MISC QUESTIONS WITH ANSWERS.
Sharpe, Treynor ANS -Sharpe: investment's return compared to its risk (Rp-Rf/sd port), slope of CAL,
Treynor: excess returns generated for each unit of risk beta/systematic risk (Rp-Rf/beta)
AI ANS -systems that can be programmed to stimulate human cognition (neural networks)
Which of the following risk management strategies is most accurately described as shifting a risk?
A)A retail store owner buys a fire insurance policy on the building.
B)A farmer takes a short position in a futures contract to deliver wheat.
C)A portfolio manager diversifies her investments across different industries. ANS -B, hedging price risk
with derivatives contract would be shifting risk
An analyst has estimated that the returns for an asset, conditional on the performance of the overall
economy, are:
ReturnProbabilityEconomic Growth5%20%Poor10%40%Average14%40%Good
The conditional expected returns on the market portfolio are:
ReturnProbabilityEconomic Growth2%20%Poor10%40%Average15%40%Good
According to the CAPM, if the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to
the market portfolio, the analyst should:
A)sell (or sell short) the risky asset because its expected return is less than equilibrium expected return
on the market portfolio.
B)buy the risky asset because the analyst expects the return on it to be higher than its required return in
equilibrium.
C)sell (or sell short) the risky asset because its expected return is not sufficient to compensate for its
systematic risk. ANS -C, risky asset return: 10.6%
,market return : 10.4
capm return: 10.94
since risky asset is less than required return you should sell... because return is not sufficient to
compensate for risk
m² ANS -risk adjusted return of portfolio
Sharpe ratio * sd benchmark + rf
Harmonic Mean ANS -avg price per share
(n)/[(1/x1)+(1/x2)+(1/x3)]
Colonia has only two political parties, the Wigs and the Wags. If the Wags are elected, there is a 32%
probability of a tax increase over the next four years. If the Wigs are elected, there is a 60% probability
of a tax increase. Based on the current polls, there is a 20% probability that the Wags will be elected.
The sum of the (unconditional) probability of a tax increase and the joint probability that the Wigs will
be elected and there will be no tax increase are closest to:
A)55%.
B)70%.
C)85%. ANS -C
Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement.
He believes he will need $37,000 at the beginning of each year for 25 years of retirement, with the first
withdrawal on the day he retires. Ralph assumes that his investment account will return 8%. The
amount he needs to deposit at the beginning of this year and each of the following 14 years (15 deposits
in all) is closest to:
A)$1,350.
B)$1,450.
,C)$1,550. ANS -B, switch to BGN mode, 1. find out how much you need 2. set that as FV and calculate
PMT
The current price of Bosto shares is 50. Over the coming year, there is a 40% probability that share
returns will be 10%, a 40% probability that share returns will be 12.5%, and a 20% probability that share
returns will be 30%. Bosto's expected return and standard deviation of returns for the coming year are
closest to:
Expected returnStandard deviation
A)15.0%7.58%
B)17.5%5.75%
C)17.5%7.58% ANS -A
Which of the following statements about probability distributions is least accurate?
A)Continuous uniform distributions have cumulative distribution functions that are straight lines from
zero to one.
B)The probability that a continuously distributed random variable will take on a specific value is always
zero.
C)A normally distributed random variable divided by its standard deviation will follow a standard normal
probability distribution. ANS -C, standard normal distribution has mean of zero,
X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability
of Y is 40%, and the probability of Z is 20%. Which of the following is closest to the probability that
either X or Y will occur?
A)70%.
B)58%.
C)12%. ANS -B, adding probabilities
An analyst should use a t-test with n - 1 degrees of freedom to test a null hypothesis that two variables
have:
A)equal means.
B)equal variances.
C)no linear relationship. ANS -A, difference in means hypothesis tests are t-tests with n-1 dof,
, correlation tests are t-tests with n-2 dof,
equality of variances are f-tests
The percentage changes in annual earnings for a company are approximately normally distributed with a
mean of 5% and a standard deviation of 12%. The probability that the average change in earnings over
the next five years will be greater than 15.5% is closest to:
A)2.5%.
B)5.0%.
C)10.0%. ANS -A, 12%/root5 > (15.5-5)/5.366 = 1.96
An analyst is evaluating the degree of competition in an industry and compiles the following
information:
Few significant barriers to entry or exit exist.
Firms in the industry produce slightly differentiated products.
Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the
industry.
The analyst should characterize the competitive structure of this industry as:
A)oligopoly.
B)monopoly.
