTAL0.0135 Target semideviation = √0.013510−1=0.0387=3.87%

A stock increased in value last year. Which will be greater, its continuously compounded or its holding period return? A. Neither, they will be equal. B. Its continuously compounded return. C. Its holding period return.

When a stock increases in value, the holding period return is always greater than the continuously compounded return that would be required to generate that holding period return. For example, if a stock increases from $1 to $1.10 in a year, the holding period return is 10%. The continuously compounded rate needed to increase a stock's value by 10% is Ln(1.10) = 9.53%.

An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity?

With PMT = 5,000; N = 7; I/Y = 11.5; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115)4 = $15,000.68.

A survey is taken to determine whether the average starting salaries of CFA charterholders is equal to or greater than $58,500 per year. What is the test statistic given a sample of 175 newly acquired CFA charterholders with a mean starting salary of $67,000 and a standard deviation of $5,200? A. 21.62.B. -1.63.C. 1.63.

With a large sample size (175) the z-statistic is used. The z-statistic is calculated by subtracting the hypothesized parameter from the parameter that has been estimated and dividing the difference by the standard error of the sample statistic. Here, the test statistic = (sample mean - hypothesized mean) / (population standard deviation / (sample size)1/2 = (X − µ) / (σ / n1/2) = (67,000 - 58,500) / (5,200 / 1751/2) = (8,500) / (5,200 / 13.22) = 21.62.

Consider the following statements: Statement 1: "When oligopoly firms cheat on price fixing agreements, the result increases economic efficiency." Statement 2: "Monopolistic competition is inefficient because a large deadweight loss from advertising and marketing costs is a characteristic of this form of competition." With respect to these statements:

With a price-fixing agreement, producers in an oligopoly market restrict output to increase price and joint profits just as a monopoly producer does. Such agreements decrease economic efficiency. When these agreements are violated, quantity produced increases, increasing economic efficiency. Therefore Statement 1 is accurate. The efficiency of monopolistic competition is not clear. While increased opportunity cost is associated with the intensive marketing and advertising activities that are characteristic of monopolistic competition, consumers definitely benefit from these selling activities because they receive information that often enables them to make better purchasing decisions. Hence the advertising and marketing costs may be more than the efficient amount, but do not represent a deadweight loss. Therefore Statement 2 is inaccurate. (Module 9.3, LOS 9.d)

A country that wishes to narrow its trade deficit devalues its currency. If domestic demand for imports is perfectly price-inelastic, whether devaluing the currency will result in a narrower trade deficit is least likely to depend on:

With perfectly inelastic demand for imports, currency devaluation of any size will increase total expenditures on imports (same quantity at higher prices in the home currency). The trade deficit will narrow only if the increase in export revenues is larger than the increase in import spending. To satisfy the Marshall-Lerner condition when import demand elasticity is zero, export demand elasticity must be larger than the ratio of imports to exports in the country's international trade. (Module 15.3, LOS 15.j)