ARM 401 Exam Practice With Detailed
Explanations and Answers Questions from
Premier Scholars Worldwide
In a normal distribution, fewer than 5% of outcomes are
A. Between one and two standard deviations above or below the mean.
B. Outside two standard deviations above or below the mean.
C. Within one standard deviation above or below the mean.
D. Between the mean and two standard deviations above or below the mean. - -correct ans-
-B
Which one of the following statements about event tree analysis is true?
A. Event trees analyze the consequences of accidental events.
B. Event trees show the results of a progression of decisions.
C. Event trees assume no risk control measures have been deployed.
D. Event trees can be used for qualitative analysis, but not for quantitative analysis. - -correct
ans- -A
A main difference between decision trees and event trees is
A. That decision trees have one possible outcome; event trees have several possible
outcomes.
B. The portrayal and analysis of various pathways.
C. The process that is used to prepare the diagrams.
,D. That event trees analyze the consequences of accidental events rather than decisions. -
correct ans- -D
Assuming a normal distribution, 34.13% of all outcomes are within one standard deviation
above the mean. If the portion of the distribution between one and two standard deviations
above the mean contains 13.59% of all outcomes, what percentage is contained in the area
between the mean and two standard deviations below the mean?
A. 20.54%
B. 47.72%
C. 52.28%
D. 68.26% - -correct ans- -B
Regression analysis assumes that the variable being forecast
A. Can only be used when production is a variable.
B. Varies predictably with another variable.
C. Stays constant and does not change over time.
D. Can only be used when time is a variable. - -correct ans- -B
Timber Company has sold lumber and wooden poles for many years. The company is
considering expanding into plywood production by building a plywood manufacturing facility.
As this is a major decision, the company gathered data on the following variables: labor costs,
cost of raw materials (wood, glue, etc.), energy costs, sales price (dollars per square foot),
and estimated sales volume. A probability distribution for each of these variables was
created. Then a computer was programmed to select a value from each probability
distribution and to calculate the net income before taxes. The computer was programmed to
repeat the calculation 250,000 times, and to create a probability distribution of the
outcomes. The results showed an expected value of $2.35 million in annual net income
before taxes. Eighty-two percent of the outcomes were positive net income before taxes. The
type of analysis that Timber Company performed i - -correct ans- -A
Management of LMN Insurance Company is considering investing in the Stability-Growth
Mutual Fund; however they are concerned about the volatility of the investment. The fund's
manager said that on any given day, there is a 5% probability of losing more than 3% of the
, investment's worth. The statistic quoted by the fund manager is A. Coefficient of variation. B.
Earnings-at-risk
C. Value-at-risk.
D. Standard deviation. - -correct ans- -C
Which one of the following statements concerning Monte Carlo Simulation is true?
A. Monte Carlo Simulation provides a single, certain, answer; rather than a range of possible
outcomes.
B. Monte Carlo Simulation can consider multiple variables and provides a range of possible
outcomes.
C. Once the data are assembled, a single calculation is performed based on the highest
likelihood of each outcome, and inference is based on this single calculation.
D. Monte Carlo Simulation is popular as it can be easily performed using a simple calculator. -
correct ans- -B
A land developer hired Build Rite Construction Company to build three sets of starter homes
in a Metro City suburb. The construction is to be completed in phases, with completion of
each phase (Phase 1, then Phase 2, and then Phase 3) required before the next construction
phase can begin. As this is a large scale project, Build Rite's controller used computer
simulation to analyze the time necessary for completion of each phase. The best case, most
likely, and worst case results, respectively, are summarized below. Based on the simulation
results, which one of the following statements is true?
Phase 1: 15 months, 16 months, 18 months
Phase 2: 10 months, 12 months, 24 months
Phase 3: 17 months, 20 months, 36 months
A. Under the best case scenario, construction of all three phases will be completed in three or
few years.
B. Construction will be completed in exactly four years.
C. Under the worst case scenario, construc - -correct ans- -D
Which one of the following is a benefit of the conditional value at risk (CVaR) method?
