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Level 1

Study Session 3
Practice Questions
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The questions and answers for study session 3 are provided by the Financial
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Questions from Financial Analyst Quizzer

(1) When several independent variables in a multiple regression are highly correlated with each other, the problem is called:
A. multicollinearity.
B. autocorrelation.
C. heteroscedasticity.
D. homoscedasticity.
(2 ) What are the mean, median, and mode, respectively of the data series: 1, 2, 3, 5, 8, 8, 15?
A. 6, 5, 8
B. 8, 5, 6
C. 5, 8, 6
D. 6, 8, 5
(3) Reg Reshin, a CFA candidate, has recently concluded that weekend beverage sales are linearly related to average
hourly wages. The regression has an intercept of 10 liters, a correlation coefficient of 0.55, and an R(squared)of 0.30. If the
average hourly wage is predicted to be $20, what would be the associated prediction of weekend beverage sales in liters?
A. 11 liters
B. 16 liters
C. 21 liters
D. Cannot be calculated from the information provided

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Study Session 3
Practice Questions
(4) To help gain a better understanding of the relationship between the return on the common stocks of small companies
and the return on the S&P 500 Index, you run a simple linear regression to quantify this relationship, using the monthly
return on small 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:

Intercept
S&P 500

Coefficient
1.71%
1.52%

Standard Error t-value

2.95
0.601
0.13
10.073

The t-statistic critical level at the 0.01 level is 2.66

Residual Standard Error is 19.85
Correlation coefficient is 0.7740
N=75
F-value = 101.465 on 1,730 degrees of freedom.
The percent of the variation in the return on the dependent variable (return on small stocks) explained by the return on the
independent variable (return on the S & P 500 ) for the period under study was:
A. 10.07 percent.
B. 59.91 percent.
C. 19.85 percent.
D. 77.40 percent.
(5) A client will move his investment account unless the portfolio manager earns at least a 10 percent rate of return on the
account. The rate of return for the portfolio the portfolio manager has chosen has a normal probability distribution with an
expected return of 19 percent and a standard deviation of 4.5 percent. What is the probability that the portfolio manager will
keep this account?
A. 0.475
B. 0.950
C. 1.000
D. 0.975

Answers from Financial Analyst Quizzer

(1) A.
Explanation:
Reference: Schroeder, Sjoquist and Stephan, Understanding Regression Analysis: An Introductory Guide, (Sage
Publications, 1986), pp. 71-72.
Source: 1998 Sample Exam 1 Question 36
Used 5 times in actual or sample exams
Quantitative Methods--Study Session 3
Reading 2 -- Understanding Regression Analysis. An Introductory Guide
Learning Outcome: discuss the results of regression and correlation analysis.
Comment: AIMR refers the candidate to pp. 71-72 in Schroeder, Sjoquist, and Stephan. Even though this is no longer an
assigned reading, it is fair game for the exam because it was included in the 1998 Sample Exam.

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Study Session 3
Practice Questions
(2) A.
Explanation:
References: Bodie and Marcus, "Quantitative Review," Appendix A, Investments, 3rd edition, (Irwin, 1996), Level I CFA
Candidate Readings (AIMR, 1997), p. A11 (39); Reilly and Brown, Investment Analysis and Portfolio Management, 5th
edition, (Dryden, 1997), Ch. 1, pp. 8-10.
Source: 1996 Sample Exam 2 Question 21
Used 1 time in actual or sample exam
Quantitative Methods--Study Session 3
Readings 1 -- Quantitative Review; 4 -- The Investment Setting
Learning Outcome: calculate mean and standard deviation of expected returns.
Solution:
1 + 2 + 3 + 5 + 8 + 8 + 15 = 42
Mean = 42 / 7 = 6.
The Median is the middle value: 5.
The Mode is the most common value: 8.
(3) D
Explanation:
Reference: Schroeder, Sjoquist and Stephan, Understanding Regression Analysis: An Introductory Guide, (Sage
Publications, 1986), pp. 16-17, 25.
Source: 1993 Exam Question 57
Used 1 time in actual or sample exam
Quantitative Methods--Study Session 3
Reading 2 -- Understanding Regression Analysis. An Introductory Guide
Learning Outcome: discuss the results of regression and correlation analysis.
Comment: What is needed to answer the question is the slope, which is not provided.
(4) B
Explanation:
Study Session 3
Reference: Schroeder, Sjoquist and Stephan, Understanding Regression Analysis: An Introductory Guide, (Sage
Publications, 1986), pp. 23-28.
Source: 1994 Exam Question 46
Used 1 time in actual or sample exam
Quantitative Methods--Study Session 3
Reading 2 -- Understanding Regression Analysis. An Introductory Guide
Learning Outcome: discuss the relationship between the dependent and independent variables.
Solution:
2

Coefficient of determination = (correlation coefficient)

2

R = 0.774
=0.5991

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Practice Questions
(5) D
Explanation:
Study Session 3
Reference: Bodie and Marcus, "Quantitative Review," Appendix A, Investments, 3rd edition, (Irwin, 1996), Level I CFA
Candidate Readings (AIMR, 1997), pp. A16-A18 (44-46) and Table 20.2 at p. 666 (69).
Source: 1996 Sample Exam 1 Question 37
Used 2 times in actual or sample exams
Quantitative Methods--Study Session 3
Reading 1 -- Quantitative Review
Learning Outcome: calculate the upper and lower limits of confidence intervals.
Solution:
As a rule of thumb, two standard deviations produce a 95% confidence level. Since this question presents a one-tailed test,
the probability of falling below the expected value by two standard deviations is 2.5%.

Confidence interval =
19% - 10%
---------------4.5%
= 2 standard deviations

Table 20.2 shows that the frequency of outcomes two standard deviations less than the expected return is 2.28%.
Hence,
Probability of keeping the account = 1.0000 - 0.0228 = 0.9772,
closest to 0.975.

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