Topic 15 - Probabilities

Test ID: 8450917

Question #1 of 21

Question ID: 438710

A company says that whether its earnings increase depends on whether it increased its dividends. From this we know:
A) P(dividend increase or earnings increase) = P(both dividend and earnings increase).
B) P(both dividend increase and earnings increase) = P(dividend increase).
C) P(dividend increase | earnings increase) is not equal to P(earnings increase).
D) P(earnings increase | dividend increase) is not equal to P(earnings increase).
Explanation
If two events A and B are dependent, then the conditional probabilities of P(A|B) and P(B|A) will not equal their respective
unconditional probabilities (of P(A) and P(B), respectively). The other choices may or may not occur, e.g., P(A | B) = P(B) is
possible but not necessary.

Question #2 of 21

Question ID: 438722

A conditional expectation involves:

A) determining the expected joint probability.
B) estimating the skewness.
C) calculating the conditional variance.
D) refining a forecast because of the occurrence of some other event.
Explanation
Conditional expected values are contingent upon the occurrence of some other event. The expectation changes as new
information is revealed.

Question #3 of 21

Question ID: 438709

An investor is choosing one of twenty securities. Ten of the securities are stocks and ten are bonds. Four of the ten stocks were
issued by utilities, the other six were issued by industrial firms. Two of the ten bonds were issued by utilities, the other eight were
issued by industrial firms. If the investor chooses a security at random, the probability that it is a bond or a security issued by an
industrial firm is:
A) 0.80.
B) 0.50.
C) 0.60.
D) 0.70.
Explanation
Let B represent the set of bonds and I the set of industrial firms. The desired probability is the probability of the union of sets B
and I, P(B I). According to the theorems of probability, P(B I)=P(B)+P(I)-P(BI), where P(B) is the probability that a security is a

1 of 8

bond=P(B)=10/20, P(I) is the probability that a security was issued by an industrial firm=P(I)=14/20, and P(BI) is the probability
that a security is both a bond and issued by an industrial firm=P(BI)=8/20. 10/20+14/20-8/20=16/20=0.80.

Question #4 of 21

Question ID: 438725

A joint probability of A and B must always be:

A) less than or equal to the conditional probability of A given B.
B) greater than or equal to than the probability of A or B.
C) greater than or equal to the conditional probability of A given B.
D) less than the probability of A and the probability of B.
Explanation
By the formula for joint probability: P(AB)=P(A|B) P(B), since P(B) 1, then P(AB) P(A|B). None of the other choices must
hold.

Question #5 of 21

Question ID: 438723

Dependent random variables are defined as variables where their joint probability is:
A) not equal to the product of their individual probabilities.
B) equal to zero.
C) equal to the product of their individual probabilities.
D) greater than the product of their individual probabilities.
Explanation
Dependence results between random variables when their joint probabilities are not equal products of individual probabilities. If
they are equal, then an independent relationship exists.

Question #6 of 21

Question ID: 438711

Thomas Baynes has applied to both Harvard and Yale. Baynes has determined that the probability of getting into Harvard is 25%
and the probability of getting into Yale (his father's alma mater) is 42%. Baynes has also determined that the probability of being
accepted at both schools is 2.8%. What is the probability of Baynes being accepted at either Harvard or Yale?
A) 7.7%.
B) 67.0%.
C) 10.5%.
D) 64.2%.
Explanation
Using the addition rule, the probability of being accepted at Harvard or Yale, is equal to: P(Harvard) + P(Yale) P(Harvard and
Yale) = 0.25 + 0.42 0.028 = 0.642 or 64.2%.

2 of 8

Question #7 of 21

Question ID: 438726

The probability of a new Wal-Mart being built in town is 64%. If Wal-Mart comes to town, the probability of a new Wendy's
restaurant being built is 90%. What is the probability of a new Wal-Mart and a new Wendy's restaurant being built?
A) 0.306.
B) 0.675.
C) 0.240.
D) 0.576.
Explanation
P(AB) = P(A|B) P(B)
The probability of a new Wal-Mart and a new Wendy's is equal to the probability of a new Wendy's "if Wal-Mart" (0.90) times the
probability of a new Wal-Mart (0.64). (0.90)(0.64) = 0.576.

Question #8 of 21

Question ID: 438721

A dealer in a casino has rolled a five on a single die three times in a row. What is the probability of her rolling another five on the
next roll, assuming it is a fair die?
A) 0.200.
B) 0.500.
C) 0.167.
D) 0.001.
Explanation
The probability of a value being rolled is 1/6 regardless of the previous value rolled.

Question #9 of 21

Question ID: 438720

X and Y are discrete random variables. The probability that X = 3 is 0.20 and the probability that Y = 4 is 0.30. The probability of
observing that X = 3 and Y = 4 concurrently is closest to:
A) 0.06.
B) 0.
C) 0.50.
D) Cannot answer with the information provided.
Explanation
If you knew that X and Y were independent, you could calculate the probability as 0.20(0.30) = 0.06. Without this knowledge, you
would need the joint probability distribution.

Question #10 of 21

Question ID: 438707

3 of 8

Which of the following statements about probability is most accurate?

A) An outcome is the calculated probability of an event.
B) Out of a sample of 100 widgets 10 were found to be defective, 20 were perfect, and 70 were OK.
The probability of picking a perfect widget at random is 29%.
C) An event is a set of one or more possible values of a random variable.
D) A conditional probability is the probability that two or more events will happen concurrently.
Explanation
Conditional probability is the probability of one event happening given that another event has happened. An outcome is the
numerical result associated with a random variable. The probability of picking a perfect widget is 20 / 100 = 0.20 or 20%.

Question #11 of 21

Question ID: 438717

The probabilities that three students will earn an A on an exam are 0.20, 0.25, and 0.30, respectively. If each student's
performance is independent of that of the other two students, the probability that all three students will earn an A is closest to:
A) 0.0150.
B) 0.0075.
C) 0.0010.
D) 0.7500.
Explanation
Since the events are independent, the probability is obtained by multiplying the individual probabilities. Probability of three As =
(0.20) (0.25) (0.30) = 0.0150.

Question #12 of 21

Question ID: 438718

An investor has an A-rated bond, a BB-rated bond, and a CCC-rated bond where the probabilities of default over the next three
years are 4 percent, 12 percent, and 30 percent, respectively. What is the probability that all of these bonds will default in the
next three years if the individual default probabilities are independent?
A) 1.44%.
B) 0.14%.
C) 46.00%.
D) 23.00%.
Explanation
Since the probability of default for each bond is independent, P(A BB CCC) = P(A) P(BB) P(CCC) = 0.04 0.12 0.30 =
0.00144 = 0.14%.

Question #13 of 21

Question ID: 438713

If the outcome of event A is not affected by event B, then events A and B are said to be:

4 of 8

 A) mutually exclusive.
B) statistically independent.
C) conditionally dependent.
D) collectively exhaustive.
Explanation
If the outcome of one event does not influence the outcome of another, then the events are independent.

Question #14 of 21

Question ID: 438724

If the probability of both a new Wal-Mart and a new Wendy's being built next month is 68% and the probability of a new Wal-Mart
being built is 85%, what is the probability of a new Wendy's being built if a new Wal-Mart is built?
A) 0.85.
B) 0.80.
C) 0.70.
D) 0.60.
Explanation
P(AB) = P(A|B) P(B)
0.68 / 0.85 = 0.80

Question #15 of 21

Question ID: 438708

If X and Y are independent events, which of the following is most accurate?

A) P(X or Y) = (P(X)) (P(Y)).
B) P(X | Y) = P(X).
C) X and Y cannot occur together.
D) P(X or Y) = P(X) + P(Y).
Explanation
Note that events being independent means that they have no influence on each other. It does not necessarily mean that they are
mutually exclusive. Accordingly, P(X or Y) = P(X) + P(Y) P(X and Y). By the definition of independent events, P(X|Y) = P(X).

Question #16 of 21

Question ID: 438706

Let A and B be two mutually exclusive events with P(A) = 0.40 and P(B) = 0.20. Therefore:

5 of 8

 A) P(A and B) = 0.08.

B) P(A or B) = 0.52.
C) P(A and B) = 0.
D) P(B|A) = 0.20.
Explanation
If the two evens are mutually exclusive, the probability of both ocurring is zero.

Question #17 of 21

Question ID: 438712

The following table summarizes the availability of trucks with air bags and bucket seats at a dealership.

Bucket

No Bucket

seats

Seats

Air Bags

75

50

125

No Air Bags

35

60

95

Total

110

110

220

Total

What is the probability of randomly selecting a truck with air bags and bucket seats?
A) 0.34.
B) 0.57.
C) 0.28.
D) 0.16.
Explanation
75 / 220 = 0.34.

Question #18 of 21

Question ID: 438714

The following table summarizes the availability of trucks with air bags and bucket seats at a dealership.
Bucket Seats No Bucket Seats

Total

Air Bags

75

50

125

No Air Bags

35

60

95

Total

110

110

220

What is the probability of selecting a truck at random that has either air bags or bucket seats?
A) 73%.
B) 50%.
C) 34%.
D) 107%.
Explanation

6 of 8

The addition rule for probabilities is used to determine the probability of at least one event among two or more events occurring.
The probability of each event is added and the joint probability (if the events are not mutually exclusive) is subtracted to arrive at
the solution. P(air bags or bucket seats) = P(air bags) + P(bucket seats) P(air bags and bucket seats) = (125 / 220) + (110 /
220) (75 / 220) = 0.57 + 0.50 0.34 = 0.73 or 73%.
Alternative: 1 P(no airbag and no bucket seats) = 1 (60 / 220) = 72.7%

Question #19 of 21

Question ID: 438719

If two fair coins are flipped and two fair six-sided dice are rolled, all at the same time, what is the probability of ending up with two
heads (on the coins) and two sixes (on the dice)?
A) 0.8333.
B) 0.4167.
C) 0.0039.
D) 0.0069.
Explanation
For the four independent events defined here, the probability of the specified outcome is 0.5000 0.5000 0.1667 0.1667 =
0.0069.

Question #20 of 21

Question ID: 438715

Given the following table about employees of a company based on whether they are smokers or nonsmokers and whether or not
they suffer from any allergies, what is the probability of both suffering from allergies and not suffering from allergies?
Suffer from Allergies Don't Suffer from Allergies

Total

Smoker

35

25

60

Nonsmoker

55

185

240

Total

90

210

300

A) 0.50.
B) 0.24.
C) 1.00.
D) 0.00.
Explanation
These are mutually exclusive, so the joint probability is zero.

Question #21 of 21

Question ID: 438716

If a fair coin is tossed twice, what is the probability of obtaining heads both times?
A) 1.

7 of 8

 B) 3/4.
C) 1/2.
D) 1/4.
Explanation
The probability of tossing a head, H, is P(H) = 1/2. Since these are independent events, the probability of two heads in a row is
P(H H) = P(H) P(H) = 1/2 1/2 = 1/4.

8 of 8

Topic 16 - Basic Statistics

Test ID: 8450922

Question #1 of 54

Question ID: 438780

In a negatively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median
values?
A) Mean, median, mode.
B) Median, mode, mean.
C) Mode, mean, median.
D) Median, mean, mode.
Explanation
In a negatively skewed distribution, the mean is less than the median, which is less than the mode.

Question #2 of 54

Question ID: 438734

An investor is considering purchasing ACQ. There is a 30% probability that ACQ will be acquired in the next two months. If ACQ
is acquired, there is a 40% probability of earning a 30% return on the investment and a 60% probability of earning 25%. If ACQ
is not acquired, the expected return is 12%. What is the expected return on this investment?
A) 17.4%.
B) 16.5%.
C) 12.3%.
D) 18.3%.
Explanation
E(r) = (0.70 0.12) + (0.30 0.40 0.30) + (0.30 0.60 0.25) = 0.165.

Question #3 of 54

Question ID: 438758

Determine and interpret the correlation coefficient for the two variables X and Y. The standard deviation of X is 0.05, the
standard deviation of Y is 0.08, and their covariance is 0.003.
A) 1.33 and the two variables are negatively associated.
B) 0.75 and the two variables are negatively associated.
C) +0.75 and the two variables are positively associated.
D) +1.33 and the two variables are positively associated.
Explanation
The correlation coefficient is the covariance divided by the product of the two standard deviations, i.e. 0.003 / (0.08 0.05).

1 of 21

Question #4 of 54

Question ID: 438751

Which of the following statements about the correlation coefficient is TRUE? The correlation coefficient is:
A) bounded between 0 and +1.
B) boundless.
C) bounded between -1 and 0.
D) bounded between -1 and +1.
Explanation
The correlation coefficient is bounded between -1 and +1.

Question #5 of 54

Question ID: 438756

If X and Y are independent random variables:

A) the variables are perfectly correlated.
B) The covariance between the two variables is equal to zero and the correlation between the two
variables is equal to zero.
C) the covariance between the two variables is equal to zero.
D) the correlation between the two variables is equal to zero.
Explanation
Variables have a zero correlation and covariance when they are independent.

Question #6 of 54

Question ID: 438772

Andrew Dawns holds a large position in the common stock of Savory Doughnuts, Inc (Savory). After an extensive executive
search, Savory is about to announce a new CEO. There are three candidates for the CEO position, and each is viewed
differently by the market. Dawns estimates the following probabilities for the rate of return on Savory's stock in the year following
the announcement:

Candidate Probability of Being Chosen Rate of Return if Chosen

One

.50

10%

Two

.15

-40%

Three

.35

20%

Based on Dawn's estimates, the expected rate of return on Savory's stock following the announcement of the new CEO is
closest to:
A) 6%.
B) -2%.
C) 9%.
D) 10%.

2 of 21

Explanation
E(R) = (0.50 10%) + (0.15 -40%) + (0.35 20%) = 6%.

Question #7 of 54

Question ID: 438785

Shawn Choate is thinking about his graduate thesis. Still in the preliminary stage, he wants to choose a variable of study that has the
most desirable statistical properties. The statistic he is presently considering has the following characteristics:
The expected value of the sample mean is equal to the population mean.
The variance of the sampling distribution is smaller than that for other estimators of the parameter.
As the sample size increases, the standard error of the sample mean rises and the sampling distribution is centered more closely on
the mean.
Select the best choice. Choate's estimator is:

A) efficient and consistent.

B) unbiased and efficient.
C) unbiased, efficient, and consistent.
D) unbiased and consistent.
Explanation
The estimator is unbiased because the expected value of the sample mean is equal to the population mean. The estimator is efficient
because the variance of the sampling distribution is smaller than that for other estimators of the parameter.
The estimator is not consistent. To be consistent, as the sample size increases, the standard error of the sample mean should fall and
the sampling distribution will be centered more closely on the mean. A consistent estimator provides a more accurate estimate of the
parameter as the sample size increases.

Question #8 of 54

Question ID: 438771

A security has the following expected returns and probabilities of occurrence:

Return Probability
6.1%

10%

7.5%

40%

9.2%

50%

What is the expected return of the security?

A) 7.6%.
B) 8.2%.
C) 7.8%.
D) 8.4%.
Explanation

3 of 21

The expected return is calculated as the sum of the return times the probability that the return occurs. In this case, the expected return is:
(0.061)(0.10) + (0.075)(0.40) + (0.092)(0.50) = 0.0821, or 8.2%.

Question #9 of 54

Question ID: 438753

Which of the following statements is least accurate regarding covariance?

A) Covariance can exceed one.
B) A covariance of zero rules out any relationship.
C) Covariance can only apply to two variables at a time.
D) Covariance can be negative.
Explanation
A covariance only measures the linear relationship. The covariance can be zero while a non-linear relationship exists. All the
other statements are true.

Question #10 of 54

Question ID: 438759

For the case of simple linear regression with one independent variable, which of the following statements about the correlation
coefficient is least accurate?
A) If the regression line is flat and the observations are dispersed uniformly about the line, the
correlation coefficient will be +1.
B) The correlation coefficient describes the strength of the relationship between the X variable and the
Y variable.
C) The correlation coefficient can vary between 1 and +1.
D) If the correlation coefficient is negative, it indicates that the regression line has a negative slope
coefficient.
Explanation
Correlation analysis is a statistical technique used to measure the strength of the relationship between two variables. The
measure of this relationship is called the coefficient of correlation.
If the regression line is flat and the observations are dispersed uniformly about the line,there is no linear relationship between
the two variables and the correlation coefficient will be zero.
All other choices are TRUE.

Question #11 of 54

Question ID: 438762

SCU and QXA are two stocks in the same industry. The variance of returns for each stock is 0.3025 and the returns are perfectly
positively correlated. The covariance between the returns is closest to:
A) 0.3025.
B) 0.2525.

4 of 21

 C) 0.5500.
D) 0.1000.
Explanation
Perfectly positively correlated means the correlation coefficient between the two stocks is 1. The standard deviation for both
stocks is the square root of 0.3025, or

. Therefore:

Question #12 of 54

Question ID: 438784

If Estimator A is a more efficient estimator than Estimator B, it will have:

A) the same mean and a smaller variance.
B) the same mean and a larger variance.
C) a smaller mean and the same variance.
D) a smaller mean and a larger variance.
Explanation
The more efficient estimator is the one that has the smaller variance, given that they both have the same mean.

Question #13 of 54

Question ID: 438754

The correlation coefficient for two dependent random variables is equal to:
A) the absolute value of the difference between the means of the two variables divided by the
product of the variances.
B) the product of the standard deviations for the two random variables divided by the covariance.
C) the covariance between the random variables divided by the product of the standard deviations.
D) the covariance between the random variables divided by the product of the variances.
Explanation
Correlation is equal to covariance divided by the product of the standard deviations.

Question #14 of 54

Question ID: 438761

For two (possibly dependent) random variables, X and Y, an upper bound on the covariance of X and Y is:
A) zero.
B) 1.
C) (X) (Y).
D) there is no upper bound unless the variables are independent.
Explanation

5 of 21

Cov(X,Y) (X) (Y).

Question #15 of 54

Question ID: 438777

When the tails of a distribution are fatter than that implied by a normal distribution, we say that the distribution is:
A) leptokurtic.
B) platykurtic.
C) symmetrical.
D) skewed.
Explanation
When the tails of a distribution are thicker than that of a normal distribution, we say that the distribution is leptokurtic. Platykurtic
means that the tails are thinner than normal. The size of the tails is not indicative of a distribution's symmetry. Rather, the
presence of skewness indicates that the distribution is not symmetrical.

Question #16 of 54

Question ID: 438757

In order to have a negative correlation between two variables, which of the following is most accurate?
A) The covariance must be negative.
B) The covariance can never be negative.
C) Both the covariance and at least one of the standard deviations must be negative.
D) Either the covariance or one of the standard deviations must be negative.
Explanation
In order for the correlation between two variables to be negative, the covariance must be negative. (Standard deviations are
always positive.)

Questions #17-19 of 54
Use the following joint probability distribution to answer the questions below.
Y=1

Y=2

Y=3

X=1

0.05

0.05

0.10

X=2

0.05

0.10

0.15

X=3

0.15

0.15

0.20

Question #17 of 54

Question ID: 438739

The expected value of Y is closest to:

A) 0.2.
B) 2.2.
C) 1.0.

6 of 21

 D) 2.3.
Explanation
p(Y=1)=0.05+0.05+0.15=0.25, p(Y=2)=0.05+0.10+0.15=0.30, and p(Y=3)=0.10+0.15+0.20=0.45, so
E(Y)=0.25(1)+0.30(2)+0.45(3)=2.20.

Question #18 of 54

Question ID: 438740

If you know that Y is equal to 2, the probability that X is equal to 1 is closest to:
A) 0.20.
B) 0.17.
C) 0.05.
D) 0.25.
Explanation
p(X=1|Y=2)=0.05/(0.05+0.10+0.15)=0.17.

Question #19 of 54

Question ID: 438741

The variance of X is closest to:

A) 0.74.
B) 0.61.
C) 0.67.
D) 0.54.
Explanation
p(X=1)=0.05+0.05+0.10=0.20, p(X=2)=0.05+0.10+0.15=0.30, and p(X=3)=0.15+0.15+0.20=.50. Thus, the mean of X is equal to
=0.20(1)+0.30(2)+0.50(3)=2.3, and the variance is calculated as 0.20(1-2.3)2+0.30(2-2.3)2+0.50(3-2.3)2=0.61.

Question #20 of 54

Question ID: 438767

A security has the following expected returns and probabilities of occurrence:

Return Probability
10%

40%

12%

40%

15%

20%

What is the expected return of the security?

7 of 21

 A) 11.8%.
B) 12.4%.
C) 11.4%.
D) 12.2%.
Explanation
The expected return is calculated as the sum of the return times the probability that the return occurs. In this case, the expected return is:
(0.10)(0.40) + (0.12)(0.40) + (0.15)(0.20) = 0.118, or 11.8%.

Questions #21-23 of 54
Y=1

Y=2

Y=3

X=1

0.05

0.15

0.20

X=2

0.15

0.15

0.30

Question #21 of 54

Question ID: 438744

The expected value of X is closest to:

A) 1.6
B) 1.2
C) 1.8
D) 1.5
Explanation
p(X = 1) = 0.05 + 0.15 + 0.20 = 0.40, and p(X = 2) = 0.15 + 0.15 + 0.30 = 0.60, so E(X) = 0.40(1) + 0.60(2) = 1.6.

