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Final exam
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45 views10 pagesFinal
Final exam
Uploaded by
Gita PodderCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Question 1:
James has been employed by ABC Co.Ltd, drawing an annual salary of
'$120000, paid at the end of each year. He plans to work for five years before
retiring. He buys a new home with mortgage repayments of $2800 per month
for the next 20 years (payable at the end of each month), and donates $2000
per annum forever to his favourite charity. Assume an annual interest rate of 6%
.a, what annual amount, in present value terms, can James withdraw for the
first five years of his retirement from the remainder of his savings?
(9 marks)
Question 2:
You have developed a set of criteria for evaluating discrete credits. Companies
that do not receive a passing score are classed as ‘likely go bankrupt within one
year’. You gathered the following information:
4. 40% of the companies to which the test is administered will go bankrupt
within one year: P(nonsurvivor) = 0.40;
2. 55% of the companies to which the test is administered pass it: P(pass
test) = 0.55;
3. The probability that a company will pass the test given that it will
subsequently survive one year is 85%: P(pass test | survivor) = 0.85;
(1) Calculate P(pass test | non-survivor)?
(2) Calculate the probability that a company is a survivor, given that it
passes the test: P(survivor |pass test)?
(445 =9 marks)
Question 3:
You are studying Rio Tinto Limited (RIO) stock performance during last years
Since RIO is listed in Sydney Security Exchange, you believe that the returns of
RIO is correlated with ASX200 index returns. As Rio Tinto is a multinational and
the world's second largest metals and mining corporations, you also assume RIO
retums are associated with S&P 500 index returns. You model the RIO returns
(reio) as below:
Taio. = Ao + Gs * Tspsoo,t + G2 * Masxe + Ue
Page 2 of 12, Type, nd Tysy,¢ ae retuns for S&P 500 index and ASX index, respectively, ur
is the error term. After obtaining historical data, you run a regression and get the
following output
ANOVA
of SS MS
Regression 2.000 0.441 0.220
Residual 212,000 1.048 0.005
Total 214.000 1.489
‘Standard
Coefficients “2 £ stat
Intercept 0.008 (0.005 1.686
S&P 500 -0.094 0171 0.550
ASK 200 1.322 0.195, 6.768
(1) Test if the first slope coefficient estimate of a, is significant at the 1% level?
(2) Construct and interpret the 95% confidence interval for the second slope
coefficient estimate of a».
(3) Determine if the two independent variables are jointly statistically related to
Taio at the 0.05 significance level.
(5 +5 +5 = 15 marks)
Question 4:
You manage a U.S. core equity portfolio that is sector-neutral to the S&P500
Index (its industry sector weights approximately match the S&P 00's). Taking a
weighted average of the projected mean returns on the holdings, you forecast a
portfolio return of 12%. You estimate a standard deviation of annual return of
22%, which is close to the long-run figure for the S&P 500. For the year-ahead
return on the portfolio, assuming Normality for portfolio returns, you are asked to
do the following
(1) Calculate and interpret a two-standard deviation confidence interval for the
portfolio returns.
(2) You can buy a one-year T-bill that yields 5%. What is the probability that
your portfolio return will be equal to or less than the risk-free rate?
(4+5=9 marks)
Page 3 of 11 Question 5:
Kevin works as an analyst in an investment bank, and he tries to build a time
series model for monthly U.S. inflation (denoted ¥, ) from Feb. 1971 to Dec. 2000.
He first tried the Autoregressive AR(1) model using the previous month's inflation
as the independent variable:
Y=a +BY,,+u,
The table below shows the results of estimation.
AR(1) model: U.S. Monthly Inflation Feb. 1971 to Dec. 2000
Regression Statistics
R Square 0.3808
‘Standard Error 3.4239
Observations 359
Durbin-Watson __ 2.3059
Coefficients __ Standard Error t Stat
Intercept (a) 1.9658 0.2803 7.0119
Lagi () 0.6275 0.0410 15.3049
Autocorrelation of the Residual
Lag Autocorrelation Standard Error t Stat
1 -0.1538 0.0528 -2.9142
2 0.1097 0.0528 2.0782
3 0.1657 0.0528 1.2442
4 0.10920 0.0528 1.7434
Based on regression results in the table, discuss whether the estimates of a
and are valid, and give reasons. If the model is misspecified, describe what is
the next step you should take to determine an appropriate Autoregressive time
series model.
