2003

www.modlin.org

Study Session 3
Sample Questions
Investment Tools
Quantitative Methods
1A

Sampling and Estimation

1.

In stratified random sampling:

A.
B.
C.
D.

the population is subdivided into subpopulations based on one or

more classification criteria
each observation has an equal chance of being selected
we collect observations at equally spaced intervals of time
we make the assumption that members of the sample come from
the same population

Answer
A.
Stratified random sampling
In stratified random sampling the population is subdivided into
subpopulations based on one or more classification criteria.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,d

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

2.

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The central limit theorem

A.
B.
C.
D.

allows us to compute confidence intervals when the sample size is

small
allows us to calculate estimates from a sample
has important implications for how we construct confidence intervals
and test hypotheses
is used when sample size is less than 30

Answer
C.
The central limit theorem
The central limit theorem has important implications for how we construct
confidence intervals and test hypotheses.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,f
3.

An analyst wants to determine how growth managers performed last year.

He assumes that the population cross sectional standard deviation of
growth manager return is 8% and the sample size selected is 40.
Determine the standard error of the sample mean. Assume the returns
are independent across managers.
A.
B.
C.
D.

1.765
1.600
1.265
1.125

Answer
A.
Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Calculating the standard error of the sample mean

The standard error of the sample mean is 1.265.

=
n

8
= 1.265
40

Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,g

4.

The desirable statistical properties of an estimate are:

I.
II.
III.

Unbiasedness
Efficiency
Consistency

Which is TRUE?
A.
B.
C.
D.

I only
II only
III only
I, II, and III

Answer
D.

Statistical properties of an estimate

The desirable statistical properties of an estimate are:

Unbiasedness
Efficiency
Consistency

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,h

5.

Assume that the equity risk premium is normally distributed with a

population mean of 8% and a population standard deviation of 15%. Over
the last 3 years, equity returns have averaged 4%. A 95 % confidence
interval for a sample of 3-year returns is as follows:
A.
B.
C.
D.

between -8.974% and 24.974%

between 5.987% and 23.876%
between 9.987% and 18.092%
between 7.098% and 12.098%

Answer
A.

Determining a confidence interval

A 95 % confidence interval for a sample of 3-year returns is between
-8.974% and 24.974%
For returns that are normally distributed, a 95% confidence interval is of
the form:
x 1.96

Lower limit: 8% - 1.96

15
= -8.974%
3

Upper limit: 8% + 1.96

15
= 24.974%
3

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,j

6.

The bias in the inference you draw as a result of prying into the empirical
results of others to guide your own analysis is known as:
A.
B.
C.
D.

Survivorship bias
Data-snooping bias
Data-mining bias
Look-ahead bias

Answer
B.

Data-snooping bias
The bias in the inference you draw as a result of prying into the empirical
results of others to guide your own analysis is known as data-snooping
bias.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Sampling and Estimation, LOS 1A,o

B.

Hypothesis Testing

1.

The hypothesis to be tested is known as:

A.
B.
C.
D.

The alternative hypothesis

The Type I hypothesis
The null hypothesis
The Type II hypothesis

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Answer
C.

The null hypothesis

The hypothesis to be tested is known as the null hypothesis.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Hypothesis Testing, LOS 1B,b

2.

The economic decision that we make at the end of the statistical process
of the hypothesis test:
A.
B.
C.
D.

takes into consideration not only the statistical decision, but also all
economic issues pertinent to the decision
only takes into consideration the statistical decision
takes into consideration only the investment decision
does not require a statistical decision to have been made

Answer
A.

The economic decision that we make at the end of the statistical process
of the hypothesis test
The economic decision that we make at the end of the statistical process
of the hypothesis test takes into consideration not only the statistical
decision, but also all economic issues pertinent to the decision.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Hypothesis Testing, LOS 1B,j
Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

3.

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Consider the following information about a fund. The fund has been in
existence for 3 years. Over this period it has achieved a mean monthly
return of 3% with a sample standard deviation of monthly returns of 5%. It
was expected to earn a 2.5% mean monthly return over the 3-year period.
Which test statistic do we use for conducting a test of the hypotheses?
A.
B.
C.
D.

f-test with 35 degrees of freedom

z-test with 36 degrees of freedom
t-test with 35 degrees of freedom
chi-squared test with 35 degrees of freedom

Answer
C.

Identifying the appropriate test statistic

T-test with 35 degrees of freedom is used for conducting a test of the
hypothesis.
This is a t-test because the population variance is not known
The degrees of freedom is always n 1 which in this case is 36 1 =
35 months
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Hypothesis Testing, LOS 1B,l

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

4.