Question #22 of 54

Question ID: 438745

If you know that X is equal to 1, the probability that Y is equal to 2 is closest to:
A) 0.30
B) 0.38
C) 0.50
D) 0.15
Explanation
p(Y = 2|X = 1) = 0.15/(0.05 + 0.15 + 0.20) = 0.375.

Question #23 of 54

Question ID: 438746

The variance of Y is closest to:

A) 1.51
B) 0.61
C) 0.76

8 of 21

 D) 2.27
Explanation
p(Y = 1) = 0.05 + 0.15 = 0.20, p(Y = 2) = 0.15 + 0.15 = 0.30, and p(Y = 3) = 0.20 + 0.30 = 0.50. Thus, the mean of Y is equal to
= 0.20(1) + 0.30(2) + 0.50(3) = 2.3, and the variance is calculated as 0.20(1 - 2.3)2 + 0.30(2 - 2.3)2 + 0.50(3 - 2.3)2 = 0.61.

Question #24 of 54

Question ID: 438748

The Y variable is regressed against the X variable resulting in a regression line that is flat with the plot of the paired observations
widely dispersed about the regression line. Based on this information, which statement is most accurate?
A) The R2 of this regression is close to 100%.
B) X is perfectly negatively correlated to Y.
C) X is perfectly positively correlated to Y.
D) The correlation between X and Y is close to zero.
Explanation
Perfect correlation means that the observations fall on the regression line. + means the line is going up and means it is pointed
down. An R2 of 100%, means perfect correlation. When there is no correlation, the regression line is flat and the residual
standard error equals the standard deviation of Y.

Question #25 of 54

Question ID: 438781

If the variance of the sampling distribution of an estimator is smaller than all other unbiased estimators of the parameter of
interest, the estimator is:
A) consistent.
B) efficient.
C) unbiased.
D) reliable.
Explanation
By definition.

Question #26 of 54

Question ID: 438783

The sample mean is an unbiased estimator of the population mean because the:

9 of 21

 A) sampling distribution of the sample mean has the smallest variance of any other unbiased
estimators of the population mean.
B) expected value of the sample mean is equal to the population mean.
C) sampling distribution of the sample mean is normal.
D) sample mean provides a more accurate estimate of the population mean as the sample size
increases.
Explanation
An unbiased estimator is one for which the expected value of the estimator is equal to the parameter you are trying to estimate.

Question #27 of 54

Question ID: 438776

A distribution that has positive excess kurtosis:

A) is less peaked than a normal distribution.

B) is more peaked than a normal distribution.
C) is more skewed than a normal distribution.
D) has thinner tails than a normal distribution.
Explanation
A distribution with positive excess kurtosis is one that is more peaked than a normal distribution.

Question #28 of 54

Question ID: 438774

Mike Palm, CFA, is an analyst with a large money management firm. Currently, Palm is considering the risk and return parameters
associated with Alux, a small technology firm. After in depth analysis of the firm and the economic outlook, Palm estimates the
following return probabilities:
Probability (Pi) Return (Ri)
0.3

-5%

0.5

15%

0.2

25%

Palm's objective is to quantify the risk/return relationship for Alux.

Given the returns and probability estimates above, what is the expected return for Alux?
A) 9%.
B) 11%.
C) 15%.
D) 45%.
Explanation
ERportfolio = S(ERstock)(W % of funds invested in each of the stocks)

10 of 21

ER = w1ER1 + w2ER2 + w3ER3, where ER = Expected Return and w = % invested in each stock.
ER = (0.3 * -5.0) + (0.50 * 15) + (0.20 * 25) = -1.5 + 7.5 + 5.0 = 11.0%

Question #29 of 54

Question ID: 438735

A two-sided but very thick coin is expected to land on its edge twice out of every 100 flips. And the probability of face up (heads)
and the probability of face down (tails) are equal. When the coin is flipped, the prize is $1 for heads, $2 for tails, and $50 when
the coin lands on its edge. What is the expected value of the prize on a single coin toss?
A) $1.50.
B) $26.50.
C) $2.47.
D) $17.67.
Explanation
Since the probability of the coin landing on its edge is 0.02, the probability of each of the other two events is 0.49. The expected
payoff is: (0.02 $50) + (0.49 $1) + (0.49 $2) = $2.47.

Question #30 of 54

Question ID: 438732

The characteristic function of the product of independent random variables is equal to the:
A) square root of the product of the individual characteristic functions.
B) exponential root of the product of the individual characteristic functions.
C) sum of the individual characteristic functions.
D) product of the individual characteristic functions.
Explanation
The characteristic function of the sum of independent random variables is equal to the product of the individual characteristic
functions. E(XY) = E(X) E(Y).

Question #31 of 54

Question ID: 438736

Use the following probability distribution to calculate the standard deviation for the portfolio.

State of the Economy Probability Return on Portfolio

Boom

0.30

15%

Bust

0.70

3%

A) 6.5%.
B) 5.5%.
C) 6.0%.

11 of 21

 D) 7.0%.
Explanation
[0.30 (0.15 0.066)2 + 0.70 (0.03 0.066)2]1/2 = 5.5%.

Question #32 of 54

Question ID: 438737

There is a 30% chance that the economy will be good and a 70% chance that it will be bad. If the economy is good, your returns
will be 20% and if the economy is bad, your returns will be 10%. What is your expected return?
A) 18%.
B) 15%.
C) 13%.
D) 17%.
Explanation
Expected value is the probability weighted average of the possible outcomes of the random variable. The expected return is:
((0.3) (0.2)) + ((0.7) (0.1)) = (0.06) + (0.07) = 0.13.

Question #33 of 54

Question ID: 438733

The variance of the sum of two independent random variables is equal to the sum of their variances:
A) plus zero.
B) minus a positive covariance term.
C) plus a positive covariance term.
D) plus a non-zero covariance term.
Explanation
Independent random variables have a covariance of zero. Hence, the variance of the sum of two variables will be the sum of the
variables' variances.

Question #34 of 54

Question ID: 438769

As a fund manager, Bryan Cole, CFA, is responsible for assessing the risk and return parameters of the portfolios he oversees. Cole is
currently considering a portfolio consisting of only two stocks. The first stock, Remba Co., has an expected return of 12 percent and a
standard deviation of 16 percent. The second stock, Labs, Inc., has an expected return of 18 percent and a standard deviation of 25
percent. The correlation of returns between the two securities is 0.25.
Cole has the option of including a third stock in the portfolio. The third stock, Wimset, Inc., has an expected return of 8% and a standard
deviation of 10 percent. If Cole constructed an equally weighted portfolio consisting of all three stocks, the portfolio's expected return
would be closest to:

A) 17.1%.
B) 12.7%.

12 of 21

 C) 13.9%.
D) 15.9%.
Explanation
ERportfolio = S(ERstock)(W% of funds invested in each of the stocks)
ER = w1ER1 + w2ER2 + w3ER3, where ER = Expected Return and w = % invested in each stock.
Here, use 1/3 for each of the weightings. (Note: If you use 0.33, you will calculate a slightly different result.)
ER =( 1/3 * 12) + (1/3 * 18) + (1/3 * 8) = 4 + 6 + 2.7 = 12.7%

Question #35 of 54

Question ID: 438760

A scatter plot is a collection of points on a graph where each point represents the values of two variables (i.e., an X/Y pair). The
pattern of data points will illustrate a correlation between these two variables that is between:
A) -0.7 and +0.7.
B) -1 to +1.
C) slope of -1 and slope of +1.
D) 0 and +1.
Explanation
Correlations range from - 1 to + 1. For r = 1 and r = -1 the data points lie exactly on a line, but the slope of that line is not
necessarily +1 or -1.

Question #36 of 54

Question ID: 438747

A bond analyst is looking at historical returns for two bonds, Bond 1 and Bond 2. Bond 2's returns are much more volatile than
Bond 1. The variance of returns for Bond 1 is 0.012 and the variance of returns of Bond 2 is 0.308. The correlation between the
returns of the two bonds is 0.79, and the covariance is 0.048. If the variance of Bond 1 increased to 0.026 while the variance of
Bond B decreased to 0.188 and the covariance remains the same, the correlation between the two bonds will:
A) increase.
B) decrease.
C) the values given are not plausible.
D) remain the same.
Explanation
P1,2 = 0.048/(0.0260.5 0.1880.5) = 0.69 which is lower than the original 0.79.

Question #37 of 54

Question ID: 438750

Suppose the covariance between Y and X is 12, the variance of Y is 25, and the variance of X is 36. What is the correlation
coefficient (r), between Y and X?

13 of 21

 A) 0.013.
B) 0.400.
C) 0.160.
D) 0.000.
Explanation
The correlation coefficient is:

Question #38 of 54

Question ID: 438770

An analyst is currently considering a portfolio consisting of two stocks. The first stock, Remba Co., has an expected return of
12% and a standard deviation of 16%. The second stock, Labs, Inc., has an expected return of 18% and a standard deviation of
25%. The correlation of returns between the two securities is 0.25.
If the analyst forms a portfolio with 30% in Remba and 70% in Labs, what is the portfolio's expected return?
A) 16.2%.
B) 15.0%.
C) 17.3%.
D) 21.5%.
Explanation
ERportfolio = (ERstock)(W % of funds invested in each of the stocks)
ER = w1ER1 + w2ER2, where ER = Expected Return and w = % invested in each stock.
ER = (0.3 12) + (0.70 18) = 3.6 + 12.6 = 16.2%

Question #39 of 54

Question ID: 438768

An investor owns the following three-stock portfolio.

Stock

Market Value

Expected Return

$5,000

12%

$3,000

8%

$4,000

9%

The expected return is closest to:

A) 9.67%.
B) 29.00%.

14 of 21

 C) 10.50%.
D) 10.00%.
Explanation
To calculate this result, we first need to calculate the portfolio value, then determine the weights for each stock, and then calculate the
expected return.
Portfolio Value: = sum of market values = 5,000 + 3,000 + 4,000 = 12,000
Portfolio Weights:
WA = 5,000 / 12,000 = 0.4167
WB = 3,000 / 12,000 = 0.2500
WC = 4,000 / 12,000 = 0.333

Expected Return
ERportfolio = S(ERstock)(W% of funds invested in each of the stocks)
ER = wAERA + wBERB + wCERC, where ER = Expected Return and w = % invested in each stock.
ER = (0.4167 * 12.0) + (0.2500 * 8.0) + (0.333 * 9.0) = 10.0%

Question #40 of 54

Question ID: 438742

Tully Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio returns for two portfolios
for their client under each scenario. Tully's economist has estimated the probability of each scenario as shown in the table below.
Given this information, what is the expected return on portfolio A?

Scenario Probability Return on Portfolio A Return on Portfolio B

A

15%

17%

19%

20%

14%

18%

25%

12%

10%

40%

8%

9%

A) 12.95%.
B) 11.55%.
C) 9.25%.
D) 10.75%.
Explanation
The expected return is equal to the sum of the products of the probabilities of the scenarios and their respective returns: = (0.15)
(0.17) + (0.20)(0.14) + (0.25)(0.12) + (0.40)(0.08) = 0.1155 or 11.55%.

Question #41 of 54

Question ID: 438773

15 of 21

Suppose you have chosen two stocks with an equity investment screener. The following data has been collected on these two securities:
Stock A

Stock B

Expected Return

5%

8%

Variance

10%

16%

Covariance (A,B)

0.2

What is the mean and variance of the sum of the two stock's expected returns and variances assuming the returns are independent of
one another?

A) Mean = 6.5%; Variance = 13.4%.

B) Mean = 13%; Variance = 26.4%.
C) Mean = 6.5%; Variance = 13.0%.
D) Mean = 13%; Variance = 26.0%.
Explanation
The mean of the sum of random variables is computed as: E(A +B) = E(A) + E(B) = 5% + 8% = 13%. The variance of the sum of
random variables is computed as: Var(A + B) = Var(A) + Var(B) = 10% + 16% = 26%. Since the returns were assumed to be
independent, the covariance was not a factor in the variance calculation.

Question #42 of 54

Question ID: 438731

An analyst has knowledge of the beginning-of-period expected returns, standard deviations of return, and market value weights
for the assets that comprise a portfolio. The analyst does not require the covariances of returns between asset pairs to calculate
the:
A) variance of the return on the portfolio.
B) reduction in risk due to diversification.
C) correlations between asset pairs.
D) expected return on the portfolio.
Explanation
All that is required to calculate the expected return for the portfolio is the portfolio weights and individual asset expected returns.
All other items are functions of the covariance.

Question #43 of 54

Question ID: 438765

Rafael Garza, CFA, is considering the purchase of ABC stock for a client's portfolio. His analysis includes calculating the
covariance between the returns of ABC stock and the equity market index. Which of the following statements regarding Garza's
analysis is most accurate?
A) The covariance of two variables is an easier measure to interpret than the correlation
coefficient.
B) A covariance of +1 indicates a perfect positive covariance between the two variables.

16 of 21

 C) The actual value of the covariance is not very meaningful because the measurement is very
sensitive to the scale of the two variables.
D) The covariance measures the strength of the linear relationship between two variables.
Explanation
Covariance is a statistical measure of the linear relationship of two random variables, but the actual value is not meaningful
because the measure is extremely sensitive to the scale of the two variables. Covariance can range from negative to positive
infinity.

Question #44 of 54

Question ID: 438775

Left-skewed distributions exhibit:

A) greater mass to the right of the expected value.
B) greater mass close to the expected value.
C) greater mass to the left of the expected value.
D) a longer tail to the right of the distribution.
Explanation
Left-skewed distributions are those with a longer tail to the left side of the distribution, and whose mass is to the right of the
expected value.

Question #45 of 54

Question ID: 438730

Tully Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio returns for two portfolios
for their client under each scenario. Tully's economist has estimated the probability of each scenario, as shown in the table
below. Given this information, what is the standard deviation of returns on portfolio A?

Scenario Probability Return on Portfolio A Return on Portfolio B

A

15%

18%

19%

20%

17%

18%

25%

11%

10%

40%

7%

9%

A) 8.76%.
B) 5.992%.
C) 1.140%.
D) 4.53%.
Explanation
E(RA) = 11.65%
2 = 0.0020506 = 0.15(0.18 0.1165)2 + 0.2(0.17 0.1165)2 + 0.25(0.11 0.1165)2 + 0.4(0.07 0.1165)2

17 of 21

 = 0.0452836

Question #46 of 54

Question ID: 438752

Consider the case when the Y variable is in U.S. dollars and the X variable is in U.S. dollars. The 'units' of the covariance
between Y and X are:
A) U.S. dollars.
B) squared U.S. dollars.
C) a range of values from 1 to +1.
D) the square root of U.S. dollars.
Explanation
The covariance is in terms of the product of the units of Y and X. It is defined as the average value of the product of the
deviations of observations of two variables from their means. The correlation coefficient is a standardized version of the
covariance, ranges from 1 to +1, and is much easier to interpret than the covariance.

Question #47 of 54

Question ID: 438764

Thomas Manx is attempting to determine the correlation between the number of times a stock quote is requested on his firm's website
and the number of trades his firm actually processes. He has examined samples from several days trading and quotes and has
determined that the covariance between these two variables is 88.6, the standard deviation of the number of quotes is 18, and the
standard deviation of the number of trades processed is 14. Based on Manx's sample, what is the correlation between the number of
quotes requested and the number of trades processed?

A) 0.78.
B) 0.35.
C) 0.18.
D) 0.98.
Explanation
Correlation = Cov (X,Y) / (Std. Dev. X)(Std. Dev. Y)
Correlation = 88.6 / (18)(14) = 0.35

Question #48 of 54

Question ID: 438763

The covariance of returns on two investments over a 10-year period is 0.009. If the variance of returns for investment A is 0.020
and the variance of returns for investment B is 0.033, what is the correlation coefficient for the returns?
A) 0.687.
B) 0.350.
C) 0.444.
D) 0.785.
Explanation

18 of 21

The correlation coefficient is: Cov(A,B) / [(Std Dev A)(Std Dev B)] = 0.009 / [(0.02)(0.033)] = 0.350.

Question #49 of 54

Question ID: 438782

The sample mean is a consistent estimator of the population mean because the:
A) sample mean provides a more accurate estimate of the population mean as the sample size
increases.
B) sampling distribution of the sample mean has the smallest variance of any other unbiased estimators
of the population mean.
C) sampling distribution of the sample mean is normal.
D) expected value of the sample mean is equal to the population mean.
Explanation
A consistent estimator provides a more accurate estimate of the parameter as the sample size increases.

Question #50 of 54

Question ID: 438779

In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median
values?
A) Mode, mean, median.
B) Mode, median, mean.
C) Mean, median, mode.
D) Median, mean, mode.
Explanation
In a positively skewed distribution, the mode is less than the median, which is less than the mean.

Question #51 of 54

Question ID: 438766

An investor owns the following portfolio today.

Stock

Market Value

Expected Annual Return

$2,000

17%

$3,200

8%

$2,800

13%

The investor's expected total rate of return (increase in market value) after three years is closest to:
A) 40.5%.
B) 136.0%.
C) 36.0%.
D) 12.0%.

19 of 21

Explanation
To calculate this result, we first need to calculate the portfolio value, then determine the weights for each stock, and then
calculate the expected return. Finally, we determine the compounded rate after three years.
Portfolio Value: = sum of market values = 2,000 + 3,200 + 2,800 = 8,000
Portfolio Weights:
W A = 2,000 / 8,000 = 0.25
W B = 3,200 / 8,000 = 0.40
W C = 2,800 / 8,000 = 0.35
Expected Return
ERportfolio = [(ERstock)(W % of funds invested in each of the stocks)]
ER = wRERR + wSERS + wTERT, where ER = Expected Return and w = % invested in each stock.
ER = (0.25 17.0) + (0.40 8.0) + (0.35 13.0) = 12.0%
Expected Return after three years
= (1 + return)3 = (1.12)3 1 = 1.405 1 = 0.405, or 40.5%.

Question #52 of 54

Question ID: 438778

It is often said that stock returns are leptokurtic. If this is true, relative to a normal distribution of the same mean and variance,
the distribution of stock returns is:
A) thin-tailed.
B) negatively skewed.
C) fat-tailed.
D) positively skewed.
Explanation
A leptokurtic distribution is more peaked and has fatter tails than a normal distribution.

Question #53 of 54

Question ID: 438749

Which model does not lend itself to correlation coefficient analysis?

A) Y = X3.
B) Y - X = 2.
C) X = Y 2.
D) Y = X + 2.
Explanation
The correlation coefficient is a measure of linear association. All of the functions except for Y = X3 are linear functions. Notice that Y - X
= 2 is the same as Y = X + 2.

Question #54 of 54

Question ID: 438755

20 of 21

The covariance:

A) must be positive.
B) must be between -1 and +1.
C) must be less than +1.
D) can be positive or negative.
Explanation
Cov(a,b) = aba,b. Since a,b can be positive or negative, Cov(a,b) can be positive or negative.

21 of 21

Topic 17 - Distributions

Test ID: 8450933

Question #1 of 32

Question ID: 438802

Standardizing a normally distributed random variable requires the:

A) mean and the standard deviation.
B) variance and kurtosis.
C) natural logarithm of X.
D) mean, variance and skewness.
Explanation
All that is necessary is to know the mean and the variance. Subtracting the mean from the random variable and dividing the
difference by the standard deviation standardizes the variable.

Question #2 of 32

Question ID: 438818

Which of the following statements is true regarding the mixture of distributions for risk modeling?
I. Distributions should never be combined.
II. It may be helpful to create a new distribution if the underlying data you are working with does not currently fit a pre-determined
distribution.
A) I only.
B) II only.
C) Neither I nor II.
D) Both I and II.
Explanation
Distributions can be combined to create unique probability density functions. It may be helpful to create a new distribution if the
underlying data you are working with does not currently fit a pre-determined distribution. In this case, a newly created distribution
may assist with explaining the relevant data set.

Question #3 of 32

Question ID: 438789

Which of the following statements about a normal distribution is least accurate?

A) A normal distribution has excess kurtosis of three.
B) The mean, median, and mode are equal.
C) Approximately 68% of the observations lie within +/- 1 standard deviation of the mean.
D) The mean and variance completely define a normal distribution.
Explanation
Even though normal curves have different sizes, they all have identical shape characteristics. The kurtosis for all normal

1 of 11

distributions is three; an excess kurtosis of three would indicate a leptokurtic distribution. The other choices are true.

Question #4 of 32

Question ID: 438816

The central limit theorem states that, for any distribution, as n gets larger, the sampling distribution:
A) becomes smaller.
B) approaches the mean.
C) becomes larger.
D) approaches a normal distribution.
Explanation
As n gets larger, the variance of the distribution of sample means is reduced, and the distribution of sample means approximates
a normal distribution.

Question #5 of 32

Question ID: 438804

Given the probabilities N(-0.5) = 0.3085, N(0.75) = 0.7734, and N(1.50) = 0.9332 from a z-table, the probability of 0.2266
corresponds to:
A) N(0.50).
B) N(-0.75).
C) N(0.25).
D) N(-0.25).
Explanation
This problem is checking your knowledge of a normal distribution and gives you more information than you need to answer the
question. The area of a normal distribution is 1, with two symmetric halves that equal 0.5 each. N(0.75) means that the area to
the left of 0.75 on the positive portion of the curve is 0.7734. This means that the area to the right of 0.75 is (1.0 - 0.7734) =
0.2266. Since the halves of a normal distribution are symmetrical, that means the area to the left of (-0.75) is also 0.2266.