(10 marks)
Question 6:
What are the philosophical assumptions made by the researchers when they
undertake a qualitative study?
(8 marks)
END OF EXAMINATION
Page 4 of 12 Appendix A: Cumulative Probabilities for standard Normal distribution P(zsx) for x20.
0.06 0.07 0.08 0.09
0523905279 05319 0.5359
0.5636 0.5675 0.5714 0.5753
0.6026 0.6064 0.6103 0.6141
0.6406 0.6443 0.6480 0.6517
0.6772 0.6808 0.6844 0.6879
0.7123 0.7157 0.7190 0.7224
0.7454 0.7486 0.7517 0.7549
0.7764 0.7794 0.7823 0.7852
0.8051 0.8078 0.8106 0.8133
0.8315 0.8340 0.8365 0.8389
0.8554 0.8577 0.8599 0.8621
0.8770 0.8790 0.8810 0.8830
0,8962 0.8980 0.8997 0.9015
09131 0.9147 0.9162 0.9177
0.9279 0.9292 0.9306 0.9319
0.9406 0.9418 0.9429 0.9441
0951S 0.9525 0.9535 0.9545
0.9608 0.9616 0.9625 0.9633
0.9686 0.9693 0.9699 0.9706
xorz
0.10 05398 0.5438
0.20 0.5793 0.5832
030 0.6179 0.6217
0.40 0.6554 0.6591
0.50 0.6915 0.6950
0.60 0.7257 0.7291
0.70 0.7580 0.7611
0.80 0.7881 0.7910
0.90 0.8159 0.8186
1.00 0.8413 0.8438
140 0.9192 0.9207
1.90 09713 0.9719 0.9750 0.9756 0.9761 0.9767
2.00 09772 09778 0.9803 0.9808 0.9812 0.9817
2.10 0.9821 0.9826 0.9846 0.9850 0.9854 0.9857
2.20 0.9861 0.9864 0.9881 0.9884 0.9887 0.9890
2.30 0.9893 0.9896 0.9909 0.9911 0.9913 0.9916
2.40 0.9918 0.9920 0.9931 0.9932 0.9934 0.9936
2.50 0.9938 0.9940 0.9948 0.9949 0.9951 0.9952
2.60 0.9953 0.9955 0.9961 0.9962 0.9963 0.9964
2.70 0.9965 0.9966
j
g
a8
Page 5 of 11 Appendix B: f distribution critical values (one-tailed)
aft tor to.025 to.005
2 4.3 9.92
3 3.18 5.84
4 2.53 2.13 2.78 4.6
5 1.48 2.02 2.57 4.03
6 add 2.94 2.45 3.72
ch 24a 2.89 2.36 3.5
8 at 2.86 2.31 3.36
9 2.38 2.83 2.26 3.25
20 2.37 21.82 2.23 3.17
ua 1.36 1.8 2.2 3.32
32 1.36 1.78 2.18 2.68 3.05
13 2.35 1.7 2.16 2.65 3.02
a4 1.35 21.76 2.44 2.62 2.98
a5 1.34 1.75 2.13 2.6 2.95
26 23d 1.75 2.12 2.58 2.92
17 2.33 1.74 2.ar 2.57 2.9
38 2.33 1.73 2a 2.55 2.88
29 1.33 Da 2.09 2.54 2.86
20 2.33 2.72 2.09 2.53 2.85
2 21.32 1.72 2.08 2.52 2.83
22 21.32 1.92 2.07 2.51 2.82
23 2.32 2.72 2.07 2.5 2.82
24 21.32 2.72 2.06 2.49 2.8
25 2.32 17a 2.06 2.49 2.79
26 2.32 104 2.06 2.48 2.78
27 2.32 1.9 2.05 2.47 2.97
28 2.32 Ls 2.08 2.47 2.76
29 2.31 1.2 2.05 2.46 2.76
30 2.32 1.7 2.08 2.46 2.75
35 1.31 2.69 2.03 2a 2.72
ao ev 2.68 2.02 2.42 2.7
50 2.3 2.68 2.02 2d 2.68
60 1.3 1.67 2. 2.39 2.66
70 2.29 1.67 1.99 2.38 2.65
80 2.29 2.66 1.99 2.37 2.64
90 2.29 1.66 21.99 2.37 2.63
200 2.29 1.66 1.98 2.36 2.63
200 1.29 2.65 1.97 2.35 2.6
300 2.28 2.65 1.97 2.34 2.59