A. It allows for changes in the portfolio.
Explanations and Answers Questions from
Premier Scholars Worldwide
In a normal distribution, fewer than 5% of outcomes are
A. Between one and two standard deviations above or below the mean.
B. Outside two standard deviations above or below the mean.
C. Within one standard deviation above or below the mean.
D. Between the mean and two standard deviations above or below the mean. - -correct ans-
-B
Which one of the following statements about event tree analysis is true?
A. Event trees analyze the consequences of accidental events.
B. Event trees show the results of a progression of decisions.
C. Event trees assume no risk control measures have been deployed.
D. Event trees can be used for qualitative analysis, but not for quantitative analysis. - -correct
ans- -A
A main difference between decision trees and event trees is
A. That decision trees have one possible outcome; event trees have several possible
outcomes.
B. The portrayal and analysis of various pathways.
C. The process that is used to prepare the diagrams.
,D. That event trees analyze the consequences of accidental events rather than decisions. -
correct ans- -D
Assuming a normal distribution, 34.13% of all outcomes are within one standard deviation
above the mean. If the portion of the distribution between one and two standard deviations
above the mean contains 13.59% of all outcomes, what percentage is contained in the area
between the mean and two standard deviations below the mean?
A. 20.54%
B. 47.72%
C. 52.28%
D. 68.26% - -correct ans- -B
Regression analysis assumes that the variable being forecast
A. Can only be used when production is a variable.
B. Varies predictably with another variable.
C. Stays constant and does not change over time.
D. Can only be used when time is a variable. - -correct ans- -B
Timber Company has sold lumber and wooden poles for many years. The company is
considering expanding into plywood production by building a plywood manufacturing facility.
As this is a major decision, the company gathered data on the following variables: labor costs,
cost of raw materials (wood, glue, etc.), energy costs, sales price (dollars per square foot),
and estimated sales volume. A probability distribution for each of these variables was
created. Then a computer was programmed to select a value from each probability
distribution and to calculate the net income before taxes. The computer was programmed to
repeat the calculation 250,000 times, and to create a probability distribution of the
outcomes. The results showed an expected value of $2.35 million in annual net income
before taxes. Eighty-two percent of the outcomes were positive net income before taxes. The
type of analysis that Timber Company performed i - -correct ans- -A
Management of LMN Insurance Company is considering investing in the Stability-Growth
Mutual Fund; however they are concerned about the volatility of the investment. The fund's
manager said that on any given day, there is a 5% probability of losing more than 3% of the
, investment's worth. The statistic quoted by the fund manager is A. Coefficient of variation. B.
Earnings-at-risk
C. Value-at-risk.
D. Standard deviation. - -correct ans- -C
Which one of the following statements concerning Monte Carlo Simulation is true?
A. Monte Carlo Simulation provides a single, certain, answer; rather than a range of possible
outcomes.
B. Monte Carlo Simulation can consider multiple variables and provides a range of possible
outcomes.
C. Once the data are assembled, a single calculation is performed based on the highest
likelihood of each outcome, and inference is based on this single calculation.
D. Monte Carlo Simulation is popular as it can be easily performed using a simple calculator. -
correct ans- -B
A land developer hired Build Rite Construction Company to build three sets of starter homes
in a Metro City suburb. The construction is to be completed in phases, with completion of
each phase (Phase 1, then Phase 2, and then Phase 3) required before the next construction
phase can begin. As this is a large scale project, Build Rite's controller used computer
simulation to analyze the time necessary for completion of each phase. The best case, most
likely, and worst case results, respectively, are summarized below. Based on the simulation
results, which one of the following statements is true?
Phase 1: 15 months, 16 months, 18 months
Phase 2: 10 months, 12 months, 24 months
Phase 3: 17 months, 20 months, 36 months
A. Under the best case scenario, construction of all three phases will be completed in three or
few years.
B. Construction will be completed in exactly four years.
C. Under the worst case scenario, construc - -correct ans- -D
Which one of the following is a benefit of the conditional value at risk (CVaR) method?
A. It allows for changes in the portfolio.