Question #6 of 32

Question ID: 438788

An analyst has determined that the probability that the S&P 500 index will increase on any given day is 0.60 and the probability
that it will decrease is 0.40. The expected value and variance of the number of up days in a 5-day period are closest to:
A) 2.0 and 2.1.
B) 3.0 and 1.2.
C) 3.0 and 1.1.
D) 2.0 and 0.5.
Explanation
E(X)=np=5(0.60)=3.0. Var(X)=np(1-p)=5(0.60)(0.40)=1.2.

2 of 11

Question #7 of 32

Question ID: 438790

A normal distribution can be completely described by its:

A) standard deviation.
B) skewness and kurtosis.
C) mean and mode.
D) mean and variance.
Explanation
The normal distribution can be completely described by its mean and variance.

Question #8 of 32

Question ID: 438800

Which of the following statements about probability distributions is least accurate?

A) A probability distribution is, by definition, normally distributed.
B) A probability distribution includes a listing of all the possible outcomes of an experiment.
C) In a binomial distribution each observation has only two possible outcomes that are mutually
exclusive.
D) One of the key properties of a probability function is 0 p 1.
Explanation
Probabilities must be zero or positive, but a probability distribution is not necessarily normally distributed. Binomial distributions
are either successes or failures.

Question #9 of 32

Question ID: 438805

The distribution of annual returns for a bond portfolio is approximately normal with an expected value of $120 million and a
standard deviation of $20 million. Which of the following is closest to the probability that the value of the portfolio one year from
today will be between $110 million and $170 million?
A) 66%.
B) 58%.
C) 74%.
D) 42%.
Explanation
Calculating z-values, z1 = (110 120) / 20 = 0.5. z2 = (170 120) / 20 = 2.5. Using the z-table, P(0.5) = (1 0.6915) =
0.3085. P(2.5) = 0.9938. P(0.5 < X < 2.5) = 0.9938 0.3085 = 0.6853. Note that on the exam, you will not have access to
z-tables, so you would have to reason this one out using the normal distribution approximations. You know that the probability
within +/ 1 standard deviation of the mean is approximately 68%, meaning that the area within 1 standard deviation of the
mean is 34%. Since 0.5 is half of 1, the area under 0.5 to 0 standard deviations under the mean is approximately 34% / 2 =
17%. The probability under +/ 2.5 standard deviations of the mean is approximately 99%. The value $170 is mid way between
+2 and +3 standard deviations, so the probability between these values must be (99% / 2) = 2%. The value from 0 to 2.5

3 of 11

standard deviations must therefore be (99% / 2) (2% / 2) = 48.5%. Adding these values gives us an approximate probability of
(48.5% + 17%) = 65.5%.

Question #10 of 32

Question ID: 438815

The central limit theorem concerns the sampling distribution of the:

A) sample standard deviation.
B) population mean.
C) population standard deviation.
D) sample mean.
Explanation
The central limit theorem tells us that for a population with a mean m and a finite variance 2, the sampling distribution of the
sample means of all possible samples of size n will approach a normal distribution with a mean equal to m and a variance equal
to 2 / n as n gets large.

Question #11 of 32

Question ID: 438808

Which one of the following statements about the t-distribution is most accurate?
A) The t-distribution approaches the standard normal distribution as the number of degrees of
freedom becomes large.
B) Compared to the normal distribution, the t-distribution is flatter with less area under the tails.
C) Compared to the normal distribution, the t-distribution is more peaked with more area under the tails.
D) The t-distribution is the appropriate distribution to use when constructing confidence intervals based
on large samples.
Explanation
As the number of degrees of freedom grows, the t-distribution approaches the shape of the standard normal distribution.
Compared to the normal distribution, the t-distribution is less peaked with more area under the tails. When choosing a
distribution, three factors must be considered: sample size, whether population variance is known, and if the distribution is
normal.

Question #12 of 32

Question ID: 438787

For a normal distribution, what approximate percentage of the observations falls within 2 standard deviations of the mean?
A) 92%.
B) 90%.
C) 95%.
D) 99%.
Explanation

4 of 11

For normal distributions, approximately 95 percent of the observations fall within 2 standard deviations of the mean.

Question #13 of 32

Question ID: 438799

Regarding a binomially distributed random variable, the variance of the number of successes, X, where n equals the number of
trials and p equals the probability of success, is most likely equal to:
A) np.
B) p.
C) p(1-p).
D) np(1 - p).
Explanation
For a given series of n trials, the variance of X for a binomial random variable is equal to: np(1 - p) = npq, where q is the
probability of failure.

Question #14 of 32

Question ID: 438796

An investment has a mean return of 15% and a standard deviation of returns equal to 10%. Which of the following statements is least
accurate? The probability of obtaining a return:

A) greater than 35% is 0.025.

B) greater than 25% is 0.32.
C) between 5% and 25% is 0.68.
D) less than 5% is 0.16.
Explanation
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%.

Question #15 of 32

Question ID: 438793

The return on a portfolio is normally distributed with a mean return of 8 percent and a standard deviation of 18 percent. Which of
the following is closest to the probability that the return on the portfolio will be between -27.3 percent and 37.7 percent?
A) 92.5%.
B) 68.0%.
C) 81.5%.
D) 96.5%.
Explanation

5 of 11

Note that if you memorize the basic intervals for a normal distribution, you do not need a normal distribution table to answer this
question. -27.3% represents a loss of -35.3% from the mean return (-27.3 - 8.0), which is (-35.3/18) = -1.96 standard deviations
to the left of the mean. For a normal distribution, we know that approximately 95 percent of all observations lie with +/- 1.96
standard deviations of the mean, so the probability that the return is between -27.3% and 8.0% must be (95%/2) = 47.5%. A
return of 37.7 percent represents a gain of (37.7 - 8.0) = 29.7% from the mean return, which is (29.7/18) = 1.65 standard
deviations to the right of the mean. For a normal distribution, we know that approximately 90 percent of all observations lie with
+/- 1.65 standard deviations of the mean, so the probability that the return is between 8.0% and 37.7% must be (90%/2) = 45%.
Therefore the probability that the return is between -27.3 percent and 37.7 percent = (47.5% + 45%) = 92.5%.

Question #16 of 32

Question ID: 438798

The lower limit of a normal distribution is:

A) negative one.
B) zero.
C) one.
D) negative infinity.
Explanation
By definition, a true normal distribution has a positive probability density function from negative to positive infinity.

Question #17 of 32

Question ID: 438810

With 60 observations, what is the appropriate number of degrees of freedom to use when carrying out a statistical test on the
mean of a population?
A) 59.
B) 60.
C) 58.
D) 61.
Explanation
When performing a statistical test on the mean of a population based on a sample of size n, the number of degrees of freedom is
n - 1 since once the mean is estimated from a sample there are only n - 1 observations that are free to vary. In this case the
appropriate number of degrees of freedom to use is 60 - 1 = 59.

Question #18 of 32

Question ID: 438797

Approximately 50 percent of all observations for a normally distributed random variable fall in the interval:
A) 2
B) 0.67
C)
D) 3

6 of 11

Explanation
0.67

Question #19 of 32

Question ID: 438806

The annual returns for a portfolio are normally distributed with an expected value of 50 million and a standard deviation of 25
million. What is the probability that the value of the portfolio one year from today will be between 91.13 million and 108.25
million?
A) 0.075.
B) 0.090.
C) 0.040.
D) 0.025.
Explanation
Calculate the standardized variable corresponding to the outcomes. Z1 = (91.13 50) / 25 = 1.645, and Z2 = (108.25 50) / 25 =
2.33. The cumulative normal distribution gives cumulative probabilities of F(1.645) = 0.95 and F(2.33) = 0.99. The probability that
the outcome will lie between Z1 and Z2 is the difference: 0.99 0.95 = 0.04. Note that even though you will not have a z-table on
the exam, the probability values for 1.645 and 2.33 are commonly used values that you should have memorized.

Question #20 of 32

Question ID: 438809

When is the t-distribution the appropriate distribution to use? The t-distribution is the appropriate distribution to use when
constructing confidence intervals based on:
A) small samples from populations with known variance that are at least approximately normal.
B) large samples from populations with known variance that are nonnormal.
C) small samples from populations with unknown variance that are at least approximately normal.
D) large samples from populations with known variance that are at least approximately normal.
Explanation
The t-distribution is the appropriate distribution to use when constructing confidence intervals based on small samples from
populations with unknown variance that are either normal or approximately normal.

Question #21 of 32

Question ID: 438817

To apply the central limit theorem to the sampling distribution of the sample mean, the sample is usually considered to be large if n
is greater than:
A) 30.
B) 25.
C) 15.
D) 20.

7 of 11

Explanation
A sample size is considered sufficiently large if it is larger than or equal to 30.

Question #22 of 32

Question ID: 438795

Which of the following statements is incorrect regarding a Bernoulli distributed random variable.
I. It only has three possible outcomes.
II. It is commonly used for assessing whether or not a company defaults during a specified time period.
A) Neither I nor II.
B) I only.
C) Both I and II.
D) II only.
Explanation
Bernoulli distributed random variable only has two possible outcomes. The outcomes can be defined as either a "success" or a
"failure."

Question #23 of 32

Question ID: 438803

A client will move his investment account unless the portfolio manager earns at least a 10% rate of return on his account. The
rate of return for the portfolio that the portfolio manager has chosen has a normal probability distribution with an expected return
of 19% and a standard deviation of 4.5%. What is the probability that the portfolio manager will keep this account?
A) 1.000.
B) 0.950.
C) 0.977.
D) 0.750.
Explanation
Since we are only concerned with values that are below a 10% return this is a 1 tailed test to the left of the mean on the normal
curve. With = 19 and = 4.5, P(X 10) = P(X 2) therefore looking up -2 on the cumulative Z table gives us a value of
0.0228, meaning that (1 0.0228) = 97.72% of the area under the normal curve is above a Z score of -2. Since the Z score of
-2 corresponds with the lower level 10% rate of return of the portfolio this means that there is a 97.72% probability that the
portfolio will earn at least a 10% rate of return.

Question #24 of 32

Question ID: 438792

A group of investors wants to be sure to always earn at least a 5% rate of return on their investments. They are looking at an investment
that has a normally distributed probability distribution with an expected rate of return of 10% and a standard deviation of 5%. The
probability of meeting or exceeding the investors' desired return in any given year is closest to:

A) 34%.

8 of 11

 B) 98%.
C) 84%.
D) 50%.
Explanation
The mean is 10% and the standard deviation is 5%. You want to know the probability of a return 5% or better. 10% - 5% = 5% , so 5%
is one standard deviation less than the mean. Thirty-four percent of the observations are between the mean and one standard deviation
on the down side. Fifty percent of the observations are greater than the mean. So the probability of a return 5% or higher is 34% + 50%
= 84%.

Question #25 of 32

Question ID: 438786

Which of the following statements about the normal probability distribution is most accurate?
A) Sixty-eight percent of the area under the normal curve falls between 0 and +1 standard
deviations above the mean.
B) The standardized normal distribution has a mean of zero and a standard deviation of 10.
C) Five percent of the normal curve probability falls more than outside two standard deviations from the
mean.
D) The normal curve is asymmetrical about its mean.
Explanation
The normal curve is symmetrical with a mean of zero and a standard deviation of 1 with 34% of the area under the normal curve
falling between 0 and +1 standard deviation above the mean. Ninety-five percent of the normal curve is within two standard
deviations of the mean, so five percent of the normal curve falls outside two standard deviations from the mean.

Question #26 of 32

Question ID: 438811

Which one of the following distributions is described entirely by the degrees of freedom?
A) Lognormal distribution.
B) Student's t-distribution.
C) Binomial distribution.
D) Normal distribution.
Explanation
Student's t-distribution is defined by a single parameter known as the degrees of freedom.

Question #27 of 32

Question ID: 438791

A call center receives an average of two phone calls per hour. The probability that they will receive 20 calls in an 8-hour day is
closest to:
A) 3.66%.

9 of 11

 B) 16.56%.
C) 6.40%.
D) 5.59%.
Explanation
To solve this question, we first need to realize that the expected number of phone calls in an 8-hour day is = 2 8 = 16. Using
the Poisson distribution, we solve for the probability that X will be 20.
P(X = x) = (xe-) / x!
P(X = 20) = (1620e-16) / 20! = 0.0559 = 5.59%

Question #28 of 32

Question ID: 438794

The probability of returns less than 10%, assuming a normal distribution with expected return of 6.5% and standard deviation of
10%, is:
A) approximately 5%.
B) not defined with only this information.
C) approximately 10%.
D) less than 2.5%.
Explanation
10 is 16.5% below the mean return, (16.5 / 10) = 1.65 standard deviations, which leaves approximately 5% of the possible
outcomes in the left tail below 10%.

Question #29 of 32

Question ID: 438807

Which statement best describes the properties of Student's t-distribution? The t-distribution is:
A) symmetrical, defined by two parameters and is less peaked than the normal distribution.
B) symmetrical, defined by a single parameter and is less peaked than the normal distribution.
C) skewed, defined by a single parameter and is more peaked than the normal distribution.
D) skewed, defined by a single parameter and is less peaked than the normal distribution.
Explanation
The t-distribution is symmetrical like the normal distribution but unlike the normal distribution is defined by a single parameter
known as the degrees of freedom and is less peaked than the normal distribution.

Questions #30-31 of 32
A study of hedge fund investors found that their household incomes are normally distributed with a mean of $280,000 and a
standard deviation of $40,000.

Question #30 of 32

Question ID: 438813

10 of 11

The percentage of hedge fund investors that have incomes greater than $350,000 is closest to:
A) 5.0%.
B) 3.0%.
C) 4.0%.
D) 25.0%.
Explanation
z = (350,000 - 280,000)/40,000 = 1.75. Using the z-table, F(1.75) = 0.9599. So, the percentage greater than $350,000 = (1 0.9599) = 4.0%.

Question #31 of 32

Question ID: 438814

The percentage of hedge fund investors with income less than $180,000 is closest to:
A) 6.48%.
B) 1.15%.
C) 2.50%.
D) 0.62%.
Explanation
z = (180,000 - 280,000)/40,000 = -2.50. Using the z-table, F(-2.50) = (1 - 0.9938) = 0.62%.

Question #32 of 32

Question ID: 438801

A food retailer has determined that the mean household income of her customers is $47,500 with a standard deviation of $12,500. She is
trying to justify carrying a line of luxury food items that would appeal to households with incomes greater than $60,000. Based on her
information and assuming that household incomes are normally distributed, what percentage of households in her customer base has
incomes of $60,000 or more?

A) 15.87%.
B) 34.13%.
C) 2.50%.
D) 5.00%.
Explanation
Z = ($60,000 - $47,500) / $12,500 = 1.0
From the table of areas under the normal curve, 84.13% of observations lie to the left of +1 standard deviation of the mean. So, 100% 84.13% = 15.87% with incomes of $60,000 or more.

11 of 11

Topic 19: Hypothesis Testing and Confidence Intervals

Test ID: 8450948

Question #1 of 82

Question ID: 438835

The table below shows a sample of returns on two securities:

Period

Mean

Security P

0.2%

0.5%

1.1% 0.6%

0.3%

Security Q

0.3%

0.9%

1.5% 0.5%

0.4%

The sample covariance between the two securities' returns is closest to:
A) 0.78.
B) 1.86.
C) 0.47.
D) 0.62.
Explanation
Period

0.1

0.2

0.8 0.9

0.7

0.5

1.1 0.9

Sum

0.07 0.10 0.88 0.81 1.86

Question #2 of 82

Question ID: 438853

Robert Patterson, an options trader, believes that the return on options trading is higher on Mondays than on other days. In order to test
his theory, he formulates a null hypothesis. Which of the following would be an appropriate null hypothesis? Returns on Mondays are:

A) not less than returns on other days.

B) less than returns on other days.
C) not greater than returns on other days.
D) greater than returns on other days.
Explanation
An appropriate null hypothesis is one that the researcher wants to reject. If Patterson believes that the returns on Mondays are greater
than on other days, he would like to reject the hypothesis that the opposite is true-that returns on Mondays are not greater than returns
on other days.

1 of 30

Question #3 of 82

Question ID: 438878

Which of the following statements about hypothesis testing is most accurate?

A) The probability of a Type I error is equal to the significance level of the test.
B) To test the claim that X is greater than zero, the null hypothesis would be H0: X > 0.
C) If you can disprove the null hypothesis, then you have proven the alternative hypothesis.
D) The power of a test is one minus the probability of a Type I error.
Explanation
The probability of getting a test statistic outside the critical value(s) when the null is ture is the level of significance and is the
probability of a Type I error. The power of a test is 1 minus the probability of a Type II error. Hypothesis testing does not prove a
hypothesis, we either reject the null or fail to reject it. The appropriate null would be "X 0" with "X > 0" as the alternative
hypothesis.

Questions #4-5 of 82
Margo Hinsdale is testing the null hypothesis that the population mean is less than or equal to 45. A random sample of 81
observations selected from this population produced a mean of 46.3. The population has a standard deviation of 4.5.

Question #4 of 82

Question ID: 438890

The value of the appropriate test statistic for the test of the population mean is:
A) t = 4.60.
B) z = -2.75.
C) z = 2.60.
D) t = 3.84.
Explanation
The population variance is known and the sample size is large. The test statistic is:

Question #5 of 82

Question ID: 438891

At a 1 percent level of significance, the correct decision is to:

A) reject the null hypothesis.
B) neither reject nor fail to reject the null hypothesis.
C) fail to reject the null hypothesis.
D) accept the null hypothesis.
Explanation
Decision rule: reject H0 if zcomputed > zcritical. Therefore, reject the null hypothesis because the computed test statistic of 2.60 (see
the answer to Part 1) exceeds the critical z-value of 2.33.

2 of 30

Questions #6-9 of 82
An analyst is testing to see if the mean of a population is less than 133. A random sample of 50 observations had a mean of 130.
Assume a standard deviation of 5. The test is to be made at the 1% level of significance.
z

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.0

0.0000

0.0040

0.0080

0.0120

0.0160

0.0199

0.0239

0.1

0.0398

0.0438

0.0478

0.0517

0.0557

0.0596

0.0636

0.2

0.0793

0.0832

0.0871

0.0910

0.0948

0.0987

0.1026

0.3

0.1179

0.1217

0.1255

0.1293

0.1331

0.1368

0.1406

1.7

0.4554

0.4564

0.4573

0.4582

0.4591

0.4599

0.4608

1.8

0.4641

0.4649

0.4656

0.4664

0.4671

0.4678

0.4686

1.9

0.4713

0.4719

0.4726

0.4732

0.4738

0.4744

0.4750

2.0

0.4772

0.4778

0.4783

0.4788

0.4793

0.4798

0.4803

2.1

0.4821

0.4826

0.4830

0.4834

0.4838

0.4842

0.4846

2.2

0.4861

0.4864

0.4868

0.4871

0.4875

0.4878

0.4881

2.3

0.4893

0.4896

0.4898

0.4901

0.4904

0.4906

0.4909

2.4

0.4918

0.4920

0.4922

0.4925

0.4927

0.4929

0.4931

Question #6 of 82

Question ID: 438861

The null hypothesis is:

A) > 133.
B) 133.
C) 133.
D) = 133.
Explanation
The null hypothesis is the hypothesis that the researcher wants to reject. Here the hypothesis that is being looked for is that the
mean of a population is less than 133. The null hypothesis is that the mean is greater than or equal to 133. The question is
whether the null hypothesis will be rejected in favor of the alternative hypothesis that the mean is less than 133.

Question #7 of 82

Question ID: 438862

The calculated test statistic is:

A) +1.33.
B) -3.00.
C) -1.33.
D) -4.24.
Explanation
A test statistic is calculated by subtracting the hypothesized parameter from the parameter that has been estimated and dividing

3 of 30

the difference by the standard error of the sample statistic. Here, the test statistic = (sample mean - hypothesized mean) /
((sample standard deviation / (sample size)1/2)) = (130 - 133) / (5 / 501/2) = (-3) / (5 / 7.0711) = -4.24.

Question #8 of 82

Question ID: 438863

The critical value is:

A) -2.38.
B) 2.47.
C) -2.33.
D) 2.17.
Explanation
This is a one-tailed test with a significance level of 0.01. The critical value for a one-tailed test at a 1% level of significance is
-2.33.

Question #9 of 82

Question ID: 438864

You should:
A) Cannot be determined with the information given.
B) accept the null hypothesis.
C) reject the alternative hypothesis.
D) reject the null hypothesis.
Explanation
The calculated test statistic of -4.24 falls to the left of the z-statistic of -2.33, and is in the rejection region. Thus, the null
hypothesis is rejected and the conclusion is that the population mean is less than 133.

Question #10 of 82

Question ID: 438852

Brian Ci believes that the average return on equity in the airline industry, , is less than 5%. What are the appropriate null (H0)
and alternative (Ha) hypotheses to test this belief?
A) H0: > 0.05 versus Ha: < 0.05.
B) H0: < 0.05 versus Ha: > 0.05.
C) H0: 0.05 versus Ha: < 0.05.
D) H0: < 0.05 versus Ha: 0.05.
Explanation
The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that he
wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the "less than" belief.

Question #11 of 82

Question ID: 438832

A sample covariance of two random variables is most commonly utilized to:

4 of 30

 A) demonstrate either the presence or absence of spurious correlation of the variables.

B) estimate the "pure" measure of the tendency of two variables to move together over a period of time.
C) identify and measure strong nonlinear relationships between the two variables.
D) calculate the correlation coefficient, which is a measure of the strength of their linear relationship.
Explanation
Since the actual value of a sample covariance can range from negative to positive infinity depending on the scale of the two
variables, it is most commonly used to calculate a more useful measure, the correlation coefficient.

Question #12 of 82

Question ID: 438898

The test statistic for an F-test of the equality of two sample variances is the:
A) product of the two sample standard deviations.
B) ratio of the two sample variances.
C) product of the two sample variances.
D) ratio of the two sample standard deviations.
Explanation
The test statistic for an F-test of the equality of two sample variances is the ratio of the two sample variances.

Question #13 of 82

Question ID: 438849

The approximate 99% confidence interval for the population mean based on a sample of 60 returns with a mean of 7% and a
sample standard deviation of 25% is closest to:
A) 1.546% to 13.454%.
B) 0.546% to 13.454%.
C) -1.584% to 15.584%.
D) 1.584% to 14.584%.
Explanation
The standard error for the mean = s / (n)0.5 = 25% / (60)0.5 = 3.227%. The critical value from the t-table should be based on 60
1 = 59 df. Since the standard tables do not provide the critical value for 59 df the closest available value is for 60 df. This leaves
us with an approximate confidence interval. Based on 99% confidence and df = 60, the critical t-value is 2.660. Therefore the
99% confidence interval is approximately: 7% 2.660(3.227) or 7% 8.584% or -1.584% to 15.584%.
If you use a z-statistic, the confidence interval is 7% 2.58(3.227) = -1.326% to 15.326%, which is closest to the correct
choice.

Questions #14-18 of 82
An analyst is conducting a hypothesis test to determine if the mean time spent on investment research is different from 3 hours

5 of 30

per day. The test is performed at the 5 percent level of significance and uses a random sample of 64 portfolio managers, where
the mean time spent on research is found to be 2.5 hours. The population standard deviation is 1.5 hours.

Question #14 of 82

Question ID: 438884

The appropriate null hypothesis for the described test is:

A) H0: 3 hours.
B) H0: 3 hours.
C) H0: = 3 hours.
D) H0: 3 hours.
Explanation
H0: = 3 hours.

Question #15 of 82

Question ID: 438885

Which type of test is this?

A) Two-tailed test.
B) Chi-square test.
C) One-tailed test.
D) Equity of variance test.
Explanation
This is a two-sided (tailed) test. We want to test if the mean "differs from" 3 hours (i.e., Ha: 3 hours).

Question #16 of 82

Question ID: 438886

The calculated z-statistic is:

A) +2.67.
B) -2.13.
C) +0.33.
D) -2.67.
Explanation
The normally distributed test statistic is:

Question #17 of 82

Question ID: 438887

The critical z-value(s) of the test statistic is (are):

A) 1.96.
B) -1.96.
C) 2.58.
D) +1.96.
Explanation

6 of 30

At /2 = 0.025, the critical z-values are: z/2 = z0.025 = 1.96.

Question #18 of 82

Question ID: 438888

Which of the following decisions is the CORRECT decision for this study?
A) Fail to reject the null hypothesis.
B) Reject the null hypothesis.
C) No decision is possible because the sample standard deviation was not given.
D) The sample size is too small, so increase the sample size.
Explanation
Decision rule: reject H0 if zcomputed < -1.96, or zcomputed > +1.96. Since -2.67 < -1.96 , reject H0.

Question #19 of 82

Question ID: 438899

What is the computed value of the test statistic that follows an F-distribution when sample variances are equal and the level of
significance is 0.10?
A) 0.90.
B) 0.05.
C) 1.00.
D) 0.10.
Explanation
The calculated value of the F-distributed test statistic, F, is s12 / s22. With equal variances, F = 1.

Question #20 of 82

Question ID: 438846

The average U.S. dollar/Euro exchange rate from a sample of 36 monthly observations is $1.00/Euro. The population variance is
0.49. What is the 95% confidence interval for the mean U.S. dollar/Euro exchange rate?
A) $0.8657 to $1.1343.
B) $0.5100 to $1.4900.
C) $0.7713 to $1.2287.
D) $0.8075 to $1.1925.
Explanation
The population standard deviation is the square root of the variance (0.49 = 0.7). Because we know the population standard
deviation, we use the z-statistic. The z-statistic reliability factor for a 95% confidence interval is 1.960. The confidence interval is
$1.00 1.960($0.7 / 36) or $1.00 $0.2287.

Question #21 of 82

Question ID: 438834

You observe the following pairs of annual returns on a sample of two stocks: [(0.03, 0.01), (0.06, 0.06), (0.02, 0.05), (0.13,

7 of 30

0.08)]. The covariance of the returns on the two stocks is closest to:
A) 0.0011.
B) 0.0033.
C) 0.00165.
D) 0.0008.
Explanation
The means for the two stocks are:
(0.03 + 0.06 + 0.02 + 0.13) / 4 = 0.06 and (0.01 + 0.06 + 0.05 + 0.08) / 4 = 0.05.
The covariance is:
[(0.03 0.06)(0.01 0.05) + (0.06 0.06)(0.06 0.05) + (0.02 0.06)(0.05 0.05) + (0.13 0.06)(0.08 0.05)] / [4 - 1] =
0.0011.

Question #22 of 82

Question ID: 438868

A Type I error occurs when the null hypothesis:

A) fails to be rejected when it is false.
B) is rejected when it is true.
C) is rejected when it is false.
D) fails to be rejected when it is true.
Explanation
A Type I error occurs when the null hypothesis is rejected when it is true. A Type II error occurs when the null hypothesis fails to
be rejected when it is false.

Question #23 of 82

Question ID: 438859

An analyst conducts a two-tailed z-test to determine if small cap returns are significantly different from 10%. The sample size was
200. The computed z-statistic is 2.3. Using a 5% level of significance, which statement is most accurate?
A) Fail to reject the null hypothesis and conclude that small cap returns are close enough to
10% that we cannot say they are significantly different from 10%.
B) You cannot determine what to do with the information given.
C) Reject the null hypothesis and conclude that small cap returns are significantly different from 10%.
D) A sample size of 200 indicates that we should fail to reject the null.
Explanation
At the 5% level of significance the critical z-statistic for a two-tailed test is 1.96 (assuming a large sample size). The null
hypothesis is H0: x = 10%. The alternative hypothesis is HA: x 10%. Because the computed z-statistic is greater than the
critical z-statistic (2.33 > 1.96), we reject the null hypothesis and we conclude that small cap returns are significantly different
than 10%.

8 of 30

Question #24 of 82

Question ID: 438876

The mean monthly return for an equity portfolio over 60 months is 1.5 percent. The standard deviation is 3.0 percent. The value
of the test statistic to test the hypothesis that mean monthly return is equal to zero is closest to:
A) 3.87.
B) 30.00.
C) 2.19.
D) 0.50.
Explanation
z = (1.5% - 0.0%) / [(3.0% / 60)] = 3.87

Question #25 of 82

Question ID: 438873

A survey is taken to determine whether the average starting salaries of CFA charterholders is equal to or greater than $59,000
per year. What is the test statistic given a sample of 135 newly acquired CFA charterholders with a mean starting salary of
$64,000 and a standard deviation of $5,500?
A) -0.91.
B) -10.56.
C) 10.56.
D) 0.91.
Explanation
With a large sample size (135) 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 ) / ( / n1/2) = (64,000 59,000) / (5,500 / 1351/2) = (5,000) / (5,500 / 11.62) = 10.56.

Question #26 of 82

Question ID: 438882

Which of the following statements about hypothesis testing is most accurate?

A) When the critical Z-statistic is greater than the sample Z-statistic in a two-tailed test, reject
the null hypothesis and accept the alternative hypothesis.
B) A Type I error is rejecting the null hypothesis when it is true, and a Type II error is accepting the
alternative hypothesis when it is false.
C) A hypothesized mean of 3, a sample mean of 6, and a standard error of the sampling means of 2
give a sample Z-statistic of 1.5.
D) A two-tailed test on a large sample with a significance level of 0.01 has confidence intervals of
1.96 standard errors.
Explanation

9 of 30

The 0.01 level of significance has confidence intervals of 2.58 standard errors. A Type II error is wrongly accepting the null
hypothesis. The null hypothesis should be rejected when the sample Z-statistic is greater than the critical Z-statistic.

Question #27 of 82

Question ID: 438851

Susan Bellows is comparing the return on equity for two industries. She is convinced that the return on equity for the discount
retail industry (DR) is greater than that of the luxury retail (LR) industry. What are the hypotheses for a test of her comparison of
return on equity?
A) H0: DR LR versus Ha: DR > LR.
B) H0: DR = LR versus Ha: DR LR.
C) H0: DR LR versus Ha: DR = LR.
D) H0: DR = LR versus Ha: DR < LR.
Explanation
The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that she
wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the "greater than" belief.

Questions #28-32 of 82
Austin Roberts wants to test if the mean price of houses in the area is greater than $145,000. A random sample of 36 houses in
the area has a mean price of $149,750. The population standard deviation is $24,000, and Roberts wants to conduct hypothesis
testing at a 1 percent level of significance.

Question #28 of 82

Question ID: 438893

The appropriate alternative hypothesis is:

A) Ha: $145,000.
B) Ha: > $145,000.
C) Ha: < $145,000.
D) Ha: &ge $145,000.
Explanation
Ha: > $145,000

Question #29 of 82

Question ID: 438894

The value of the calculated test statistic is closest to:

A) z = 0.67.
B) z = 8.13.
C) z = 4.00.
D) z = 1.19.
Explanation

10 of 30

Question #30 of 82

Question ID: 438895

Which of the following most accurately describes the appropriate test structure?
A) One-tailed test.
B) Two-tailed test.
C) F-test.
D) Chi-square test.
Explanation
The alternative hypothesis, Ha: > $145,000, only allows for values greater than the hypothesized value. Thus, this is a
one-sided (one-tailed) test.

Question #31 of 82

Question ID: 438896

The critical value of the z-statistic is:

A) z = 2.33.
B) z = 1.96.
C) z = +2.33.
D) z = -2.33.
Explanation
For a one-tailed z-test at the 1% level of significance, the critical z-value is z0.01 = 2.33. Since the test is one-tailed on the upper
end (i.e., Ha: > 145,000), we use a positive z-critical value

Question #32 of 82

Question ID: 438897

At a 1 percent level of significance, Roberts should:

A) fail to reject the null hypothesis.
B) reject the null hypothesis.
C) accept the null hypothesis.
D) neither reject nor fail to reject the null hypothesis.
Explanation
The decision rule is: reject H0 if z-computed > z-critical. Since 1.1875 < 2.33, Roberts will fail to reject the null.

Question #33 of 82

Question ID: 438821

Assume that the following returns are a sample of annual returns for firms in the clothing industry. Given the following sample of
returns, what are the sample variance and standard deviation?
Firm 1

Firm 2

Firm 3

Firm 4

Firm 5

15%

2%

5%

(7%)

0%

11 of 30

Variance

Standard Deviation

A) 64.5

8.0

B) 51.6

7.2

C) 22.0

4.7

D) 32.4

5.7

Explanation
The sample variance is found by taking the sum of all squared deviations from the mean and dividing by (n 1). [(15 3)2 + (2
3)2 + (5 3)2 + (-7 3)2 + (0 3)2] / (5 1) = 64.5
The sample standard deviation is found by taking the square root of the sample variance. 64.5 = 8.03

Question #34 of 82

Question ID: 438870

Which of the following statements about testing a hypothesis using a Z-test is least accurate?
A) If the calculated Z-statistic lies outside the critical Z-statistic range, the null hypothesis can
be rejected.
B) A Type I error is rejecting the null hypothesis when it is actually true.
C) The calculated Z-statistic determines the appropriate significance level to use.
D) The confidence interval for a two-tailed test of a population mean at the 5% level of significance is
that the sample mean falls between 1.96 /n of the null hypothesis value.
Explanation
The significance level is chosen before the test so the calculated Z-statistic can be compared to an appropriate critical value.

Questions #35-37 of 82
John Starwall, CFA, is assigned the task of estimating the risk and return for security X, which is being considered as an addition
to his current portfolio. If the investment is accepted, then the total portfolio will consist of five different equities that are not
highly correlated. Security X has an estimated beta of 1.4. The probabilities of various states of the economy and the expected
return for security X given each state are as follows:

State of

Pi

E(Ri )

Recession

0.3

0.01

Average

0.6

0.10

0.1

0.20

Economy

Economy
Boom

Question #35 of 82

Question ID: 438823

12 of 30

Based on the information above, what is the estimated expected return for security X?

A) 15.5%.
B) 8.3%.
C) 10.0%.
D) 8.0%.
Explanation
E(R) = 0.3(0.01) + 0.6(0.1) + 0.1(0.2) = 0.003 + 0.06 + 0.02 = 0.083 or 8.3%

Question #36 of 82

Question ID: 438824

Based on the information above, what is the estimated standard deviation for security X?

A) 10.1%.
B) 5.6%.
C) 7.8%.
D) 0.3%.
Explanation
Variance = 0.3(0.01 - 0.083)2 + 0.6(0.10 - 0.083)2 + 0.1(0.20 - 0.083)2 = 0.00160 + 0.00017 + 0.00137 = 0.00314
Standard Deviation = (0.00314)0.5 = 0.056 or 5.6%

Question #37 of 82

Question ID: 438825

Based on the information above, what are the appropriate measures for assessing whether or not this security should be added to the
portfolio?

A) Expected return and standard deviation of the security.

B) Beta and standard deviation of the security.
C) Expected return, beta, and standard deviation of the security.
D) Expected return and beta of the security.
Explanation
Total risk is comprised of systematic and unsystematic risk. In a well-diversified portfolio only systematic risk is important. Systematic
risk is measured by beta. However, if the portfolio is not well diversified, total risk as measured by standard deviation must be
considered. The stand-alone risk for this security is important in the decision because not all of the unsystematic risk is diversified away.
Therefore, the correct answer is expected return and standard deviation. Beta only applies to a well-diversified portfolio.

Question #38 of 82

Question ID: 438858

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

13 of 30

 B) The analyst should reject the null hypothesis and conclude that the earnings estimates are
significantly different from reported earnings.
C) The analyst should fail to reject the null hypothesis and conclude that the earnings estimates are not
significantly different from reported earnings.
D) The appropriate test to apply is a two-tailed chi-square test.
Explanation
The null hypothesis is that earnings estimates are equal to reported earnings. To reject the null hypothesis, the calculated test
statistic must fall outside the two critical values. IF the analyst tests the null hypothesis with a z-statistic, the crtical values at a
5% confidence level are 1.96. Because the calculated test statistic, 1.25, lies between the two critical values, the analyst
should fail to reject the null hypothesis and conclude that earnings estimates are not significantly different from reported earnings.
If the analyst uses a t-statistic, the upper critical value will be even greater than 1.96, never less, so even without the exact
degrees of freedom the analyst knows any t-test would fail to reject the null.

Questions #39-42 of 82
Two samples were drawn from a normally distributed population. For the first sample, the mean was $50, and the standard
deviation was $5. For the second sample, the mean was $55, and the standard deviation was $6. The first sample consists of 25
observations, and the second sample consists of 36 observations. (Note: In the following questions, the subscripts "1" and "2"
indicate the first and second sample, respectively.)

Question #39 of 82

Question ID: 438905

Consider the hypotheses structured as H0: 1 = $48 versus Ha: 1 $48. At a 1 percent level of significance, the null hypothesis:
A) should be rejected.
B) cannot be tested using this sample information provided.
C) should neither be rejected nor fail to be rejected.
D) cannot be rejected.
Explanation
A two-tailed t-test is appropriate. The decision rule is to reject H0 if the t-statistic is outside the range defined by t at /2 = 0.025
with df = 24. The t-statistic =

t24 =
t24 at /2 = p = 0.025 = 2.797, therefore, H0 cannot be rejected.

Question #40 of 82
Using a 5 percent level of significance and a hypothesis test structure of

Question ID: 438906

versus

, the null hypothesis:

A) cannot be rejected.
B) should neither be rejected nor fail to be rejected.
C) should be rejected.
D) cannot be tested using this sample information provided.
Explanation

14 of 30

The chi-square test is used to test hypotheses concerning a single population variance. Since this is a one-tailed test, the
decision rule is to reject H0 if 2 > the critical chi-square value at = 0.05 with df = 24.
. The right-tail critical chi-square value is 36.415. Since 2 = 25 36.415, H0 cannot be rejected.

Question #41 of 82

Question ID: 438907

Consider the hypotheses structured as H0: 1 $48 versus Ha: 1 > $48. At a 5 percent level of significance, the null hypothesis:
A) cannot be tested using the sample information provided.
B) cannot be rejected.
C) should neither be rejected nor fail to be rejected.
D) should be rejected.
Explanation
A one-tailed t-test is appropriate. The decision rule is to reject H0 if the computed t-statistic > t-critical at = 0.05 with df = 24.
The computed value of the t-statistic =

, and t-critical = t24 = 1.711. Since t > t-critical, H0 should be

rejected.

Question #42 of 82

Question ID: 438908

Using a 5 percent level of significance for a test of the null of H0: 1 = 2 versus the alternative of Ha: 1 2, the null
hypothesis:
A) should neither be rejected nor fail to be rejected.
B) should be rejected.
C) cannot be tested using the sample information provided.
D) cannot be rejected.
Explanation
The two-sided F-test is appropriate to test the equality of population variances. The decision rule is to reject H0 if the computed
test statistic, F, exceeds the critical F-value at /2. For the information provided, F =

= 36/25 = 1.44. At a 0.025 level of

significance with d1 = 35 and d2 = 24, F-critical = 1.915. Since F < F-critical (1.44 < 1.915), we fail to reject the null hypothesis.

Question #43 of 82

Question ID: 438819

A sample covariance for the common stock of the Earth Company and the S&P 500 is 9.50. Which of the following statements
regarding the estimated covariance of the two variables is most accurate?
A) The two variables will have a strong tendency to move in opposite directions.
B) The two variables will have a slight tendency to move together.
C) The relationship between the two variables is not easily predicted by the calculated covariance.
D) The relationship between the two variables is highly predictable given the calculated covariance.
Explanation
The actual value of the covariance for two variables is not very meaningful because its measurement is extremely sensitive to
the scale of the two variables, ranging from negative to positive infinity. Covariance can, however be converted into the

15 of 30

correlation coefficient, which is more straightforward to interpret.

Question #44 of 82

Question ID: 438830

You observe the following annual returns on a stock portfolio for the last nine years: [5%, 7%, 20%, 4%, 2%, 5%, 13%, 18%,
4%]. Which measure of central tendency has the highest value?
A) For these observations, the mean, median, and mode are equal.
B) The mean.
C) The mode.
D) The median.
Explanation
Ordering the observations gives: [4%, 2%, 4%, 5%, 5%, 7%, 13%, 18%, 20%]. The mode is the value that occurs most
frequently; in this case, 5%. The median is the fifth ordered observation, 5%. The mean is: (4% + 2% + 4% + 5% + 5% + 7% +
13% + 18% + 20%) / 9 = 7.8%.

Question #45 of 82

Question ID: 438848

The 95 percent confidence interval of the sample mean of the price earnings ratio for all traded stocks is 19 to 44. There are
over 5,000 traded stocks and the sample size of this test is 100. Given that the expected value of the price earnings ratio is
31.5, the standard error of the ratio is closest to:
A) 2.58.
B) 6.38.
C) 1.96.
D) 12.50.
Explanation
The confidence interval is 31.5 1.96x, where x is the standard error. If we take the upper bound, we know that 31.5 +/- 1.96x =
44, or 1.96x = 12.5. Hence, x = 6.38.

Question #46 of 82

Question ID: 438902

Abby Ness is an analyst for a firm that specializes in evaluating firms involved in mineral extraction. Ness believes that the
earnings of copper extracting firms are more volatile than those of bauxite extraction firms. In order to test this, Ness examines
the volatility of returns for 31 copper firms and 25 bauxite firms. The standard deviation of earnings for copper firms was $2.69,
while the standard deviation of earnings for bauxite firms was $2.92. Ness's Null Hypothesis is 12 = 22. Based on the samples,
can we reject the null hypothesis at a 95% confidence level using an F-statistic and why? Null is:
A) rejected. The F-value exceeds the critical value by 0.71.
B) rejected. The F-value exceeds the critical value by 0.849.
C) not rejected. The critical value exceeds the F-value by 0.194.
D) not rejected. The critical value exceeds the F-value by 0.71.

16 of 30

Explanation
F = s12 / s22 = $2.922 / $2.692 = 1.18
From an F table, the critical value with numerator df = 24 and denominator df = 30 is 1.89.