400 2.28 1.65 1.97 2.34 2.59
- Zour 20.05 2.025 Zo.01 Zo.005
1.28 1.645 1.96 2.33 2.58
Page 6 of 11 Appendix C: F-distribution critical values at 5% level
df2/afl | 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 | 10.00 | 12.00 INF
a 161.45 | 199.50 | 215.71 | 224.58 | 230.16 | 233.99 | 236.77 | 238.88 | 240.54 241.88 | 243.91 | 254.31
2 1851) 19.00 | 19.16 | 19.25 | 1930| 19.33] 19.35] 19.37 19.38 | 19.40 | 19.41] 19.50
3 10.13 9.55 9.28 9.12 9.01 8.94 8.89 8.85 8.81 8.79 8.74 853
4_| 77| 694] 6s9| 639[ 626[ 616| 609| 608] 600] 596[ sa | 563
5_| 6s] s7| sai:[ sas] sos|495| 488 as2] 477|474| een] aa7
S_| sso] sss] a76[ 4s3[ aso[ 428] 421 ais] 430] 408] a00| 367
7 5.59 4.74 4.35 4.12 3.97 3.87 3.79 3.73 3.68 3.64 3.57 3.23
& 5.32 446 4.07 3.84 3.69 3.58 3.50 3.44 3.39 3.35 3.28 2.93
9 5.12 4.26 3.86. 3.63 3.48 3.37, 3.29 3.23 3.18 3.14 3.07, 271
so | 496] 4so| a7] sas] 333] 322[ 314 207] 302[ 298] 2011 258
u_{ asa 398] ss9[336[ 320] 300] 301] 205] 250] 20a 2.40
a2_{ 475| s80[ aao[ 326[ 7 311[ 300] 291| 245] 240] 275| 2601 2.0
13_| 467] ssi] sai[ 31s" 303 202| 293| 277) 27 267| 260] 2.0
44 | asol aze[ aaa[ air] 206] 205| 276| 270] 265 [260] 72531 248
4s _| asa] 368] 329/306] 250] 270] 27] 264] 259] 254] 248] 207
is_| a49| 363] 324] 30x] 28s] 274 266[ 259] 254] 209] a0] 201
a7 445 3.59 3.20 2.96 2.81 2.70 2.61 2.55 2.49 2.45 2.38 1.96
18 441 3.55, 3.16 2.93 2.77 2.66 2.58 2.51 2.46 241 2.34 192
19 4.38 3.52 3.13 2.90 2.74 2.63 2.54 2.48 2.42 2.38 231 188
zo_{ sas| 349] sso] 297] 27] 260 251] 24s] 239] 235] 228] 188
21 4.32 3.47 3.07 2.84 2.68 2.57 2.49 2.42 237 2.32 2.25 181
z2_| 430| s4s| aos| 282 [ 266[ 255] 246| 240] 238] 2302231178
%3_| 428| 342| 303| 260[ 26a] 253| 24a| 237] 232| 227| 220] 176
24 | 426 340] aor] 27e[ 262] 251] 242| 236] 230] 225| 218] 173
2 426 3.39 2.99 2.76 2.60 2.49 2.40 2.34 2.28 2.24 2.16 72
26 4.23 2.98 2.74 2.59 2.47, 2.39 2.32 2.27 2.22 2.15 1.69
az | aa 296| 273| 257| 246| 237 231| 225] 220/ 213| 167
2 [420 295| 2m| 256| 245/236] 229| 224] 219| 212 165
2 {| 41s| 333[ 293| 270] 2s5[ 243 [ 235[ 228] 222| 218| 210] 164
30 4.17 3.32 2.92 2.69 2.53 2.42 2.33, 2.27 221 2.16 2.09 1.62
40 4.08 3.23 2.84 261 2.45 2.34 2.25, 2.18 2.12 2.08 2.00 151
60 4.00 3.15 2.76 2.53 2.37 2.25 2.17 2.10 2.04 1.99 1.92 139
120 3.92 3.07 2.68 245, 2.29 2.18 2.09 2.02 1.96 1.91 1.83 1.25
int _| asa] 300] 260] 237[ 221] 2101 20:/ 196] 198] 183 [ 175] 1.00
Page 7 of 11 Future Value of a Single Cash Flow
FV, =PV(1+r)*
pv
FY, = future value N periods from today
resent value
r= interest rate
Frequency of Compounding
_
FY, = Pr(t + 2)
Future Value of a Series of Cash Flows
PV, |
+
Present Value of a Lump Sum
FV, = PV(1+r)*
PV =FV,| ——
Gary
Present Value of an ordinary annuity
=FV (+r)
Present Value of a Perpetuity
a ih a
which simplifies to
A
PY, =—
oe
Population Mean
Page 8 of 11
Solving for the Ann
eae
1
_ +n"
r
(try
Internal Rate of Return
NPV =CF,+—CA_y 4, CF _
(i+ IRRY Oe RRy
Holding Period Return (HPR)
HpR=2ahe*D,
R
‘Time-Weighted Return
Fw [04H <4 x0 tn IP =I
Bank Discount Yield
Holding Period Yield
ppy Aah D,
4h
Effective Annual Yield
EAY = (1+ HPY)" -1
Money Market Yield
‘iy = (HPYY(360/0)
Population Variance Xe=>wX,
a
where, Dw, =1
Geometric Mean
G=[XX,.X,]"
withX, 2 0 for
Geometric Mean Using Natural Logs
InG)=+Incx,4,X,..X,)
n
QyroeyMl
once In(G) is computed G = e™®
Geometric Mean Return
1+R, =[0+ R)V+R)U+R).0+ RPP
[fa-a)] =
Measures of Dispersion
Range = Maximum value ~ Minimum value
Mean Absolute Deviation (MAD)
2h -3]
MAD ==1____
”
Page 9 of 11,
Semivariance
(=
jordx cx (0 ~1)
Target Semivariance
-8)
wrt ce (0 1)
Chebyshev's Inequality.
forall k >1
Sample Skewness
Do, -xy
a
(n=1(n=2) °
s Location of the yth percentile
y
=(n4Ie
Balas
Linear interpolation
x12 + (12.75 -12)(x13- x12), e.g.
12.75,
Conditional Probability
Pea| B=, PB) #0
The Total Probability Rule
P(A) = P(AS) + P(AS®)
= P(A| S)P(S)+ P(A| S)P(S°)
Conditional Expected Value and
variance
ANS=AX| SX +AY| NG +. AX |X,
700 = 5 PEL, - £007
‘Total Probability Rule for Expected
Value
E(X) = E(X|S8)P(S)+ E(X | S°)P(S°)
UES)» ECS )PCS)+ 80S) PUS)) 44 EOL PUS,)
Bayes’ formula
Covariance between Y and Y
conga $ C=O
Variance of X
yu ~xy
ot (n=1)
Page 10 of 11
Correlation Coefficient
Testing the Significance of the
Correlation Coefficient
rvn-2
foe
Linear Regression
Y=b,+bX,+6,
Standard Error of the Estimate
Compute the (1 ~ a) percent prediction
interval for the prediction:
Ytts,,
it, Wah
n (n-1)s;
Coefficient of Determination
p? = Explained variation
Total variation
= 1 _ Unexplained variation
Total variation
Hypothesis Testing.
bid
Sy
Confidence Interval for regression
coefficient
bits:
where,
t eS e
= Rs ERu Re
Analysis of variance (ANOV, E(R,)=R, Crfecp a=
Fr = Mean regression sum of squares Capital Asset Pricing Mod.
Mean squared error
E(R)= Ry + BLE(R,)~ Ry]
Market Model
R=a,+hRy, +6,
E(R) =a, + BE(R,)
Var(R,) = Bo?
Uniform distribution’s pdf and edf Cov(RR,) = BB,03,
1
=a
0 otherwise
fora
