UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY 2017

BSc (Hons) Banking and Finance

BSc (Hons) Finance

PROGRAMME BSc (Hons) Finance (Minor: Law)

BSc (Hons) International Business Finance
Level II & Fee-Paying

MODULE NAME QUANTITATIVE FINANCE II

Friday
DATE 19 May 2017 MODULE CODE DFA2033Y (3)

TIME 13.30 – 16.30 Hours DURATION 3 Hours

20 MCQs + 4 20 MCQs + 3
NO. OF NO. OF QUESTIONS
Questions Questions
QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 20 MCQs and 3 Sections. Students are requested to

answer MCQs on MCQ Sheet provided.
Answer All questions from Section A.
Answer All questions from Section B.
Answer ANY TWO (2) questions from Section C.
Formula Sheet and Statistical Distribution Tables are attached.
 Quantitative Finance II – DFA2033Y (3)

SECTION A (COMPULSORY)

Answer ALL questions.

Each question carries 1.5 marks

Question 1

1. What does the adjusted R2 value give?

a. The adjusted R2 value tells you if there is a negative relationship
b. The adjusted R2 value tells you if there is a significant relationship
c. The adjusted R2 value tells you if there is a positive relationship
d. The adjusted R2 value tells you how much of the variance in the dependent
variable can be accounted for by the independent variable
e. None of the above

2. Which of the following points are not true when conducting a multiple regression?
a. Multiple regression can be used to assess linear relationships
b. Multiple regression can be used to assess quadratic relationships
c. Data must be normally distributed for multiple regression
d. The assumption of multicollinearity must be met for a multiple regression
e. None of the above

3. Which of these points reflect the assumption of multicollinearity?

a. The relationship between your independent variables must not be above
r = 0.7
b. The variance across your variables must be equal
c. There must not be any extreme scores in the data set
d. Data must be normally distributed and not skewed
e. None of the above

4. The assumption that the variance of the residuals about the predicted dependent
variable scores should be the same for all predicted scores reflects which
assumption?
a. Homogeneity
b. Normality
c. Homoskedasticity
d. Multicollinearity
e. None of the above

5. The joint probability of events A and B is 32 percent with the probability of event A
being 60 percent and the probability of event B being 50 percent. Based on this
information, the conditional probability of event A given event B has occurred is
closest to:
a. 30.0%
b. 53.3%
c. 64.0%
d. 80.0%
e. None of the above
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 Quantitative Finance II – DFA2033Y (3)

6. What is the area under the normal curve for z > 1.79?
a. 0.4633
b. 0.9599
c. 0.0367
d. 0.9700
e. None of the above

7. Events which cannot happen at the same time are called:

a. Independent
b. Mutually Exclusive
c. A Bayes’ Relationship
d. Non-Mutually Exclusive
e. None of the above

8. The probability of a head on a coin and a 6 on a dice is:

a. 1/36
b. 1/12
c. ¼
d. 2/3
e. None of the above

9. If a significance level of 1% is used rather than 5%, the null hypothesis is:
a. More likely to be rejected
b. Less likely to be rejected
c. Just as likely to be rejected
d. Never rejected
e. None of the above

10. An ANOVA procedure is applied to data obtained from four samples where each
sample contains ten observations. The degree of freedom for the critical value of F is:
a. 4 numerator and 9 denominator degrees of freedom
b. 4 numerator and 10 denominator degrees of freedom
c. 3 numerator and 36 denominator degrees of freedom
d. 3 numerator and 40 denominator degrees of freedom
e. None of the above

11. If the coefficient b in the linear regression model is zero, then the correlation between
the two variables must be:
a. +1
b. -1
c. 0
d. -0.5
e. None of the above
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 Quantitative Finance II – DFA2033Y (3)

12. Let Z be a standard normal random variable. An event X is defined to happen if

either z takes a value between -1 and 1 or z takes any value greater than 1.5. What is
the probability of event X happening if N (1) = 0.8413, N (0.5) = 0.6915 and N (-1.5) =
0.0668, where N() is the cumulative distribution function of a standard normal
variable?
a. 0.083
b. 0.2166
c. 0.6826
d. 0.7494
e. None of the above

13. Suppose the standard deviation of a normal population is known to be 10 and the
mean is hypothesized to be 8. Suppose a sample size of 100 is considered. What is the
range of sample means that allows the hypothesis to be accepted at a level of
significance of 0.05?
a. Between -11.60 and 27.60
b. Between 6.04 and 9.96
c. Between 6.355 and 9.645
d. Between -8.45 and 24.45
e. None of the above

14. The error term represents the portion of the:

a. Dependent variable that is not explained by the independent variable(s) but
could possibly be explained by adding additional independent variables.
b. Dependent variable that is explained by the independent variable(s).
c. Independent variables when their average is zero.
d. Dependent variable that is explained by the error in the independent
variable(s).
e. None of the above

15. A distribution of returns that has a greater percentage of small deviations from the
mean and a greater percentage of extremely large deviations from the mean:
a. Is positively skewed
b. Is a symmetric distribution
c. Has positive excess kurtosis
d. Has negative excess kurtosis
e. None of the above