Question #47 of 82

Question ID: 438845

What is the appropriate test statistic for constructing confidence intervals for the population mean of a nonnormal distribution
when the population variance is unknown and the sample size is large (n 30)?
A) The z-statistic at with n degrees of freedom.
B) The t-statistic at /2 with n degrees of freedom.
C) The z-statistic or the t-statistic.
D) The t-statistic at with 29 degrees of freedom.
Explanation
When the sample size is large, and the central limit theorem can be relied upon to assure a sampling distribution that approaches
normal, either the t-statistic or the z-statistic is acceptable for constructing confidence intervals for the population mean.
However, the t-statistic will provide a more conservative range (wider) at a given level of significance.

Question #48 of 82

Question ID: 438901

You have collected monthly returns for a mutual fund and want to test the null hypothesis that the standard deviation exceeds the
advertised standard deviation of 3.5 percent. The most appropriate test statistic is based on a:
A) chi-square test.
B) t-test.
C) F-test.
D) z-test.
Explanation
The chi-square test is used to test hypotheses about a single population variance.

Question #49 of 82

Question ID: 438877

A goal of an "innocent until proven guilty" justice system is to place a higher priority on:
A) avoiding type I errors.
B) the null hypothesis.
C) avoiding type II errors.
D) avoiding type III errors.
Explanation
In an "innocent until proven guilty" justice system, the null hypothesis is that the accused is innocent. The hypothesis can only be

17 of 30

rejected by evidence proving guilt beyond a reasonable doubt, favoring the avoidance of type I errors.

Question #50 of 82

Question ID: 438866

Maria Huffman is the Vice President of Human Resources for a large regional car rental company. Last year, she hired Graham
Brickley as Manager of Employee Retention. Part of the compensation package was the chance to earn one of the following two
bonuses: if Brickley can reduce turnover to less than 30%, he will receive a 25% bonus. If he can reduce turnover to less than
25%, he will receive a 50% bonus (using a significance level of 10%). The population of turnover rates is normally distributed.
The population standard deviation of turnover rates is 1.5%. A recent sample of 100 branch offices resulted in an average
turnover rate of 24.2%. Which of the following statements is most accurate?
A) For the 50% bonus level, the critical value is -1.65 and Huffman should give Brickley a 50% bonus.
B) Brickley should not receive either bonus.
C) For the 50% bonus level, the test statistic is -5.33 and Huffman should give Brickley a 50% bonus.
D) For the 25% bonus level, the test statistic is -10.66.
Explanation
Using the process of Hypothesis testing:
Step 1: State the Hypothesis. For 25% bonus level - Ho: m 30% Ha: m < 30%; For 50% bonus level - Ho: m 25% Ha: m <
25%.
Step 2: Select Appropriate Test Statistic. Here, we have a normally distributed population with a known variance (standard
deviation is the square root of the variance) and a large sample size (greater than 30.) Thus, we will use the z-statistic.
Step 3: Specify the Level of Significance. = 0.10.
Step 4: State the Decision Rule. This is a one-tailed test. The critical value for this question will be the z-statistic that
corresponds to an of 0.10, or an area to the left of the mean of 40% (with 50% to the right of the mean). Using the z-table
(normal table), we determine that the appropriate critical value = -1.28 (Remember that we highly recommend that you have the
"common" z-statistics memorized!) Thus, we will reject the null hypothesis if the calculated test statistic is less than -1.28.
Step 5: Calculate sample (test) statistics. Z (for 50% bonus) = (24.2 - 25) / (1.5 / 100) = 5.333. Z (for 25% bonus) = (24.2 30) / (1.5 / 100) = 38.67.
Step 6: Make a decision. Reject the null hypothesis for both the 25% and 50% bonus level because the test statistic is less than
the critical value. Thus, Huffman should give Soberg a 50% bonus.
The other statements are false. The critical value of -1.28 is based on the significance level, and is thus the same for both the
50% and 25% bonus levels.

Question #51 of 82

Question ID: 438820

The mean equity risk premium over a 40-year period is equal to 8.0 percent. The standard deviation of the sample is 12 percent.
The standard error of the sample mean is closest to:

18 of 30

 A) 1.26%.
B) 8.00%.
C) 0.30%.
D) 1.90%.
Explanation
Note the size of the sample here is the number of years.
X = 12 / 40 = 1.90%

Question #52 of 82

Question ID: 438843

A nursery sells trees of different types and heights. Suppose that 75 pine trees are sold for planting at City Hall. These 75 trees
average 60 inches in height with a standard deviation of 16 inches.
Using this information, construct a 95% confidence interval for the mean height of all trees in the nursery.
A) 0.8 + 1.96(16).
B) 60 + 1.96(1.85).
C) 0.8 + 1.96(1.85).
D) 60 + 1.96(16).
Explanation
Because we know the population standard deviation, we use the z-statistic. A 95% confidence level is constructed by taking the
population mean and adding and subtracting the product of the z-statistic reliability (z/2) factor times the known standard
deviation of the population divided by the square root of the sample size: x z/2 ( / n1/2) = 60 (1.96) (16 / 751/2) = 60
(1.96) (16 / 8.6603) = 60 (1.96) (1.85).

Question #53 of 82

Question ID: 438844

What is the appropriate test statistic for constructing confidence intervals for the population mean of a normal distribution when
the population variance is unknown?
A) The z-statistic at with n degrees of freedom.
B) The t-statistic at /2 with n degrees of freedom.
C) The z-statistic with n - 1 degrees of freedom.
D) The t-statistic at /2 with n - 1 degrees of freedom.
Explanation
Use the t-statistic at /2 and n - 1 degrees of freedom when the population variance is unknown, regardless of sample size.

Question #54 of 82

Question ID: 438869

If the null hypothesis is innocence, then the statement "It is better that the guilty go free, than the innocent are punished" is an example of

19 of 30

preferring a:

A) two tailed test over a one tailed test.

B) higher level of significance.
C) type II error over a type I error.
D) type I error over a type II error.
Explanation
The statement shows a preference for not rejecting the null hypothesis when it is false (a type II error), over rejecting it when it is true (a
type I error).

Question #55 of 82

Question ID: 438867

A bottler of iced tea wishes to ensure that an average of 16 ounces of tea is in each bottle. In order to analyze the accuracy of
the bottling process, a random sample of 150 bottles is taken. Using a t-distributed test statistic of -1.09 and a 5% level of
significance, the bottler should:
A) reject the null hypothesis and conclude that bottles do not contain an average of 16 ounces
of tea.
B) reject the null hypothesis and conclude that bottles contain an average 16 ounces of tea.
C) not reject the null hypothesis and conclude that bottles do not contain an average of 16 ounces of
tea.
D) not reject the null hypothesis and conclude that bottles contain an average 16 ounces of tea.
Explanation
Ho: = 16; Ha: 16. Do not reject the null since |t| = 1.09 < 1.96 (critical value).

Question #56 of 82

Question ID: 438871

A Type I error:
A) fails to reject a true null hypothesis.
B) rejects a true null hypothesis.
C) fails to reject a false null hypothesis.
D) rejects a false null hypothesis.
Explanation
A Type I Error is defined as rejecting the null hypothesis when it is actually true. The probability of committing a Type I error is the
significance level or alpha risk.

Question #57 of 82

Question ID: 438865

Which of the following statements about hypothesis testing is least accurate?

A) The null hypothesis is a statement about the value of a population parameter.

20 of 30

 B) A Type I error is rejecting the null hypothesis when it is actually true.

C) If the alternative hypothesis is Ha: > 0, a two-tailed test is appropriate.
D) A Type II error is failing to reject a false null hypothesis.
Explanation
The hypotheses are always stated in terms of a population parameter. Type I and Type II are the two types of errors you can
make - reject a null hypothesis that is true or fail to reject a null hypothesis that is false. The alternative may be one-sided (in
which case a > or < sign is used) or two-sided (in which case a is used).

Question #58 of 82

Question ID: 438857

In the process of hypothesis testing, what is the proper order for these steps?
A) Specify the level of significance. State the hypotheses. Make a decision. Collect the sample
and calculate the sample statistics.
B) State the hypotheses. Collect the sample and calculate the sample statistics. Make a decision.
Specify the level of significance.
C) Collect the sample and calculate the sample statistics. State the hypotheses. Specify the level of
significance. Make a decision.
D) State the hypotheses. Specify the level of significance. Collect the sample and calculate the test
statistics. Make a decision.
Explanation
The hypotheses must be established first. Then the test statistic is chosen and the level of significance is determined. Following
these steps, the sample is collected, the test statistic is calculated, and the decision is made.

Question #59 of 82

Question ID: 438875

A return series with 250 observations has a sample mean of 10 percent and a standard deviation of 15 percent. The standard
error of the sample mean is closest to:
A) 0.06.
B) 15.80.
C) 3.87.
D) 0.95.
Explanation
The standard error of the sample mean is the standard deviation of the sample divided by the square root of the number of
observations in the sample. In this case, (15 / 250) = 0.95.

Question #60 of 82

Question ID: 438836

The mean and variance of a sample average help define the distributional characteristics of a sample distribution and allow
assumptions to be made about this distribution when the sample size is large. Which of the following choices represent the

21 of 30

standard deviation of a sample average?

A) (X)2
B) 1/n.
C) (X)/n.
D) (X)2/ n.
Explanation
The central limit theorem states that for a population with a mean and a finite variance 2, the sampling distribution of the
sample mean of all possible samples of size n will be approximately normally distributed with a mean equal to and a variance
equal to 2/n. Thus, the standard deviation of the sample average is equal to: /n. This standard deviation measure is known as
the standard error.

Question #61 of 82

Question ID: 438881

The mean monthly return for an equity portfolio over 60 months is 1.5%. The standard deviation is 3.0%. The value of the test
statistic to test the hypothesis that mean monthly return is equal to zero is closest to:
A) 3.87.
B) 0.50.
C) 2.19.
D) 30.00
Explanation

Question #62 of 82

Question ID: 438855

Which of the following statements least describes the procedure for testing a hypothesis?

A) Select the level of significance, compute the test statistic, and make a decision.
B) Select the level of significance, formulate the decision rule, and make a decision.
C) Compute the sample value of the test statistic, set up a rejection (critical) region, and make a decision.
D) Develop a hypothesis, compute the test statistic, and make a decision.
Explanation
Depending upon the author there can be as many as seven steps in hypothesis testing which are:
1. Stating the hypotheses.
2. Identifying the test statistic and its probability distribution.
3. Specifying the significance level.
4. Stating the decision rule.
5. Collecting the data and performing the calculations.
6. Making the statistical decision.
7. Making the economic or investment decision.

22 of 30

Question #63 of 82

Question ID: 438880

Given the following hypothesis:

The null hypothesis is H0 : = 5
The alternative is H1 : 5
The mean of a sample of 17 is 7
The population standard deviation is 2.0
What is the calculated z-statistic?
A) 4.00.
B) 4.12.
C) 8.25.
D) 8.00.
Explanation
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 ) / ( / n1/2) = (7 5) / (2 / 171/2) = (2) / (2 / 4.1231) = 4.12.

Question #64 of 82

Question ID: 438847

A random sample of 100 technology stocks earned an average of 10%. Assuming the distribution of equity returns is normal and
the population standard deviation is 5%, the 95% confidence interval for the population mean is:
A) 9.91% to 10.90%.
B) 9.50% to 10.50%.
C) 9.02% to 10.98%.
D) 5.00% to 15.00%.
Explanation
Z / 2 = Z0.025 = 1.96. So, 0.1 +/1.96(0.05 / 10) = 9.02% to 10.98%.

Question #65 of 82

Question ID: 438874

If the sample size is greater than 30 and population variance is unknown, the appropriate test for the sample mean is the:
A) p-test or F-test.
B) t-test.
C) z-test.
D) t-test or z-test.
Explanation
The central limit theorem makes it appropriate to use the z-test with an unknown variance if the sample size is large enough (n

23 of 30

30), regardless of the distribution of the population. Since the t- and the z-distributions converge as sample size increases, either
test is appropriate, although the t-test is a more conservative estimate.

Question #66 of 82

Question ID: 438833

A sample of paired points A and B is shown below. What is the covariance between the values of A and B?

Sample A B
1

1 2

4 5

9 7

11 10

14 12

A) 82.20.
B) 20.55.
C) 7.80.
D) 29.76.
Explanation

Sample

A-mean (A)

B-mean (B)

Product

6.8

5.2

35.36

3.8

2.2

8.36

1.2

0.2

0.24

11

3.2

10

2.8

8.96

14

6.2

12

4.8

29.76

mean

7.8

7.2

Sum

82.2

Cov = 82.20 / (5 - 1) = 20.55

Question #67 of 82

Question ID: 438856

The first step in the process of hypothesis testing is:

A) the calculation of sample statistics.
B) the collection of the sample.
C) selecting the test statistic.
D) to state the hypotheses.
Explanation
The researcher must state the hypotheses prior to the collection and analysis of the data. More importantly, it is necessary to

24 of 30

know the hypotheses before selecting the appropriate test statistic.

Question #68 of 82

Question ID: 438826

For the investments shown in the table below, what are the mean, median, and mode of the returns?
Investment Return (%)
A

12

14

13

12

Mean

Median

Mode

A) 10.71%

12%

12%

B) 12.00%

12%

12%

C) 11.20%

12%

12%

D) 10.71%

9%

13%

Explanation
The mean is the average return computed by summing the returns and dividing by the number of investments: 75 / 7 = 10.71%.
The median is the mid-point or central number of returns arranged from highest to lowest or lowest to highest. In this case: 7, 8,
9, 12, 12, 13, 14. The median return is 12%.
The mode is the return that occurs most frequently. In this case, 12% is also the mode.

Question #69 of 82

Question ID: 438850

A sample of size 25 is selected from a normal population. This sample has a mean of 15 and the population variance is 4.
Using this information, construct a 95% confidence interval for the population mean, m.
A) 15 1.96(0.4).
B) 15 1.96(2).
C) 15 1.96(4).
D) 15 1.96(0.8).
Explanation
Because we can compute the population standard deviation, we use the z-statistic. A 95% confidence level is constructed by
taking the population mean and adding and subtracting the product of the z-statistic reliability (z/2) factor times the known
standard deviation of the population divided by the square root of the sample size (note that the population variance is given and

25 of 30

its positive square root is the standard deviation of the population): x z/2 ( / n1/2) = 15 1.96 (41/2 / 251/2) = 15 1.96
(0.4).

Questions #70-71 of 82
Annual Returns on ABC Mutual Fund
1991 1992 1993 1994 1995 1996 1997 1998 1999

2000

11.0% 12.5% 8.0% 9.0% 13.0% 7.0% 15.0% 2.0% -16.5% 11.0%

Question #70 of 82

Question ID: 438828

What is the arithmetic mean return for ABC Mutual Fund for the period 1991-2000?
Arithmetic Mean
A) 28.2%
B) 11%
C) 7.2%
D) 8.2%

Explanation
arithmetic mean = (11 + 12.5 + 8 + 9 + 13 + 7 + 15 + 2 16.5 + 11) / 10 = 7.20

Question #71 of 82

Question ID: 438829

Assuming a mean of 7.2%, what is the sample standard deviation of the returns for ABC Mutual Fund for the period 1991-2000?
A) 7.8%.
B) 9.1%.
C) 10.2%.
D) 9.8%.
Explanation
Standard deviation = [i (xi X)2 / (n 1)]1/2
= (744.10 / 9) = (82.68) = 9.1%

Question #72 of 82

Question ID: 438903

The sampling distribution of variances is described by which distribution?

A) F-distribution.
B) Student's t-distribution.
C) Normal distribution.

26 of 30

 D) Chi-square distribution.
Explanation
The sampling distribution of variances is described by the chi-square distribution.

Question #73 of 82

Question ID: 438854

Which of the following is the correct sequence of events for testing a hypothesis?
A) State the hypothesis, select the level of significance, compute the test statistic, formulate the
decision rule, and make a decision.
B) State the hypothesis, select the level of significance, formulate the decision rule, compute the test statistic,
and make a decision.
C) State the hypothesis, formulate the decision rule, select the level of significance, compute the test statistic,
and make a decision.
D) State the hypothesis, formulate the decision rule, compute the test statistic, select the level of significance,
and make a decision.
Explanation
Depending upon the author there can be as many as seven steps in hypothesis testing which are:
1. Stating the hypotheses.
2. Identifying the test statistic and its probability distribution.
3. Specifying the significance level.
4. Stating the decision rule.
5. Collecting the data and performing the calculations.
6. Making the statistical decision.
7. Making the economic or investment decision.

Question #74 of 82

Question ID: 438879

Which of the following statements is FALSE?

A) The probability of committing a Type I error is the significance level of the test.
B) If a person is presumed innocent unless proven otherwise, finding a guilty person innocent is an example of
a Type I error.
C) Failing to reject the null when it is false is an example of a Type II error.
D) A Type I error is rejecting the null when it is actually true.
Explanation
This is a Type II error. The null hypothesis is that the defendant is innocent which is not rejected when it should have been.

Question #75 of 82

Question ID: 438900

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

27 of 30

stocks. The appropriate test statistics to carry out the test is the:
A) Chi-square test.
B) Z test.
C) F test.
D) t test.
Explanation
The F test is used to test the differences of variance between two samples.

Question #76 of 82

Question ID: 438872

In a two-tailed test of a hypothesis concerning whether a population mean is zero, Jack Olson computes a t-statistic of 2.7 based on a
sample of 20 observations where the distribution is normal. If a 5% significance level is chosen, Olson should:
A) not make a conclusion pending additional observations.
B) reject the null hypothesis and conclude that the population mean is significantly different from zero.
C) reject the null hypothesis and conclude that the population mean is not significantly different from zero.
D) fail to reject the null hypothesis that the population mean is not significantly different from zero.
Explanation
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 (with a large sample size the critical z-statistic of 1.960 may be used). Because the critical
t-statistic of 2.093 is to the left of the calculated t-statistic of 2.7, meaning that the calculated t-statistic is in the rejection range, we reject
the null hypothesis and we conclude that the population mean is significantly different from zero.

Question #77 of 82

Question ID: 438831

The last three year-end returns for a stock are 5%, 2%, and 1%. Using an arithmetic mean, the sample standard deviation is closest to:
A) 1.33%.
B) 2.87%.
C) 3.11%.
D) 3.51%.
Explanation
The sample arithmetic mean is:
X = (5 2 + 1) / 3 = 1.33%
The sample standard deviation is:

28 of 30

Questions #78-82 of 82
XYZ Corp. Annual Stock Prices
1995 1996 1997 1998 1999 2000
22% 5% -7% 11% 2% 11%

Question #78 of 82

Question ID: 438838

What is the mean return for XYZ stock?

A) 8.0%.
B) -7.0%.
C) 7.3%.
D) 11.0%.
Explanation

Question #79 of 82

Question ID: 438839

Assuming that the distribution of XYZ stock returns is a population, what is the population variance (in %2)?
A) 7.7.
B) 80.2.
C) 5.0.
D) 6.8.
Explanation
The population variance, 2, is found by taking the mean of all squared deviations from the mean.

Question #80 of 82

Question ID: 438840

Assuming that the distribution of XYZ stock returns is a population, what is the population standard deviation?
A) 8.96%.
B) 5.02%.
C) 46.22%.
D) 6.84%.
Explanation
The population standard deviation, , is found by taking the square root of the population variance.

Question #81 of 82

Question ID: 438841

29 of 30

Assuming that the distribution of XYZ stock returns is a sample, what is the sample variance (in %2)?
A) 7.4.
B) 5.0.
C) 96.3.
D) 72.4.
Explanation
The sample variance, s2, uses n - 1 in the denominator:

Question #82 of 82

Question ID: 438842

Assuming that the distribution of XYZ stock returns is a sample, what is the sample standard deviation?
A) 72.4%.
B) 7.4%.
C) 96.3%.
D) 9.8%.
Explanation
The sample standard deviation is the square root of the sample variance:

30 of 30

Topic 21: Linear Regression with One Regressor

Test ID: 8450958

Question #1 of 37

Question ID: 438933

Which of the following statements regarding the coefficient of determination is least accurate? The coefficient of determination:
A) may range from 1 to +1.
B) is the percentage of the total variation in the dependent variable that is explained by the independent
variable.
C) cannot decrease as independent variables are added to the model.
D) is the ratio of explained variation to total variation.
Explanation
In a simple regression, the coefficient of determination is calculated as the correlation coefficient squared and ranges from 0 to
+1.

Question #2 of 37

Question ID: 438929

Which of the following statements about linear regression analysis is most accurate?
A) The coefficient of determination is defined as the strength of the linear relationship between
two variables.
B) A perfectly negative correlation can be depicted by a correlation coefficient of +1.
C) An assumption of linear regression is that the residuals are independently distributed.
D) When there is a strong relationship between two variables we can conclude that a change in one will
cause a change in the other.
Explanation
Even when there is a strong relationship between two variables, we cannot conclude that a causal relationship exists. The
coefficient of determination is defined as the percentage of total variation in the dependent variable explained by the independent
variable.

Question #3 of 37

Question ID: 438934

A simple linear regression equation had a coefficient of determination (R2) of 0.8. What is the correlation coefficient between the
dependent and independent variables and what is the covariance between the two variables if the variance of the independent
variable is 4 and the variance of the dependent variable is 9?