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Consider the following information about a fund. The fund has been in
existence for 3 years. Over this period it has achieved a mean monthly
return of 3% with a sample standard deviation of monthly returns of 5%. It
was expected to earn a 2.5% mean monthly return over the 3-year period
The rejection point(s) at the 0.10 level of significance is/are:
A.
B.
C.
D.

reject when t < 1.690 or t > -1.690

reject when t > 1.690 or t > -1.690
reject when t < 1.690 or t < -1.690
reject when t > 1.690 or t < -1.690

Answer
D.

Interpreting the results of a hypothesis test

The rejection point(s) at the 0.10 level of significance are:
reject when t > 1.690 or t < -1.690.
The t-tables need to be used.
In this case we look at p = 0.05 because the significance level given is 0.1
and 35 degrees of freedom (36-1)
The value read from the table is 1,690 which determines the rejection
point(s)
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Hypothesis Testing, LOS 1B,n

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

5.

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An analyst compiled the following information relating to EPS forecasts.

The analyst wants to forecast quality. The test used to forecast quality is
the zero-mean test, which states that optimal forecasts should have a
mean forecasting error of 0.
Number of
forecasts
100

Mean Forecast
error
0.07

Standard deviation of
forecast error
0.2

Using a z-test, at the 0.05 level of significance

A.
B.
C.
D.

we reject the null

we accept the null
we have insufficient information to make a decision
we have committed a Type I error

Answer
A.

Interpreting the results of a hypothesis test

Using a z-test, at the 0.05 level of significance we reject the null.
Z=

0.07
0.07 0
=
= 3.5
0.02
0.2/ 100

Note that the calculation of the z-statistic with unknown variance is the
same as the calculation of the t-statistic.
When the significance level is 0.05 the rejection points are Z > 1.96 and Z
< -1.96.
The computed value of Z of 3.5 is greater than 1.96 and this means we
reject the null at the 0.05 level.

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Hypothesis Testing, LOS 1B,n

C.

Correlation and Regression

1.

A scatter plot is:

A.
B.
C.
D.

a graph of the mean and standard deviation of observations for two

data series
a graph that shows the relationship between the observations for
two data series in two dimensions
a graph of the mean, standard deviation and covariance of
observations for two data series
a graph that shows the relationship between the observations for
two data series in one dimension

Answer
B.

Scatter plot
A scatter plot is a graph that shows the relationship between the
observations for two data series in two dimensions.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Correlation and Regression, LOS 1C,a

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

2.

www.modlin.org

Covariance is defined as:

A.
B.
C.
D.

small numbers of observations at either extreme of a sample

the variance of the product of the deviations of two random
variables from their respective means
the expected value of the product of the deviations of two random
variables from their respective means
the correlation of two variables divided by the product of their
sample standard deviations

Answer
C.

Covariance
Covariance is defined as the expected value of the product of the
deviations of two random variables from their respective means.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Correlation and Regression, LOS 1C,b

3.

The correlation coefficient is:

A.
B.
C.
D.

the variance of two variables divided by the product of their sample

standard deviations
the expected value of two variables divided by the product of their
sample standard deviations
the expected value of the product of the deviations of two random
variables from their respective means
the covariance of two variables divided by the product of their
sample standard deviations

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

www.modlin.org

Answer
D.

The correlation coefficient

The correlation coefficient is the covariance of two variables divided by
the product of their sample standard deviations.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Correlation and Regression, LOS 1C,c

4.

In correlation analysis, the correlation coefficient measures:

A.
B.
C.
D.

the direction between two variables

the extent of linear association between two variables
the expected value of the product of the deviations of two random
variables from their respective means
the direction and extent of linear association between two variables

Answer
D.

Correlation analysis
In correlation analysis, the correlation coefficient measures the direction
and extent of linear association between two variables.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Correlation and Regression, LOS 1C,d

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods

 2003

5.

www.modlin.org

Outliers are:
A.
B.
C.
D.

small numbers of observations at either extreme of a sample

small numbers that lie off the scatter plot
large numbers of observations at either extreme of a sample
the expected values of the products of the deviations of two random
variables from their respective means

Answer
A.

Outliers
Outliers are small numbers of observations at either extreme of a sample.
Reference
Quantitative Methods for Investment Analysis, Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle (AIMR, 2001)
Study Session 3 2003, Correlation and Regression, LOS 1C,f

Study Session 3 Sample Questions

Investment Tools: Quantitative Methods