16. The unconditional probability of an increase in stock price of a company is 0.62.

There can be only three states of economy good, normal and bad. The probability of
good times is 0.20 and the probability of normal times is 0.50. The probability of the
stock price going up given that the economy is going through good times is 0.85. The
probability of the stock price going up given that the economy is going through bad
times is 0.20. What is the probability of the stock price going up given that the
economy is going through normal times?
a. 0.39
b. 0.70
c. 0.78
d. 0.81
e. None of the above

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 Quantitative Finance II – DFA2033Y (3)

17. Which of the following distribution is most likely to have the fattest tail?
a. A leptokurtic distribution with kurtosis = 6
b. A leptokurtic distribution with excess kurtosis = 4
c. A normal distribution
d. A platykurtic distribution
e. None of the above

18. What is the value of F-statistics for a multiple regression having 3 independent
variables? The total sum of squares is 520 and the standard error of regression is 4.
The number of observations is 28.
a. 1.81
b. 2.82
c. 2.83
d. 22.59
e. None of the above

19. The confidence interval for a regression coefficient in a multiple regression equation
is -0.12 to 0.36 at 5% level of significance. What can we say about the result of the
hypothesis test for testing that the regression coefficient is significantly different than
zero at 1% level of significance?
a. Reject the null hypothesis
b. Fail to reject the null hypothesis
c. Reject the null hypothesis at 5% level of significance and can't say at 1% level
of significance
d. Fail to reject the null hypothesis at 5% level of significance and can't say at 1%
level of significance
e. None of the above

20. The coefficient of determination for a multiple regression equation with 3

independent variables is 0.7428.The total sum of squares, TSS, is 472. What is the
standard error of the regression for a sample size of 24?
a. 2.4637
b. 4.1869
c. 6.3613
d. 10.8105
e. None of the above

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 Quantitative Finance II – DFA2033Y (3)

SECTION B (COMPULSORY)

Question 2 [40 marks]

Part I

A study was carried out to see how employees’ job satisfaction test score is affected by the
number of years of service and the wage rate.

Y: job satisfaction test score X1: number of years of service X2: wage rate
Data was collected for a sample of 8 employees and the following regression function is
obtained:

= 14.4 − 8.69 + 13.5 +

A portion of the regression results generated using statistical software is given below:

standard
Coefficient error t-stat
Constant ? 8.191 1.76
X1 ? 1.555 ?
X2 ? 2.085 ?

Adj R2 =?
Standard Error = 3.773 R2 =? % %

Analysis of Variance
Source DF SS MS F
Regression ? ? ? ?
Error ? 71.17 ?
Total ? 720

a. Calculate the missing entries in the above output table. [12 marks]

b. Test if the overall model is significant at 5% level of significance. [3 marks]

c. Did the estimated regression equation provide a good fit to the data? Explain.
[2 marks]

d. Verify the significance of each individual independent variable, using 5% level of

significance. [4 marks]

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 Quantitative Finance II – DFA2033Y (3)

Part II

A chain of restaurant wants to study how its quarterly sales are affected by the student
population. The following data is collected.

Xi = Student Yi = Quarterly
population Sales
Restaurant (*1000s) (*1000s)
1 2 58
2 6 105
3 8 88
4 8 118
5 12 117
6 16 137
7 20 157
8 20 169
9 22 149
10 26 202

a. Develop a scatter diagram for the data given in the above table. [3 marks]

b. Use the least squares method to develop the estimated regression equation.
[6 marks]

c. Estimate the quarterly sales if the student population is 24000. [2 marks]

d. Does the estimated regression function provide a good fit to the data? [8 marks]

SECTION C

Answer ANY TWO (2) questions.

Question 3 [15 marks]

A financial analyst is studying an Equity fund which has been in existence for the past 24
months. During that period, the equity fund achieved a sample standard deviation of
monthly returns of 3.6%. The financial analyst wants to test a claim that the particular
investment strategies followed by the equity fund result in a standard deviation of monthly
returns of less than 4%.

(i) Give the null and alternative hypothesis. [4 marks]

(ii) Identify and calculate the test statistic. [4 marks]

(iii) Find the critical point/s to determine if the null hypothesis is rejected at 5% level
of significance. [7 marks]

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 Quantitative Finance II – DFA2033Y (3)

Question 4 [15 marks]

a. Give the assumptions which must be verified before doing an OLS regression and
explain in details how to verify these assumptions. [8 marks]

b. Explain what is meant by a non-stationary time series. Use examples to illustrate.

[7 marks]

Question 5 [15 marks]

A linear trend model is used for forecasting the unemployment rate for a particular country.
Data has been collected on a monthly basis from January 1995 to December 1999. The
following regression statistics have been obtained:

R2 0.9314
Standard Error 0.1441
Observations 60
Durbin Watson 0.9578

variable coefficient standard error t-statistic

Intercept 5.8509 0.0377 155.1963
Trend -0.0301 0.0011 -27.3636

a. Write the linear trend model. [3 marks]

b. Calculate the model’s prediction of the unemployment rate for July 1995. [3 marks]

c. Interpret the DW statistic for the regression. What does the DW statistic say about the
validity of a t-test on the coefficient estimate? Use 5% level of significance.
[9 marks]

END OF QUESTION PAPER

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