Correlation
coefficient
A) 0.91

Covariance

4.80

1 of 14

 B) 0.89

4.80

C) 0.91

5.34

D) 0.89

5.34

Explanation
The correlation coefficient is the square root of the R2, r = 0.89.
To calculate the covariance multiply the correlation coefficient by the product of the standard deviations of the two variables:
COV = 0.89 4 9 = 5.34

Question #4 of 37

Question ID: 438924

Consider the regression results from the regression of Y against X for 50 observations:

Y = 5.0 - 1.5 X
The standard error of the estimate is 0.40 and the standard error of the coefficient is 0.45. The predicted value of Y if X is 10 is:
A) -10.
B) 10.
C) 4.5.
D) 20.
Explanation
The predicted value of Y is: Y = 5.0 - [1.5 (10)] = 5.0 - 15 = -10

Question #5 of 37

Question ID: 438936

Unlike the coefficient of determination, the coefficient of correlation:

A) indicates whether the slope of the regression line is positive or negative.
B) indicates the percentage of variation explained by a regression model.
C) measures the strength of association between the two variables more exactly.
D) can have an absolute value greater than 1.
Explanation
In a simple linear regression the coefficient of determination (R2) is the squared correlation coefficient, so it is positive even
when the correlation is negative.

Question #6 of 37

Question ID: 438915

The purpose of regression is to:

2 of 14

 A) explain the variation in the independent variable.

B) get the largest R2 possible.
C) explain the mean of the independent variable.
D) explain the variation in the dependent variable.
Explanation
The goal of a regression is to explain the variation in the dependent variable.

Question #7 of 37

Question ID: 438910

In a regression analysis, the effects from independent variables that are not included in the model are embodied in the:
A) error term.
B) slope coefficient.
C) intercept.
D) scattergram.
Explanation
The error term embodies the effect of variables omitted from the model.

Question #8 of 37

Question ID: 438931

Linear regression is based on a number of assumptions. Which of the following is least likely an assumption of linear regression?
A) A linear relationship exists between the dependent and independent variables.
B) There is at least some correlation between the error terms from one observation to the next.
C) Values of the independent variable are not correlated with the error term.
D) The variance of the error terms each period remains the same.
Explanation
When correlation exists, autocorrelation is present. As a result, residual terms are not normally distributed. This is inconsistent
with linear regression.

Question #9 of 37

Question ID: 438921

A simple linear regression is run to quantify the relationship between the return on the common stocks of medium sized
companies (Mid Caps) and the return on the S&P 500 Index, using the monthly return on Mid Cap stocks as the dependent
variable and the monthly return on the S&P 500 as the independent variable. The results of the regression are shown below:

Coefficient Standard Error of Coefficient t-Value

Intercept 1.71

2.950

0.58

S&P 500 1.52

0.130

11.69

R2 = 0.599

3 of 14

Use the regression statistics presented above and assume this historical relationship still holds in the future period. If the
expected return on the S&P 500 over the next period were 11%, the expected return on Mid Cap stocks over the next period
would be:
A) 18.4%.
B) 33.8%.
C) 20.3%.
D) 25.6%.
Explanation
Y = intercept + slope(X)
Mid Cap Stock returns = 1.71 + 1.52(11) =18.4%

Question #10 of 37

Question ID: 438938

An analyst performs two simple regressions. The first regression analysis has an R-squared of 0.40 and a beta coefficient of 1.2. The
second regression analysis has an R-squared of 0.77 and a beta coefficient of 1.75. Which one of the following statements is most
accurate?

A) The second regression equation has more explaining power than the first regression equation.
B) The R-squared of the first regression indicates that there is a 0.40 correlation between the independent
and the dependent variables.

C) The first regression equation has more explaining power than the second regression equation.
D) The beta coefficient of the 2nd regression indicates that this regression has more explaining power than
the first.

Explanation
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by the variation in the
independent variable. The larger R-squared (0.77) of the second regression means that 77% of the variability in the dependent variable is
explained by variability in the independent variable, while only 40% of that is explained in the first regression. This means that the second
regression has more explaining power than the first regression. Note that the Beta is the slope of the regression line and doesn't
measure explaining power.

Question #11 of 37

Question ID: 438913

In the scatter plot below, the correlation between the return on stock A and the market index is:

4 of 14

 A) zero.
B) not discernable using the scatter plot.
C) positive.
D) negative.
Explanation
In the scatter plot, higher values of the return on stock A are associated with higher values of the return on the market, i.e. a
positive correlation between the two variables.

Question #12 of 37

Question ID: 438911

Which of the following statements regarding scatter plots is most accurate? Scatter plots:
A) illustrate the scatterings of a single variable.
B) are used to examine the third moment of a distribution (skewness).
C) illustrate the relationship between two variables.
D) are used to examine the fourth moment of a distribution (kurtosis).
Explanation
A scatter plot is a collection of points on a graph where each point represents the values of two variables. They are used to
examine the relationship between two variables.

Question #13 of 37

Question ID: 424959

Which of the following is least likely an assumption of linear regression? The:

A) expected value of the residuals is zero.
B) residuals are mean reverting; that is, they tend towards zero over time.
C) residuals are independently distributed.
D) variance of the residuals is constant.
Explanation
The assumptions regarding the residuals are that the residuals have a constant variance, have a mean of zero, and are

5 of 14

independently distributed.

Question #14 of 37

Question ID: 438940

Assume an analyst performs two simple regressions. The first regression analysis has an R-squared of 0.90 and a slope
coefficient of 0.10. The second regression analysis has an R-squared of 0.70 and a slope coefficient of 0.25. Which one of the
following statements is most accurate?
A) The influence on the dependent variable of a one unit increase in the independent variable is
0.9 in the first analysis and 0.7 in the second analysis.
B) Results of the second analysis are more reliable than the first analysis.
C) The influence on the dependent variable of a one unit increase in the independent variable is 0.7 in
the first analysis and 0.9 in the second analysis.
D) The first regression has more explanatory power than the second regression.
Explanation
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by the variation in
the independent variable. The larger R-squared (0.90) of the first regression means that 90 percent of the variability in the
dependent variable is explained by variability in the independent variable, while 70 percent of that is explained in the second
regression. This means that the first regression has more explanatory power than the second regression. Note that the Beta is
the slope of the regression line and doesn't measure explanatory power.

Question #15 of 37

Question ID: 424957

Which of the following is least likely an assumption of a simple regression?

A) The variance of the error term is one.
B) The expected value of the error term is zero.
C) There is a linear relationship between dependent and independent variables.
D) The error term is normally distributed.
Explanation
There is no requirement that the variance of the error term should be equal to one.

Question #16 of 37

Question ID: 424960

Which of the following is least likely an assumption of linear regression?

A) The variance of the residuals is constant.
B) There is a linear relation between the dependent and independent variables.
C) The independent variable is correlated with the residuals.
D) The residuals are normally distributed.
Explanation

6 of 14

The assumption is that the independent variable is uncorrelated with the residuals.

Question #17 of 37

Question ID: 438916

The capital asset pricing model is given by: Ri =Rf + Beta ( Rm -Rf) where Rm = expected return on the market, Rf = risk-free market and
Ri = expected return on a specific firm. The dependent variable in this model is:
A) Ri.
B) Rm.
C) Rf.
D) Rm - Rf.
Explanation
The dependent variable is the variable whose variation is explained by the other variables. Here, the variation in ri is explained by the
variation in the other variables, rf and rm.

Question #18 of 37

Question ID: 438912

If the correlation between two variables is 1.0, the scatter plot would appear along a:
A) a curved line running from southwest to northeast.
B) straight line running from southwest to northeast.
C) straight line running from northwest to southeast.
D) a curved line centered in the scatter plot.
Explanation
If the correlation is 1.0, then higher values of the y-variable will be associated with lower values of the x-variable. The points would lie
on a straight line running from northwest to southeast.

Question #19 of 37

Question ID: 438932

Assume you perform two simple regressions. The first regression analysis has an R-squared of 0.80 and a beta coefficient of 0.10. The
second regression analysis has an R-squared of 0.80 and a beta coefficient of 0.25. Which one of the following statements is most
accurate?
A) Results of the second analysis are more reliable than the first analysis.
B) Results from the first analysis are more reliable than the second analysis.
C) The influence on the dependent variable of a one-unit increase in the independent variable is the same in
both analyses.
D) Results from both analyses are equally reliable.
Explanation
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by the variation in the
independent variable. The R-squared (0.80) being identical between the first and second regressions means that 80 percent of the

7 of 14

variability in the dependent variable is explained by variability in the independent variable for both regressions. This means that the first
regression has the same explaining power as the second regression.

Question #20 of 37

Question ID: 438914

Joe Harris is interested in why the returns on equity differ from one company to another. He chose several company-specific variables to
explain the return on equity, including financial leverage and capital expenditures. In his model:
A) return on equity is the explanatory variable, and financial leverage and capital expenditure are the
explained variables.
B) return on equity, financial leverage, and capital expenditures are all independent variables.
C) return on equity is the dependent variable, and financial leverage and capital expenditures are independent
variables.
D) return on equity is the independent variable, and financial leverage and capital expenditures are dependent
variables.
Explanation
The dependent variable is return on equity. This is what he wants to explain. The variables he uses to do the explaining (i.e., the
independent variables) are financial leverage and capital expenditures.

Question #21 of 37

Question ID: 438918

The independent variable in a regression equation is called all of the following EXCEPT:
A) predicting variable.
B) explanatory variable.
C) exogenous variable.
D) predicted variable.
Explanation
The dependent variable is the predicted variable.

Question #22 of 37

Question ID: 438935

Which term is least likely to apply to a regression model?

A) Coefficient of determination.
B) Goodness of fit.
C) R2.
D) Coefficient of variation.
Explanation
Goodness of fit, coefficient of determination and R2 are different names for the same concept. The coefficient of variation is not directly
part of a regression model.

8 of 14

Question #23 of 37

Question ID: 438927

Which of the following are included in a sample regression function?

I. The intercept.
II. The error term.
III. The slope coefficient.
IV. The independent variable.
A) I, II, III, and IV.
B) III and IV only.
C) I and III only.
D) I, III, and IV only.
Explanation
The sample regression function has a residual and not an error term. Although the residual and error term serve a similar purpose in their
respective equations, there are distinctions.

Question #24 of 37

Question ID: 438917

A regression analysis has the goal of:

A) measuring how the properties of the variables regress towards each other.
B) estimating how changes in independent variables affect a dependent variable.
C) estimating how changes in dependent variable affect an independent variable.
D) measuring the tendency of both independent and dependent variables to regress towards their respective
means.
Explanation
A regression analysis has the goal of measuring how changes in one variable, called a dependent or explained variable, can be explained
by changes in one or more other variables called the independent or explanatory variables.

Question #25 of 37

Question ID: 424958

Which of the following is least likely an assumption of linear regression analysis?

A) The Y values are all less than 3 standard deviations from the regression line.
B) The error term is normally distributed.
C) The expected value of the residuals is zero.
D) The X values are uncorrelated with the error terms.
Explanation
In a normal distribution, approximately 99%, but not necessarily all, of the observations are within 3 standard deviations of the regression
line.

9 of 14

Question #26 of 37

Question ID: 438939

A simple linear regression is run to quantify the relationship between the return on the common stocks of medium sized companies (Mid
Caps) and the return on the S&P 500 Index, using the monthly return on Mid Cap stocks as the dependent variable and the monthly
return on the S&P 500 as the independent variable. The results of the regression are shown below:
Standard Error
Coefficient

t-Value
of coefficient

Intercept

1.71

2.950

0.58

S&P 500

1.52

0.130

11.69

R2= 0.599

The strength of the relationship, as measured by the correlation coefficient, between the return on Mid Cap stocks and the return on the
S&P 500 for the period under study was:
A) 2.950.
B) 0.774.
C) 0.599.
D) 0.130.
Explanation
You are given R2 or the coefficient of determination of 0.599 and are asked to find R or the coefficient of correlation. The square root of
0.599 = 0.774.

Question #27 of 37

Question ID: 438941

Sample regression coefficients are often estimated with a process known as:
A) a population regression function.
B) a scattergram.
C) ordinary least squares.
D) Ockham's razor.
Explanation
Ordinary least squares or OLS is a method for estimating population coefficients. It provides the line that minimizes the squared
deviations of the dependent variables in the sample from the sample regression line.

Question #28 of 37

Question ID: 438937

What does the R2 of a simple regression of two variables measure and what calculation is used to equate the correlation coefficient to
the coefficient of determination?
R2 measures:

Correlation coefficient

10 of 14

 A) percent of variability of the

independent variable that is
explained by the variability of

R2 = r2

the dependent variable

B) percent of variability of the
independent variable that is
explained by the variability of the

R2 = r 2

dependent variable
C) percent of variability of the
dependent variable that is
explained by the variability of the

R2 = r2

independent variable
D) percent of variability of the
dependent variable that is
explained by the variability of the

R2 = r 2

independent variable

Explanation
R2, or the Coefficient of Determination, is the square of the coefficient of correlation (r). The coefficient of correlation describes the
strength of the relationship between the X and Y variables. The standard error of the residuals is the standard deviation of the dispersion
about the regression line. The t-statistic measures the statistical significance of the coefficients of the regression equation. In the
response: "percent of variability of the independent variable that is explained by the variability of the dependent variable," the definitions
of the variables are reversed.

Question #29 of 37

Question ID: 438920

An analyst is examining the relationship between two random variables, RCRANTZ and GSTERN. He performs a linear regression that
produces an estimate of the relationship:
RCRANTZ = 61.4 5.9GSTERN
Which interpretation of this regression equation is least accurate?
A) The covariance of RCRANTZ and GSTERN is negative.
B) In this regression, RCRANTZ is the dependent variable and GSTERN is the independent variable.
C) If GSTERN increases by one unit, RCRANTZ should increase by 5.9 units.
D) The intercept term implies that if GSTERN is zero, RCRANTZ is 61.4.
Explanation
The slope coefficient in this regression is -5.9. This means a one unit increase of GSTERN suggests a decrease of 5.9 units of
RCRANTZ. The slope coefficient is the covariance divided by the variance of the independent variable. Since variance (a squared term)
must be positive, a negative slope term implies that the covariance is negative.

11 of 14

Question #30 of 37

Question ID: 438922

Given: Y = 2.83 + 1.5X

What is the predicted value of the dependent variable when the value of an independent variable equals 2?
A) 2.83
B) 5.83
C) 6.50
D) -0.55
Explanation
Y = 2.83 + (1.5)(2)
= 2.83 + 3
= 5.83

Question #31 of 37

Question ID: 438926

In the estimated regression equation Y = 0.78 - 1.5 X, which of the following is least accurate when interpreting the slope coefficient?
A) The dependent variable declines by -1.5 units if X increases by 1 unit.
B) The dependent variable increases by 1.5 units if X decreases by 1 unit.
C) -1.5 is the elasticity of Y with respect to X.
D) If the value of X is zero, the value of Y will be -1.5.
Explanation
The slope represents the change in the dependent variable for a one-unit change in the independent variable. If the value of X is zero, the
value of Y will be equal to the intercept, in this case, 0.78.

Question #32 of 37

Question ID: 438942

As part of a regression analysis, an analyst finds that: Y - b1 X = -1.8 and b1 = 3.2. Based upon these results, for every unit increase in
the independent variable, on average the dependent variable increases by:
A) 5.0.
B) 3.2.
C) 1.8.
D) 1.4.
Explanation
b1 gives the slope coefficient which indicates the average change in the dependent variable given a unit change in the independent
variable.

Question #33 of 37

Question ID: 438928

12 of 14

Trudy Baker, FRM and Steven Phillips, FRM are planning to do a regression analysis. They discuss specifying the equation they wish to
estimate. Baker proposes the specification E(Y i|Xi) = B0 + (B1) (Xi2). Phillips proposes the specification (Yi|Xi) = B0 + (B1 Xi)2.
Which, if either, is appropriate when applying linear regression?
A) The specification of Baker but not that of Phillips.
B) Both the specification of Baker and Phillips.
C) The specification of Phillips but not that of Baker.
D) Neither the specification of Baker nor that of Phillips.
Explanation
Since the specification of Phillips would essentially be B0 + (B12) (Xi2), this precludes the application of linear regression analysis
because there is an exponent on B1, i.e., the specification is nonlinear with respect to the parameters. When we refer to a linear
regression model we generally assume that the equation is linear in the parameters; it may or may not be linear in the variables.

Question #34 of 37

Question ID: 438923

Paul Frank is an analyst for the retail industry. He is examining the role of television viewing by teenagers on the sales of accessory
stores. He gathered data and estimated the following regression of sales (in millions of dollars) on the number of hours watched by
teenagers (TV, in hours per week):

Salest = 1.05 + 1.6 TVt

The predicted sales if television watching is 5 hours per week is:
A) $8.00 million.
B) $9.05 million.
C) $2.65 million.
D) $1.05 million.
Explanation
The predicted sales are: Sales = $1.05 + [$1.6 (5)] = $1.05 + $8.00 = $9.05 million.

Question #35 of 37

Question ID: 438925

Sera Smith, a research analyst, had a hunch that there was a relationship between the percentage change in a firm's number of
salespeople and the percentage change in the firm's sales during the following period. Smith ran a regression analysis on a sample of 50
firms, which resulted in a slope of 0.72, an intercept of +0.01, and an R2 value of 0.65. Based on this analysis, if a firm made no changes
in the number of sales people, what percentage change in the firm's sales during the following period does the regression model predict?
A) +0.65%.
B) +1.00%.
C) +0.72%.
D) +0.10%.
Explanation

13 of 14

The slope of the regression represents the linear relationship between the independent variable (the percent change in sales people) and
the dependent variable, while the intercept represents the predicted value of the dependent variable if the independent variable is equal
to zero. In this case, the percentage change in sales is equal to: 0.72(0) + 0.01 = +0.01.

Question #36 of 37

Question ID: 438930

The assumptions underlying linear regression include all of the following EXCEPT the:
A) independent variable is linearly related to the residuals (or disturbance term).
B) disturbance term is normally distributed with an expected value of 0.
C) dependent variable and independent variable are linearly related.
D) disturbance term is homoskedastic and is independently distributed.
Explanation
The independent variable is uncorrelated with the residuals (or disturbance term).
The other statements are true. The disturbance term is homoskedastic because it has a constant variance. It is independently distributed
because the residual for one observation is not correlated with that of another observation. Note: The opposite of homoskedastic is
heteroskedastic. For the examination, memorize the assumptions underlying linear regression!

Question #37 of 37

Question ID: 438919

Paul Frank is an analyst for the retail industry. He is examining the role of television viewing by teenagers on the sales of accessory
stores. He gathered data and estimated the following regression of sales (in millions of dollars) on the number of hours watched by
teenagers (in hours per week):

Salest = 1.05 + 1.6 TVt

Which of the following is the most accurate interpretation of the estimated results? If TV watching:
A) goes up by one hour per week, sales of accessories increase by $1.60.
B) is zero (that is, every teenager turns off the TV for a week), the expected sales of accessories is $0.
C) goes up by one hour per week, sales of accessories increase by $1.6 million.
D) changes, no change in sales is expected.
Explanation
The interpretation of the slope coefficient is the change in the dependent variable (sales in millions of dollars) for a given one-unit change
in the independent variable (TV hours per week). The intercept of 1.05 means that 1.05 million dollars worth of accessories is expected
to be sold even if TV watching is zero.

14 of 14

Topic 22: Regression with a Single Regressor: Hypothesis Tests and

Confidence Intervals
Test ID: 8450964

Question #1 of 17

Question ID: 438947

Consider the regression results from the regression of Y against X for 50 observations:

Y = 0.78 + 1.2 X
The standard error of the estimate is 0.40 and the standard error of the coefficient is 0.45.
Which of the following reports the correct value of the t-statistic for the slope and correctly evaluates its statistical significance
with 95 percent confidence?
A) t = 1.789; slope is not significantly different from zero.
B) t = 1.200; slope not significantly different from zero.
C) t = 3.000; slope is significantly different from zero.
D) t = 2.667; slope is significantly different from zero.
Explanation
The test statistic is t = (1.2 - 0) / 0.45 = 2.667. The critical t-values for 48 degrees of freedom are 2.011. Therefore, the slope
is different from zero.

Question #2 of 17

Question ID: 438959

If the variance of the residuals is not constant across all observations in the sample, the regression exhibits heteroskedasticity.
Effects of heteroskedasticity include which of the following problems?
I. The coefficient estimates in the regression model are affected.
II. If the standard errors are too small, but the coefficient estimates themselves are not affected, the t-statistics may be too large
and the null hypothesis of no statistical significance will be rejected too often.
A) II only.
B) I only.
C) Both I and II.
D) Neither I nor II.
Explanation
Effects of heteroskedasticity include:
The standard errors are usually unreliable estimates.
The coefficient estimates are not affected.
If the standard errors are too small, but the coefficient estimates themselves are not affected, the t-statistics will be too large
and the null hypothesis of no statistical significance is rejected too often. The opposite will be true if the standard errors are
too large.

1 of 7

Question #3 of 17

Question ID: 438946

An analyst is regressing fund returns against the return on the Wilshire 5000 to determine whether beta is equal to 1.0. The analyst is
trying to determine whether the number of observations should be increased. Which of the following is a reason why the test will have
higher power if the number of observations is increased? The:

A) mean squared error of the regression will be lower.