C)monopolistic competition. ANS -C, oligopoly: firms highly dependent on each others decisions
Current, Capital and Financial ANS -Current: merchandise/services/income receipts/unilateral transfers
Capital: capital transfers/sales and purchases of non-financial assets
Financial Account: gov.-owned assets abroad, foreign-owned assets in country
Depreciation of a country's currency is most likely to narrow its trade deficit when:
Sharpe, Treynor ANS -Sharpe: investment's return compared to its risk (Rp-Rf/sd port), slope of CAL,
Treynor: excess returns generated for each unit of risk beta/systematic risk (Rp-Rf/beta)
AI ANS -systems that can be programmed to stimulate human cognition (neural networks)
Which of the following risk management strategies is most accurately described as shifting a risk?
A)A retail store owner buys a fire insurance policy on the building.
B)A farmer takes a short position in a futures contract to deliver wheat.
C)A portfolio manager diversifies her investments across different industries. ANS -B, hedging price risk
with derivatives contract would be shifting risk
An analyst has estimated that the returns for an asset, conditional on the performance of the overall
economy, are:
ReturnProbabilityEconomic Growth5%20%Poor10%40%Average14%40%Good
The conditional expected returns on the market portfolio are:
ReturnProbabilityEconomic Growth2%20%Poor10%40%Average15%40%Good
According to the CAPM, if the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to
the market portfolio, the analyst should:
A)sell (or sell short) the risky asset because its expected return is less than equilibrium expected return
on the market portfolio.
B)buy the risky asset because the analyst expects the return on it to be higher than its required return in
equilibrium.
C)sell (or sell short) the risky asset because its expected return is not sufficient to compensate for its
systematic risk. ANS -C, risky asset return: 10.6%
,market return : 10.4
capm return: 10.94
since risky asset is less than required return you should sell... because return is not sufficient to
compensate for risk
m² ANS -risk adjusted return of portfolio
Sharpe ratio * sd benchmark + rf
Harmonic Mean ANS -avg price per share
(n)/[(1/x1)+(1/x2)+(1/x3)]
Colonia has only two political parties, the Wigs and the Wags. If the Wags are elected, there is a 32%
probability of a tax increase over the next four years. If the Wigs are elected, there is a 60% probability
of a tax increase. Based on the current polls, there is a 20% probability that the Wags will be elected.
The sum of the (unconditional) probability of a tax increase and the joint probability that the Wigs will
be elected and there will be no tax increase are closest to:
A)55%.
B)70%.
C)85%. ANS -C
Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement.
He believes he will need $37,000 at the beginning of each year for 25 years of retirement, with the first
withdrawal on the day he retires. Ralph assumes that his investment account will return 8%. The
amount he needs to deposit at the beginning of this year and each of the following 14 years (15 deposits
in all) is closest to:
A)$1,350.
B)$1,450.
,C)$1,550. ANS -B, switch to BGN mode, 1. find out how much you need 2. set that as FV and calculate
PMT
The current price of Bosto shares is 50. Over the coming year, there is a 40% probability that share
returns will be 10%, a 40% probability that share returns will be 12.5%, and a 20% probability that share
returns will be 30%. Bosto's expected return and standard deviation of returns for the coming year are
closest to:
Expected returnStandard deviation
A)15.0%7.58%
B)17.5%5.75%
C)17.5%7.58% ANS -A
Which of the following statements about probability distributions is least accurate?
A)Continuous uniform distributions have cumulative distribution functions that are straight lines from
zero to one.
B)The probability that a continuously distributed random variable will take on a specific value is always
zero.
C)A normally distributed random variable divided by its standard deviation will follow a standard normal
probability distribution. ANS -C, standard normal distribution has mean of zero,
X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability
of Y is 40%, and the probability of Z is 20%. Which of the following is closest to the probability that
either X or Y will occur?
A)70%.
B)58%.
C)12%. ANS -B, adding probabilities
An analyst should use a t-test with n - 1 degrees of freedom to test a null hypothesis that two variables
have:
A)equal means.
B)equal variances.
C)no linear relationship. ANS -A, difference in means hypothesis tests are t-tests with n-1 dof,
, correlation tests are t-tests with n-2 dof,
equality of variances are f-tests
The percentage changes in annual earnings for a company are approximately normally distributed with a
mean of 5% and a standard deviation of 12%. The probability that the average change in earnings over
the next five years will be greater than 15.5% is closest to:
A)2.5%.
B)5.0%.
C)10.0%. ANS -A, 12%/root5 > (15.5-5)/5.366 = 1.96
An analyst is evaluating the degree of competition in an industry and compiles the following
information:
Few significant barriers to entry or exit exist.
Firms in the industry produce slightly differentiated products.
Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the
industry.
The analyst should characterize the competitive structure of this industry as:
A)oligopoly.
B)monopoly.
C)monopolistic competition. ANS -C, oligopoly: firms highly dependent on each others decisions
Current, Capital and Financial ANS -Current: merchandise/services/income receipts/unilateral transfers
Capital: capital transfers/sales and purchases of non-financial assets
Financial Account: gov.-owned assets abroad, foreign-owned assets in country
Depreciation of a country's currency is most likely to narrow its trade deficit when:
