1. If net interest rate is 8% & inflation is 3%, what is interest rate net of inflation?

a. 8.00%
b. 5.00%
c. 5.15%
d. 4.85%

(1 + nominal interest rate) = (1 + real interest rate) * (1 + inflation)

Here, we already had the answer

2. Annual returns of Apple are 12%, 26%, 36%, 50%, 24%, 44% & 6%; S&P500’ returns are 6%,
𝐂𝐨𝐯𝐚𝐫𝐢𝐚𝐧𝐜𝐞(𝐫𝐞𝐭𝐮𝐫𝐧𝐬𝐢 ,𝐫𝐞𝐭𝐮𝐫𝐧𝐬𝐌 )
13%, 18%, 25%, 12%, 22% & 3%. Beta = 𝐕𝐚𝐫𝐢𝐚𝐧𝐜𝐞(𝐫𝐞𝐭𝐮𝐫𝐧𝐬 )
. What is beta?
𝐌
a. <0
b. Between 0 and 0.39
c. Between 0.40 and 1.39
d. > 1.39

Covariance = 0.01

Variance market = 0.006

Beta = 2

3. 12 athletes in a race. # of different ways the gold, silver & bronze medals:
a. 1,320
b. 220
c. 36

12!
Order is important: permutation = (1245)! = 1,320

12!
If order is not important: combination = (1245)! ∗ 5! = 220

4. To annualize monthly returns, multiply standard deviation of monthly returns by square

root of 12
a. True
b. False

Multiply average of monthly returns by 12

5. Apple stock pays $9 annual dividend in perpetuity. Required rate of return is 11%; share
price?
 a. $122.22
b. $99.00
c. $81.82

9 / 11% = $81.82

6. The probability distribution for a company's sales:

Probability Sales ($ M)
5% 70
70% 40
25% 25

Standard deviation of sales?

a. $9.81 M
b. $12.20 M
c. $32.40 M

E(X) = 5% ∗ 80 + 70% ∗ 40 + 25% ∗ 25 = 37.75

E(X 2 ) = 5% ∗ 802 + 70% ∗ 402 + 25% ∗ 252 = 1,521.25

σ2 = E(X 2 ) − E(X)2 = 96.19

7. Q-You test a hypothesis that the population rho of 2 variables = 0. You collect a sample of
24 observations & calculate a sample rho of 0.37. Can you test this hypothesis using only
these 2 inputs, at 95%?

t-test for correlation coefficient

• H0 : ρ = 0
• HA : ρ ≠ 0

ρ√n − 2 0.37 ∗ √24 − 2

Statistic = = = 1.87
B1 − ρ2 √1 − 0.372

Critical
• = LOI.STUDENT.INVERSE(5%;22)
• = 2.07

Since:
• 1.87 < 2.07
• Fail to reject H0, so correlation coefficient = 0

8. Q-Bob believes that the average ROE > 10%. What is H0 & HA hypothesis?
 a. H0: > 0.10 vs HA: < 0.10
b. H0: > 0.10 vs HA: ≤ 0.10
c. H0: ≤ 0.10 vs HA: > 0.10

H0: ≤ 0.10 vs HA: > 0.10

H0: you hope to reject (in favor of HA) or not

9. Pr(default over next year) = 0.06%. Pr(default over next 3 months):

a. 0.014%
b. 0.015%
c. 0.016%
d. 0.017%

Pr(default over next year) = 0.06%

Pr(no default over next year) = 1 – 0.06% = 99.94%

Pr(no default over next 3 months) = 99.94%^0.25 = 99.9850%

Pr(default over next 3 months) = 1 – 99.9850% = 0.015%

10. “I have a 95% probability that my loss will exceed X%”:

a. VaR
b. Expected shortfall
c. Other

VaR: “I have a 95% probability that my loss will not exceed X%”

11. Other things being equal, t-distribution is bounded by 0

a. True
b. False

Lognormal is

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12. Kurtosis of a normal distribution?

a. 0
 b. Cannot be determined, because it depends on the variance of the particular N-
distribution considered
c. 2
d. 3

13. A dog runs 100 races and wins 40 times; Odds of winning
a. 1: 2.5
b. 2.5: 1
c. 1.5: 1.5
d. 2: 3
e. 60% / 40%

89 (:;<) =>% 2
Odds = 1489 (:;<) = @>% = 5 , or 2 to 3, or 2: 3

14. A graphic depletion of a continuous distribution that shows the left tail to be longer than
the right tall Is best described as having:
a. Lepto-kurtosis
b. Positive skewness
c. Negative skewness

15. Critical values from Student’s t-distribution for a two-tailed test at a 5% significance level:
• df (28): 2.048
• df (29): 2.045
• df (30): 2.042
A researcher wants to test a hypothesis that 2 variables have a population correlation
coefficient = 0. For n = 30, the critical value for this test is plus-or-minus:
a. 2.042
b. 2.045
c. 2.048

Use n − 2

16. Tesla loses money

 a. True
b. False
c. Not enough information given

It has positive earnings, since P/E ratio > 0

17. These is a criterion for assessing companies:

• 50% of companies will be insolvent
• 65% of companies meet the criterion
• 80% of the companies meet the criterion, given it is solvent
Probability a company will remain solvent, given that it meets the criterion?
a. 53%
b. 57%
c. 60%
d. 62%
e. 64%

89(ABBC & EFGHI<J)

Pr(MEET ∣ Solvent) = 89 (EFGHI<J)
= 80%
89(ABBC & EFGHI<J)
Pr(MEET ∣ Solvent) = K>%
= 80%

à Pr(MEET & Solvent) = 80% ∗ 50% = 40%

Bayes':
89L MEET ∣∣ Solvent N ∗ 89 (EFGHI<J) O>%∗ K>%
• Pr(Solvent ∣ MEET) = 89 (ABBC)
= @K%
= 61.5%

18. An asset manager's portfolio had the following annual rates of return:

Year Return
20X7 6%
20X8 -37%
20X9 27%
The manager states that the return for the period is −5.34%. The manager has reported
the:
a. Geometric mean return
b. Arithmetic mean return

#
Geometric mean = √1.06 ∗ 0.63 ∗ 1.27 = −5.34%

6% − 37% + 27%
Arithmetic mean = = −1.33
3
19. Amount you should deposit in an account earning a continuously compounded interest
rate of 8% for a period of 5 years so as to earn $2,238?
a. $1500
b. $1523
c. $1541

X ∗ eK∗O% = $2,238

20. A sample of 100 observations drawn from a normally distributed population has a sample
mean of 12 and a sample standard deviation of 4. The 95% confidence interval for the
population mean:
a. 11.34 to 12.66
b. 11.216 to 12.784
c. 4.16 to 19.84

s
T ± 1.96 ∗
X
√n

4
12 ± 1.96 ∗
√100

4
12 ± 1.96 ∗
√100