B) constant of the regression will be closer to zero.
C) estimate of beta will be farther away from 1.0.
D) standard error of the regression will be lower.
Explanation
A larger number of observations will decrease the standard error of the regression which will increase the size of the test statistic if beta
is different than 1.0.

Question #4 of 17

Question ID: 438954

Consider the following graph of residuals and the regression line from a time-series regression:

These residuals exhibit the regression problem of:

A) homoskedasticity.
B) multicolinearity.
C) autocorrelation.
D) heteroskedasticity.

Explanation
The residuals appear to be from two different distributions over time; in the earlier periods, the model fits rather well compared to the
later periods.

Question #5 of 17

Question ID: 438958

Which expression best represents the condition homoskedasticity? (In the expressions assume 2 > 0)

2 of 7

 A) corr(Xi, i) = 0.
B) E(i|Xi) = 2.
C) corr(i, i + j) = 0.
D) V(i|Xi) = 2.
Explanation
Homoskedasticity means the variance of i is constant and unrelated to the value of the independent variable.

Question #6 of 17

Question ID: 438945

A sample of 200 monthly observations is used to run a simple linear regression: Returns = b0 + b1Leverage + u. The t-value for the
regression coefficient of leverage is calculated as t = - 1.09. A 5 percent level of significance is used to test whether leverage has a
significant influence on returns. The correct decision is to:

A) reject the null hypothesis and conclude that leverage significantly explains returns.
B) do not reject the null hypothesis and conclude that leverage significantly explains returns.
C) reject the null hypothesis and conclude that leverage does not significantly explain returns.
D) do not reject the null hypothesis and conclude that leverage does not significantly explain returns.
Explanation
Do not reject the null since |-1.09|<1.96(critical t-value).

Question #7 of 17

Question ID: 438955

An analyst is estimating whether a fund's excess return for a quarter is related to interest rates and last quarter's excess return. The
regression equation is found to have unconditional heteroskedasticity and serial correlation. Which of the following is most accurate?
Parameter estimates will be:

A) accurate but statistical inference about the parameters will not be valid.
B) inaccurate and statistical inference about the parameters will not be valid.
C) inaccurate but statistical inference about the parameters will be valid.
D) accurate and statistical inference about the parameters will be valid.
Explanation
One of the independent variables is a lagged value of the dependent variable. This means that serial correlation will cause an inaccurate
parameter estimate. Serial correlation always impacts the statistical inference about the parameters. Unconditional heteroskedasticity
never impacts statistical inference or parameter accuracy.

Question #8 of 17

Question ID: 438944

Consider the following estimated regression equation:

ROEt = 0.23 - 1.50 CEt

3 of 7

The standard error of the slope coefficient is 0.40 and the number of observations is 32. The 95 percent confidence interval for
the slope coefficient, b1, is:
A) {-2.300 < b1 < -0.700}.
B) {0.683 < b1 < 2.317}.
C) {-3.542 < b1 < 0.542}.
D) {-2.317 < b1 < -0.683}.
Explanation
The confidence interval is -1.50 2.042 (0.40), or {-2.317 < b1 < -0.683}.

Questions #9-10 of 17
Assume you ran a multiple regression to gain a better understanding of the relationship between lumber sales, housing starts, and
commercial construction. The regression uses lumber sales as the dependent variable with housing starts and commercial
construction as the independent variables. The results of the regression are:

Coefficient

Standard Error

t-statistics

Intercept

5.37

1.71

3.14

Housing starts

0.76

0.09

8.44

Commercial construction

1.25

0.33

3.78

The level of significance for a 95% confidence level is 1.96

Question #9 of 17

Question ID: 438951

Construct a 95% confidence interval for the slope coefficient for Housing Starts.
A) 0.76 1.96(0.09).
B) 1.25 1.96(0.33).
C) 0.76 1.96(8.44).
D) 1.25 1.96(3.78).
Explanation
The confidence interval for the slope coefficient is b1 (tc sb1).

Question #10 of 17

Question ID: 438952

Construct a 95% confidence interval for the slope coefficient for Commercial Construction.
A) 0.76 1.96(8.44).
B) 1.25 1.96(0.33).
C) 0.76 1.96(0.09).
D) 1.25 1.96(3.78).

4 of 7

Explanation
The confidence interval for the slope coefficient is b1 (tc sb1).

Question #11 of 17

Question ID: 438953

An analyst has been assigned the task of evaluating revenue growth for an online education provider company that specializes in training
adult students. She has gathered information about student ages, number of courses offered to all students each year, years of
experience, annual income and type of college degrees, if any. A regression of annual dollar revenue on the number of courses offered
each year yields the results shown below.

Coefficient Estimates
Predictor

Coefficient Standard Error of the Coefficient

Intercept

0.10

0.50

Slope (Number of Courses)

2.20

0.60

Which statement about the slope coefficient is most correct, assuming a 5 percent level of significance and 50 observations?
A) t-Statistic: 0.20. Slope: Significantly different from zero.
B) t-Statistic: 3.67. Slope: Significantly different from zero.
C) t-Statistic: 3.67. Slope: Not significantly different from zero.
D) t-Statistic: 0.20. Slope: Not significantly different from zero.
Explanation
t = 2.20/0.60 = 3.67. Since the t-statistic is larger than an assumed critical value of about 2.0, the slope coefficient is statistically
significant.

Question #12 of 17

Question ID: 438949

Consider the following estimated regression equation:

AUTOt = 0.89 + 1.32 PIt

The standard error of the coefficient is 0.42 and the number of observations is 22. The 95 percent confidence interval for the slope
coefficient, b1, is:
A) {-0.766 < b1 < 3.406}.
B) {0.900 < b1 < 1.740}.
C) {0.480 < b1 < 2.160}.
D) {0.444 < b1 < 2.196}.
Explanation
The degrees of freedom are found by n-k-1 with k being the number of independent variables or 1 in this case. DF = 22-1-1 = 20.
Looking up 20 degrees of freedom on the student's t distribution for a 95% confidence level and a 2 tailed test gives us a critical value of
2.086. The confidence interval is 1.32 2.086 (0.42), or {0.444 < b1 < 2.196}.

5 of 7

Question #13 of 17

Question ID: 438956

Which of the following conditions will least likely affect the statistical inference about regression parameters by itself?
A) Serial correlation.
B) Conditional heteroskedasticity.
C) Multicollinearity.
D) Unconditional heteroskedasticity.
Explanation
Unconditional heteroskedasticity does not impact the statistical inference concerning the parameters.

Question #14 of 17

Question ID: 438957

Which of the following statements regarding heteroskedasticity is FALSE?

A) Conditional heteroskedasticity is the case in which the residuals are correlated with the values of
the independent variables.
B) The assumption of linear regression is that the residuals are heteroskedastic.
C) Heteroskedasticity may occur in cross-section or time-series analyses.
D) Heteroskedasticity results in an estimated variance that is too large and, therefore, affects statistical
inference.

Explanation
The assumption of regression is that the residuals are homoskedastic (i.e., the residuals are drawn from the same distribution).

Question #15 of 17

Question ID: 438948

Consider the regression results from the regression of Y against X for 50 observations:

Y = 0.78 - 1.5 X
The standard error of the estimate is 0.40 and the standard error of the coefficient is 0.45.
Which of the following reports the correct value of the t-statistic for the slope and correctly evaluates H0: b1 0 versus Ha: b1 < 0 with 95
percent confidence?
A) t = -3.333; slope is significantly negative.
B) t = -3.750; slope is significantly different from zero.
C) t = 3.750; slope is significantly different from zero.
D) t = 3.333; slope not significantly different from zero.
Explanation

6 of 7

The test statistic is t = (-1.5 - 0) / 0.45 = -3.333. The critical t-value for 48 degrees of freedom is +/- 1.667. However, in the Schweser
Notes you should use the closest degrees of freedom number of 40 df. which is +/-1.684. Therefore, the slope is different from zero. We
reject the null in favor of the alternative.

Question #16 of 17

Question ID: 438960

The Gauss-Markov theorem says that if the linear regression model assumptions are true and the regression errors display
homoskedasticity, then the ordinary least squares (OLS) estimators exhibit which of the following properties?
A) In repeated sampling, the averages of the coefficients from a sample will be distributed around the
true population parameters.
B) The OLS estimated coefficients are based on non-linear functions.
C) The OLS estimated coefficients have the maximum variance compared to other methods of estimating the
coefficients.
D) The OLS estimate of the variance of the errors is biased.
Explanation
If the estimator is the best available (has the minimum variance), exhibits linearity, and is unbiased, it is said to be the best linear
unbiased estimator. The OLS estimated coefficients are unbiased, which means that in repeated sampling the averages of the
coefficients from the sample will be distributed around the true population parameters.

Question #17 of 17

Question ID: 438943

The estimated slope coefficient from a single linear regression model is 0.55 with a standard error of 0.30. Assuming the sample for this
model has 1,000 observations, what can we conclude about the 95% confidence interval for the model's slope coefficient?
A) The null hypothesis that the slope coefficient is different than zero should be accepted.
B) The slope coefficient is significantly different from zero.
C) The slope coefficient is not significantly different from zero.
D) The null hypothesis that the slope coefficient is equal to zero should be accepted.
Explanation
The confidence interval for b1 is:
b1 (tc sb1)
The critical two-tail t-values are roughly 1.96 (with a high number of observations). The 95% confidence interval is computed as:
0.55 (1.96 0.3) = 0.55 0.588 or -0.038 to 1.138
Because this confidence interval includes zero, we can conclude that the slope coefficient is not significantly different from zero. In
hypothesis testing, we either reject or fail to reject the null hypothesis.

7 of 7

Topic 23 - Linear Regression with Multiple Regressors

Test ID: 8450981

Question #1 of 10

Question ID: 438968

A variable is regressed against three other variables, x, y, and z. Which of the following would NOT be an indication of multicollinearity? X
is closely related to:

A) 3y + 2z.
B) 3.
C) 9y, and x is closely related to 4z.
D) y2.
Explanation
If x is related to y2, the relationship between x and y is not linear, so multicollinearity does not exist. If x is equal to a constant (3), it will
be correlated with the intercept term.

Question #2 of 10

Question ID: 438961

Which of the following statements regarding the results of a regression analysis is FALSE? The:
A) slope coefficient in a multiple regression is the change in the dependent variable for a
one-unit change in the independent variable, holding all other variables constant.
B) slope coefficients in the multiple regression are referred to as partial betas.
C) intercept is the value that the dependent variable takes on if all the independent variables had a
value of zero.
D) slope coefficient in a multiple regression is the value of the dependent variable for a given value of
the independent variable.
Explanation
The slope coefficient is the change in the dependent variable for a one-unit change in the independent variable.

Question #3 of 10

Question ID: 438966

Which of the following is a potential remedy for multicollinearity?

A) Increase the sample size.

B) Add dummy variables to the regression.
C) Take first differences of the dependent variable.
D) Omit one or more of the collinear variables.

Explanation

1 of 4

The first differencing is not a remedy for the collinearity, nor is the inclusion of dummy variables. Increasing the sample size may improve
the t-statistics associated with the estimates, but does is not a remedy to the problem. The best potential remedy is to attempt to
eliminate highly correlated variables.

Question #4 of 10

Question ID: 438964

Assume that in a particular multiple regression model, it is determined that the error terms are uncorrelated with each other.
Which of the following statements is most accurate?
A) Serial correlation may be present in this multiple regression model, and can be confirmed
only through a Durbin-Watson test.
B) Unconditional heteroskedasticity present in this model should not pose a problem, but can be
corrected by using robust standard errors.
C) This model is in accordance with the basic assumptions of multiple regression analysis because the
errors are not serially correlated.
D) Multicollinearity exists in this multiple regression model, and can be corrected through the addition of
a correlated variable.
Explanation
One of the basic assumptions of multiple regression analysis is that the error terms are not correlated with each other. In other
words, the error terms are not serially correlated. Multicollinearity and heteroskedasticity are problems in multiple regression that
are not related to the correlation of the error terms.

Question #5 of 10

Question ID: 438970

An analyst further studies the independent variables of a study she recently completed. The correlation matrix shown below is the
result. Which statement best reflects possible problems with a multivariate regression?

Age
Age

Education Experience Income

1.00

Education 0.50

1.00

Experience 0.95

0.55

1.00

0.65

0.89

Income

0.60

1.00

A) Income is not needed.

B) Experience may be a redundant variable.
C) Education may be unnecessary.
D) Age should be excluded from the regression.
Explanation
The correlation coefficient of experience with age and income, respectively, is close to +1.00. This indicates a problem of multicollinearity
and should be addressed by excluding experience as an independent variable.

2 of 4

Question #6 of 10

Question ID: 438962

When interpreting the results of a multiple regression analysis, which of the following terms represents the value of the dependent
variable when the independent variables are all equal to zero?
A) Intercept term.
B) t-value.
C) p-value.
D) Slope coefficient.
Explanation
The intercept term is the value of the dependent variable when the independent variables are set to zero.

Question #7 of 10

Question ID: 438969

An analyst runs a regression of portfolio returns on three independent variables. These independent variables are price-to-sales (P/S),
price-to-cash flow (P/CF), and price-to-book (P/B). The analyst discovers that the p-values for each independent variable are relatively
high. However, the F-test has a very small p-value. The analyst is puzzled and tries to figure out how the F-test can be statistically
significant when the individual independent variables are not significant. What violation of regression analysis has occurred?

A) unconditional heteroskedasticity.
B) multicollinearity.
C) serial correlation.
D) conditional heteroskedasticity.
Explanation
An indication of multicollinearity is when the independent variables individually are not statistically significant but the F-test suggests that
the variables as a whole do an excellent job of explaining the variation in the dependent variable.

Question #8 of 10

Question ID: 438967

Which of the following statements regarding multicollinearity is FALSE?

A) If the t-statistics for the individual independent variables are insignificant, yet the F-statistic
is significant, this indicates the presence of multicollinearity.
B) Multicollinearity makes it difficult to determine the contribution to explanation of the dependent
variable of an individual explanatory variable.
C) Multicollinearity may be present in any regression model.
D) Multicollinearity may be a problem even if the multicollinearity is not perfect.
Explanation
Multicollinearity is not an issue in simple regression.

3 of 4

Question #9 of 10

Question ID: 438965

Which of the following statements least accurately describes one of the fundamental multiple regression assumptions?
A) There is no exact linear relationship between any two or more independent variables.
B) The error term is normally distributed.
C) The independent variables are not random.
D) The variance of the error terms is not constant (i.e., the errors are heteroskedastic).
Explanation
The variance of the error term IS assumed to be constant, resulting in errors that are homoskedastic.

Question #10 of 10

Question ID: 438963

One of the underlying assumptions of a multiple regression is that the variance of the residuals is constant for various levels of
the independent variables. This quality is referred to as:
A) a normal distribution.
B) homoskedasticity.
C) a linear relationship.
D) serial correlation.
Explanation
Homoskedasticity refers to the basic assumption of a multiple regression model that the variance of the error terms is constant.

4 of 4

Topic 24: Hypothesis Tests and Confidence Intervals in Multiple

Regression
Test ID: 8450984

Question #1 of 21

Question ID: 438976

A dependent variable is regressed against three independent variables across 25 observations. The regression sum of squares
is 119.25, and the total sum of squares is 294.45. The following are the estimated coefficient values and standard errors of the
coefficients.

Coefficient Value Standard error

1

2.43

1.4200

3.21

1.5500

0.18

0.0818

For which of the coefficients can the hypothesis that they are equal to zero be rejected at the 0.05 level of significance?
A) 1 and 2 only.
B) 2 and 3 only.
C) 3 only.
D) 1, 2, and 3.
Explanation
The values of the t-statistics for the three coefficients are equal to the coefficients divided by the standard errors, which are 2.43 / 1.42 =
1.711, 3.21 / 1.55 = 2.070, and 0.18 / 0.0818 = 2.200. The statistic has 25 3 1 = 21 degrees of freedom. The critical value for a
p-value of 0.025 (because this is a two-sided test) is 2.080, which means only coefficient 3 is significant.

Question #2 of 21

Question ID: 438971

Consider the following estimated regression equation, with standard errors of the coefficients as indicated:
Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi - 2.0 COMPi + 8.0 CAPi
where the standard error for R&D is 0.45, the standard error for ADV is 2.2, the standard error for COMP 0.63, and the standard
error for CAP is 2.5.

The equation was estimated over 40 companies. Using a 5 percent level of significance, what are the hypotheses and the calculated test
statistic to test whether the slope on R&D is different from 1.0?

A) H0: bR&D = 1 versus Ha: bR&D 1; t = 0.556.

B) H0: bR&D = 1 versus Ha: bR&D1; t = 2.778.
C) H0: bR&D 1 versus Ha: bR&D = 1; t = 0.556.
D) H0: bR&D 1 versus Ha: bR&D = 1; t = 2.778.

1 of 12

Explanation
The test for "is different from 1.0" requires the use of the "1" in the hypotheses and requires 1 to be specified as the hypothesized value
in the test statistic. The calculated t-statistic = (1.25-1)/.45 = 0.556

Question #3 of 21

Question ID: 438974

David Black wants to test whether the estimated beta in a market model is equal to one. He collected a sample of 60 monthly returns on
a stock and estimated the regression of the stock's returns against those of the market. The estimated beta was 1.1, and the standard
error of the coefficient is equal to 0.4. What should Black conclude regarding the beta if he uses a 5% level of significance? The null
hypothesis that beta is:

A) equal to one is rejected.

B) equal to one cannot be rejected or accepted.
C) not equal to one cannot be rejected.
D) equal to one cannot be rejected.

Explanation
The calculated t-statistic is t = (1.1 1.0) / 0.4 = 0.25. The critical t-value for (60 2) = 58 degrees of freedom is approximately 2.0.
Therefore, the null hypothesis that beta is equal to one cannot be rejected.

Question #4 of 21

Question ID: 440959

In the multivariable regression model: Y = B0 + B1 Xli + B2 X2i + i, the formula for the standard errors of the estimated
coefficients includes the variance of i, which is represented by: 2. Since the term is:
A)

not known with certainty, the expression 2 is replaced with:

B) not known with certainty, the standard errors of the coefficients cannot be estimated.
C)

not known with certainty, the expression 2 is replaced with:

D) known with certainty, the standard errors of the coefficients are known with certainty.
Explanation
is an estimate of 2 when there are two independent variables and n-3 degrees of freedom.

The expression:

Question #5 of 21

Question ID: 438993

Consider the following analysis of variance (ANOVA) table:

Source
Regression

Sum of squares Degrees of freedom

20

Mean square
20

2 of 12

Error

80

40

Total

100

41

The F-statistic for the test of the fit of the model is closest to:
A) 10.00.
B) 0.10.
C) 0.25.
D) 0.20.

Explanation
F = MSR/MSE = 20 / 2 = 10.

Questions #6-11 of 21
Autumn Voiku is attempting to forecast sales for Brookfield Farms based on a multiple regression model. Voiku has constructed
the following model:

sales = b 0 + (b1 CPI) + (b2 IP) + (b 3 GDP) + t

Where:
sales = $ change in sales (in 000's)
CPI = change in the consumer price index
IP = change in industrial production (millions)
GDP = change in GDP (millions)
All changes in variables are in percentage terms.
Voiku uses monthly data from the previous 180 months of sales data and for the independent variables. The model estimates
(with coefficient standard errors in parentheses) are:
sales = 10.2 + (4.6 CPI) + (5.2 IP) + (11.7 GDP)
(5.4) (3.5)

(5.9)

(6.8)

The sum of squared errors is 140.3 and the total sum of squares is 368.7.
Voiku calculates the unadjusted R2, the adjusted R2, and the standard error of estimate to be 0.592, 0.597, and 0.910,
respectively.
Voiku is concerned that one or more of the assumptions underlying multiple regression has been violated in her analysis. In a
conversation with Dave Grimbles, CFA, a colleague who is considered by many in the firm to be a quant specialist. Voiku says,
"It is my understanding that there are five assumptions of a multiple regression model:"
Assumption 1:

There is a linear relationship between the dependent and independent

variables.

Assumption 2:

The independent variables are not random, and there is no correlation between

Assumption 3:

The residual term is normally distributed with an expected value of zero.

any two of the independent variables.

3 of 12

Assumption 4:

The residuals are serially correlated.

Assumption 5:

The variance of the residuals is constant.

Grimbles agrees with Miller's assessment of the assumptions of multiple regression.

Voiku tests and fails to reject each of the following four null hypotheses at the 99% confidence interval:
Hypothesis 1:

The coefficient on GDP is negative.

Hypothesis 2:

The intercept term is equal to -4.

Hypothesis 3:

A 2.6% increase in the CPI will result in an increase in sales of more than
12.0%.

Hypothesis 4:

A 1% increase in industrial production will result in a 1% decrease in sales.

Figure 1: Partial table of the Student's t-distribution (One-tailed probabilities)

df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005

170 1.287

1.654

1.974

2.348

2.605

176 1.286

1.654

1.974

2.348

2.604

180 1.286

1.653

1.973

2.347

2.603

Figure 2: Partial F-Table critical values for right-hand tail area equal to 0.05
df1 = 1 df1 = 3 df1 = 5
df2 = 170 3.90

2.66

2.27

df2 = 176 3.89

2.66

2.27

df2 = 180 3.89

2.65

2.26

Figure 3: Partial F-Table critical values for right-hand tail area equal to 0.025
df1 = 1 df1 = 3 df1 = 5
df2 = 170 5.11

3.19

2.64

df2 = 176 5.11

3.19

2.64

df2 = 180 5.11

3.19

2.64

Question #6 of 21

Question ID: 438986

Concerning the assumptions of multiple regression, Grimbles is:

A) incorrect to agree with Voiku's list of assumptions because one of the assumptions is stated
incorrectly.
B) correct to agree with Voiku's statement of the assumptions.
C) incorrect to agree with Voiku's list of assumptions because three of the assumptions are stated
incorrectly.
D) incorrect to agree with Voiku's list of assumptions because two of the assumptions are stated
incorrectly.
Explanation
Assumption 2 is stated incorrectly. Some correlation between independent variables is unavoidable; high correlation results in
multicollinearity. An exact linear relationship between linear combinations of two or more independent variables should not exist.

4 of 12

Assumption 4 is also stated incorrectly. The assumption is that the residuals are serially uncorrelated (i.e., they are not serially
correlated).

Question #7 of 21

Question ID: 438987

For which of the four hypotheses did Voiku incorrectly fail to reject the null, based on the data given in the problem?
A) Hypothesis 2.
B) Hypothesis 3.
C) Hypothesis 1.
D) Hypothesis 4.
Explanation
The critical values at the 1% level of significance (99% confidence) are 2.348 for a one-tail test and 2.604 for a two-tail test (df =
176).
The t-values for the hypotheses are:
Hypothesis 1: 11.7 / 6.8 = 1.72
Hypothesis 2: 14.2 / 5.4 = 2.63
Hypothesis 3: 12.0 / 2.6 = 4.6, so the hypothesis is that the coefficient is 4.6, and the t-stat of that hypothesis is 0.
Hypothesis 4: (5.2 + 1) / 5.9 = 1.05
Hypotheses 1 and 3 are one-tail tests; 2 and 4 are two-tail tests. Only Hypothesis 2 exceeds the critical value, so only
Hypothesis 2 should be rejected.

Question #8 of 21

Question ID: 438988

The most appropriate decision with regard to the F-statistic for testing the null hypothesis that all of the independent variables are
simultaneously equal to zero at the 5 percent significance level is to:
A) reject the null hypothesis because the F-statistic is larger than the critical F-value of 2.66.
B) reject the null hypothesis because the F-statistic is larger than the critical F-value of 3.19.
C) fail to reject the null hypothesis because the F-statistic is smaller than the critical F-value of 3.19.
D) fail to reject the null hypothesis because the F-statistic is smaller than the critical F-value of 2.66.
Explanation
RSS = 368.7 - 140.3 = 228.4, F-statistic = (228.4 / 3) / (140.3 / 176) = 95.51. The critical value for a one-tailed 5% F-test with 3
and 176 degrees of freedom is 2.66. Because the F-statistic is greater than the critical F-value, the null hypothesis that all of the
independent variables are simultaneously equal to zero should be rejected.

Question #9 of 21

Question ID: 438989

Regarding Voiku's calculations of R2 and the standard error of estimate, she is:
A) correct in her calculation of the unadjusted R2 but incorrect in her calculation of the standard
error of estimate.
B) incorrect in her calculation of the unadjusted R2 but correct in her calculation of the standard error of
estimate.
C) correct in her calculation of both the unadjusted R2 and the standard error of estimate.
D) incorrect in her calculation of both the unadjusted R2 and the standard error of estimate.

5 of 12

Explanation
SEE = [140.3 / (180 3 1)] = 0.893
unadjusted R2 = (368.7 140.3) / 368.7 = 0.619

Question #10 of 21

Question ID: 459978

The multiple regression, as specified, most likely suffers from:

A) multicollinearity.
B) serial correlation of the error terms.
C) heteroskedasticity.
D) omitted variables.
Explanation
The regression is highly significant (based on the F-stat in Part 3), but the individual coefficients are not. This is a result of a
regression with significant multicollinearity problems. The t-stats for the significance of the regression coefficients are,
respectively, 1.89, 1.31, 0.88, 1.72. None of these are high enough to reject the hypothesis that the coefficient is zero at the 5%
level of significance (two-tailed critical value of 1.974 from t-table).

Question #11 of 21

Question ID: 438991

A 90 percent confidence interval for the coefficient on GDP is:

A) 0.5 to 22.9.
B) -1.9 to 19.6.
C) -4.4 to 20.8.
D) -1.5 to 20.0.
Explanation
A 90% confidence interval with 176 degrees of freedom is coefficient tc(se) = 11.7 1.654 (6.8) or 0.5 to 22.9.

Questions #12-13 of 21
You have been asked to forecast the level of operating profit for a proposed new branch of a tire store. This forecast is one component
in forecasting operating profit for the entire company for the next fiscal year. You decide to conduct multiple regression analysis using
"branch store operating profit" as the dependent variable and three independent variables. The three independent variables are
"population within 5 miles of the branch," "operating hours per week," and "square footage of the facility." You used data on the
company's existing 23 branches to develop the model (n=23).

Regression of Operating Profit on Population, Operating Hours, and Square

Footage

Dependent Variable
Independent Variables
Intercept

Operating Profit (Y)

Coefficient Estimate

t-value

103,886

2.740

6 of 12

Population within 5 miles (X1)

4.372

2.133

Operating hours per week (X2)

214.856

0.258

Square footage of facility (X3)

56.767

2.643

R2

0.983

Adjusted R2

0.980

F-Statistic

360.404

Standard error of the model

19,181

Correlation Matrix
Y

X1

X2

X3

1.00

X1

0.99

1.00

X2

0.69

0.67

1.00

X3

0.99

0.99

.71

1.00

Degrees of Freedom

.20

.10

.05

.02

.01

1.638

2.353

3.182

4.541

5.841

19

1.328

1.729

2.093

2.539

2.861

23

1.319

1.714

2.069

2.50

2.807

Question #12 of 21

Question ID: 438978

You want to evaluate the statistical significance of the slope coefficient of an independent variable used in this regression model. For 95
percent confidence, you should compare the t-statistic to the critical value from a t-table using:

A) 19 degrees of freedom and 0.05 level of significance for a two-tailed test.

B) 24 degrees of freedom and 0.05 level of significance for a two-tailed test.
C) 24 degrees of freedom and 0.05 level of significance for a one-tailed test.
D) 19 degrees of freedom and 0.05 level of significance for a one-tailed test.
Explanation
The degrees of freedom are [n - k - 1)]. Here, n is the number of observations in the regression (23) and k is the number of independent
variables (3). df = [23 - 3 - 1)] = 19 Because the null hypothesis is that the slope coefficient is equal to zero, this is a two-tailed test.

Question #13 of 21

Question ID: 438979

The probability of finding a value of t for variable X1 that is as large or larger than |2.133| when the null hypothesis is true is:

A) between 2% and 5%.

B) between 1% and 2%.
C) between 10% and 20%.
D) between 5% and 10%.
Explanation

7 of 12

The degree of freedom is = (n - [k + 1])

= (23 - [3 + 1])
= 19
In the table above, for 19 degrees of freedom, the value 2.133 would lie between a 2% chance (alpha of 0.02) or 2.539 and a 5%
chance (alpha of 0.05) or 2.093.

Question #14 of 21

Question ID: 438973

Seventy-two monthly stock returns for a fund between 1997 and 2002 are regressed against the market return, measured by the
Wilshire 5000, and two dummy variables. The fund changed managers on January 2, 2000. Dummy variable one is equal to 1 if
the return is from a month between 2000 and 2002. Dummy variable number two is equal to 1 if the return is from the second half
of the year. There are 36 observations when dummy variable one equals 0, half of which are when dummy variable two also
equals 0. The following are the estimated coefficient values and standard errors of the coefficients.

Coefficient

Value

Standard error

Market

1.43000

0.319000

Dummy 1

0.00162

0.000675

Dummy 2

0.00132

0.000733

What is the p-value for a test of the hypothesis that the new manager outperformed the old manager?
A) Lower than 0.01.
B) Between 0.01 and 0.05.
C) Between 0.05 and 0.10.
D) Greater than 0.10.
Explanation
Dummy variable one measures the effect on performance of the change in managers. The t-statistic is equal to 0.00162 / 0.000675 =
2.400, which is higher than the t-value (with 72 - 3 - 1 = 68 degrees of freedom) of approximately 2.39 for a p-value of between 0.01 and
0.005 for a 1 tailed test.

Questions #15-16 of 21
In a recent analysis of salaries (in $1,000) of financial analysts, a regression of salaries on education, experience, and gender is
run. Gender equals one for men and zero for women. The regression results from a sample of 230 financial analysts are
presented below, with t-statistics in parenthesis.
Salaries = 34.98 + 1.2 Education + 0.5 Experience + 6.3 Gender
(29.11)

(8.93)

(2.98)

(1.58)

Question #15 of 21

Question ID: 438982

What is the expected salary (in $1,000) of a woman with 16 years of education and 10 years of experience?

A) 54.98.

8 of 12

 B) 61.28.
C) 59.18.
D) 65.48.
Explanation
34.98 + 1.2(16) + 0.5(10) = 59.18

Question #16 of 21

Question ID: 438983

Holding everything else constant, do men get paid more than women? Use a 5% level of significance. No, since the t-value:
A) exceeds the critical value of 1.96.
B) exceeds the critical value of 1.65.
C) does not exceed the critical value of 1.96.
D) does not exceed the critical value of 1.65.
Explanation
H0: bgender 0
Ha: bgender > 0
t-value of 1.58 < 1.65 (critical value)

Question #17 of 21

Question ID: 438972

63 monthly stock returns for a fund between 1997 and 2002 are regressed against the market return, measured by the Wilshire
5000, and two dummy variables. The fund changed managers on January 2, 2000. Dummy variable one is equal to 1 if the return
is from a month between 2000 and 2002. Dummy variable number two is equal to 1 if the return is from the second half of the
year. There are 36 observations when dummy variable one equals 0, half of which are when dummy variable two also equals 0.
The following are the estimated coefficient values and standard errors of the coefficients.

Coefficient Value Standard error

Market

1.43000

0.319000

Dummy 1 0.00162

0.000675

Dummy 2 0.00132

0.000733

What is the p-value for a test of the hypothesis that performance in the second half of the year is different than performance in
the first half of the year?
A) Between 0.05 and 0.10.
B) Between 0.01 and 0.05.
C) Greater than 0.10.
D) Lower than 0.01.
Explanation
The difference between performance in the second and first half of the year is measured by dummy variable 2. The t-statistic is

9 of 12

equal to 0.00132 / 0.000733 = 1.800, which is between the t-values (with 63 3 1 = 59 degrees of freedom) of 1.671 for a
p-value of 0.10, and 2.00 for a p-value of 0.05 (note that the test is a two-sided test).

Question #18 of 21

Question ID: 438994

When utilizing a proxy for one or more independent variables in a multiple regression model, which of the following errors is most
likely to occur?
A) Model misspecification.
B) Serial correlation.
C) Multicollinearity.
D) Heteroskedasticity.
Explanation
By using a proxy for an independent variable in a multiple regression analysis, there is some degree of error in the measurement
of the variable.

Question #19 of 21

Question ID: 438980

An analyst is investigating the hypothesis that the beta of a fund is equal to one. The analyst takes 60 monthly returns for the
fund and regresses them against the Wilshire 5000. The test statistic is 1.97 and the p-value is 0.05. Which of the following is
CORRECT?
A) For a sample of 100 beta values, the expected number of times beta would be equal to 1 is
less than or equal to 5%.
B) The proportion of occurrences when the absolute value of the test statistic will be higher when beta
is equal to 1 than when beta is not equal to 1 is less than or equal to 5%.
C) If beta is equal to 1, the likelihood that the absolute value of the test statistic is equal to 1.97 is less
than or equal to 5%.
D) If beta is equal to 1, the likelihood that the absolute value of the test statistic would be greater than
or equal to 1.97 is 5%.
Explanation
A statistical test computes the likelihood of a test statistic being higher than a certain value assuming the null hypothesis is true.

Question #20 of 21

Question ID: 438992

A dependent variable is regressed against three independent variables across 25 observations. The regression sum of squares is
119.25, and the total sum of squares is 294.45. The following are the estimated coefficient values and standard errors of the coefficients.
Coefficient Value Standard error
1

2.43

1.4200

3.21

1.5500

10 of 12

0.18

0.0818

What is the p-value for the test of the hypothesis that all three of the coefficients are equal to zero?

A) Greater than 0.10.

B) lower than 0.025.
C) Between 0.05 and 0.10.
D) Between 0.025 and 0.05.
Explanation
This test requires an F-statistic, which is equal to the ratio of the mean regression sum of squares to the mean squared error.
The mean regression sum of squares is the regression sum of squares divided by the number of independent variables, which is
119.25 / 3 = 39.75. The residual sum of squares is the difference between the total sum of squares and the regression sum of
squares, which is 294.45 119.25 = 175.20. The denominator degrees of freedom is the number of observations minus the
number of independent variables, minus 1, which is 25 3 1 = 21. The mean squared error is the residual sum of squares
divided by the denominator degrees of freedom, which is 175.20 / 21 = 8.34. The F-statistic is 39.75 / 8.34 = 4.76, which is
higher than the F-values (with 3 numerator degrees of freedom and 21 denominator degrees of freedom) of 3.07 at the 5% level
of significance and higher than the F-value of 3.82 at the 2.5% level of significance. The conclusion is that the p-value must be
lower than 0.025. Remember the p-value is the probability that lies above the computed test statistic for upper tail tests or below
the computed test statistic for lower tail tests.

Question #21 of 21

Question ID: 438975

Seventy-two monthly stock returns for a fund between 1997 and 2002 are regressed against the market return, measured by the
Wilshire 5000, and two dummy variables. The fund changed managers on January 2, 2000. Dummy variable one is equal to 1 if
the return is from a month between 2000 and 2002. Dummy variable number two is equal to 1 if the return is from the second half
of the year. There are 36 observations when dummy variable one equals 0, half of which are when dummy variable two also
equals zero. The following are the estimated coefficient values and standard errors of the coefficients.

Coefficient

Value

Standard error

Market

1.43000

0.319000

Dummy 1

0.00162

0.000675

Dummy 2

0.00132

0.000733

What is the p-value for a test of the hypothesis that the beta of the fund is greater than 1?
A) Between 0.05 and 0.10.
B) Greater than 0.10.
C) Lower than 0.01.
D) Between 0.01 and 0.05.
Explanation
The beta is measured by the coefficient of the market variable. The test is whether the beta is greater than 1, not zero, so the
t-statistic is equal to (1.43 1) / 0.319 = 1.348, which is in between the t-values (with 72 3 1 = 68 degrees of freedom) of
1.29 for a p-value of 0.10 and 1.67 for a p-value of 0.05.

11 of 12

12 of 12

Topic 28 to 29

Test ID: 8450994

Question #1 of 8

Question ID: 438996

The midsquare technique was one of the first pseudorandom number generators. What are the next two random numbers in a
sequence of random numbers between 0 and 1 that is created using the midsquare technique with a seed number of 5236?
A) 1st = 0.4156; 2nd = 0.2723.
B) 1st = 0.6325; 2nd = 0.6514.
C) 1st = 0.2741; 2nd = 0.7153.
D) 1st = 0.5696; 2nd = 0.4416.
Explanation
The first random number is determined by squaring the seed and taking the middle four digits. 52362 = 27415696; thus, the first
random number is 0.4156.
The second random number is determined by squaring the first generated number, 4156, and taking the middle four digits. 41562
= 17272336; thus, the second random number is 0.2723.

Question #2 of 8

Question ID: 439003

GARCH(1,1) (generalized autoregressive conditional heteroskedastic) models of volatility may be useful for option traders
because they:
A) are used in the Black-Scholes option pricing model.
B) provide efficient estimates of past volatility.
C) are useful in forecasting future volatility
D) are the simplest volatility models to estimate.
Explanation
GARCH(1,1) models have been shown to be useful in forecasting future volatility, which may indicate to an option trader the
relative value of an option price.

Question #3 of 8

Question ID: 439001

Consider the following four GARCH equations:

Equation 1: 2n = 0.83 + 0.052n-1 + 0.932n-1

Equation 2: 2n = 0.06 + 0.042n-1 + 0.952n-1
Equation 3: 2n = 0.60 + 0.102n-1 + 0.942n-1
Equation 4: 2n = 0.03 + 0.032n-1 + 0.932n-1
Which of the following statements regarding these equations is (are) CORRECT?

I. Equation 1 is a stationary model.

1 of 4

II. Equation 2 shows no mean reversion

III. Volatility will revert to a long run mean level faster with Equation 1 than it will for Equation 4.
IV. Volatility will revert to a long run mean level faster with Equation 3 than it will for Equation 2.

A) III only.
B) II and IV only.
C) I only.
D) II and III only.
Explanation
The format of the GARCH equation is 2n = + 2n-1 + 2n-1, where ( + ) = persistence. For a model to be stationary over
time, the persistence must be less than one. A persistence of one means there is no mean reversion and the higher the
persistence (given that it is less than one), the longer it will take for volatility to revert to a long run mean level following a large
shock or movement. The persistence for Equation 2 is (0.04 + 0.95) = 0.99, which is less than one meaning there is mean
reversion. The persistence for Equation 1 is higher than that of Equation 3, meaning mean reversion will take longer for Equation
1. Because the persistence for Equation 1 is less than one, Equation 1 is a stationary model. Equation 3 has a persistence
greater than one, which mean the model shows no mean reversion. Only Statement I is correct.

Question #4 of 8

Question ID: 438995

There are four major advantages of simulation modeling when multiple input variables and compounding distributions are involved.
Which of the following statements correctly identifies one of these advantages? Simulation models:
A) can easily examine effects on input variables when changing strategies or scenarios.
B) allow for correlations between output variables.
C) create visible output probability distributions that can be analyzed when compounding probability
distributions result from multiple input variables.
D) simplify complex functions when the probability distribution of the output variable is identified.
Explanation
Simulation models create visible output probability distributions that can be analyzed when compounding probability distributions
result from multiple input variables. Simulation models simplify complex functions because the probability distribution of the output
variable does not need to be identified. Simulation models allow for correlations between input variables. Simulation models can
easily examine effects on output variables when changing strategies or scenarios.

Question #5 of 8

Question ID: 438997

Which of the following statements is incorrect regarding the use of historical data and weighting schemes to estimate volatility?
A) If an analyst's goal is to estimate the current level of volatility, she may want to weight recent data
more heavily.
B) An example of a volatility estimation weighting scheme is to assume a long-run variance
level in addition to weighted squared return observations.

2 of 4

 C) Straightforward volatility estimation approaches weight each observation equally in that more distant
past returns have the same influence on estimated volatility as observations that are more recent.
D) The volatility estimate from an autoregressive conditional heteroskedasticity model is a function of a
short-run variance level and a series of squared variance observations.
Explanation
An extension to a weighting scheme that weighs recent data more heavily is to assume a long-run variance level in addition to
weighted squared return observations. The most frequently used model for this extension is an autoregressive conditional
heteroskedasticity model, ARCH(m).

Question #6 of 8

Question ID: 439004

Traditional covariance calculations assume that all past observations receive the same weighting. One alternative is to apply differential
weightings to past observations and create GARCH-type models to take into account the time variability of covariance. Which of the
following statements is true regarding these alternative covariance calculations?
I. If one uses a particular weighting scheme for variance calculations, one should use the same weighting scheme for the covariance
calculations.
II. If one uses a particular weighting scheme variance calculations, one should use a different weighting scheme for the covariance
calculations.

A) Neither I nor II.

B) I only.
C) II only.
D) Both I and II.
Explanation
The main factor to consider when calculating covariance is to maintain consistency in the calculation process. That is, if one
uses a particular weighting scheme (e.g., EWMA or GARCH) for variance calculations, one should use the same weighting
scheme and procedure for the covariance calculations. Otherwise, the estimates are inconsistent with each other.

Question #7 of 8

Question ID: 438999

A portfolio manager is using an exponentially weighted moving average (EWMA) model to forecast volatility for a particular
market parameter. What is the implication of an EWMA weighting parameter value of 0.84?
A) More information is required to determine the implication.
B) A greater weight is placed on the previous volatility estimate than on the most recent change
in parameter value.
C) An equal weight is placed on the previous volatility estimate as on the most recent change in
parameter value.
D) A greater weight is placed on the most recent change in parameter value than on the previous
volatility estimate.
Explanation

3 of 4

The EWMA weighting parameter of 0.84 indicates that a weighting of 0.84 will be placed on the previous volatility estimate and a
weighting of 0.16 will be placed on the most recent change in the parameter value.

Question #8 of 8

Question ID: 439000

You estimate the following GARCH model:

2n = 0.04 + 0.302t-1 + 0.502n-1

If the most recent volatility estimate and error term are 0.15 and 0.02, respectively, the long-run average variance is closest to:
A) 0.04.
B) 0.23.
C) 0.20.
D) 0.16.
Explanation

4 of 4