info@finstructor.in| Ph : +91- 9920222792| www.finstructor.

in
Finstructor. All Rights Reserved.
CFA
LEVEL1
QUANTITATIVEMETHODS
Finstructor.All Rights Reserved.
Quantitative Methods
Question 1
What is the standard deviation of a portfolio if you invest 30% in stock one (standard deviation of
4.6%) and 70% in stock two (standard deviation of 7.8%) if the correlation coefficient for the two
stocks is 0.45?
A) 0.38%.
B) 6.83%.
C) 6.20%.
Question 2
Avery Scott, financial planner, recently obtained his CFA Charter and is considering multiple job
offers. Scott devised the following four criteria to help him decide which offers to pursue most
aggressively.
Criterion % Expected to Meet the Criteria
1. Within 75 miles of San Francisco 0.85
2. Employee size less than 50 0.50
3. Compensation package exceeding $100,000 0.30
4. Three weeks of vacation 0.15
If Scott has 20 job offers and the probabilities of meeting each criterion are independent, how many
are expected to meet all of his criteria? (Round to nearest whole number).
A) 3.
B) 1.
C) 0.
Question 3
An analyst has a list of 20 bonds of which 14 are callable, and five have warrants attached to them.
Two of the callable bonds have warrants attached to them. If a single bond is chosen at random, what
is the probability of choosing a callable bond or a bond with a warrant?
A) 0.70.
B) 0.55.
C) 0.85.
Question 4
Following is the population of temperatures (in degrees Celsius) observed during a ten-day period of
January taken in San Francisco at the Ferry Building.
Finstructor.All Rights Reserved.
Day/oC 1 2 3 4 5 6 7 8 9 10
High 9 11 13 14 13 13 11 14 15 17
Low 3 6 6 7 10 10 9 6 8 4
The population of high temperatures is normally distributed with a mode of 13oC and a
coefficient of variation (CV) of 0.165.
The population of low temperatures is positively skewed with a mean of 6.9oC and a CV of
0.328.
A sample of high temperatures taken on odd days (5 data points) has a mean of 12.2oC and
a variance of 5.20.
A sample of low temperatures taken on odd days (5 data points) has a mean of 7.2oC.
Which of the following statements about the temperatures in San Francisco is least accurate?
A)
For the low temperatures, the population standard deviation is less than the sample
standard deviation.
B) For the low temperatures, the mode is less than 6.9oC.
C) For the high temperatures, the population variance is greater than the sample variance.
Question 5
Assume two stocks are perfectly negatively correlated. Stock A has a standard deviation of 10.2%
and stock B has a standard deviation of 13.9%. What is the standard deviation of the portfolio if 75%
is invested in A and 25% in B?
A) 0.00%.
B) 4.18%.
C) 0.17%.
Question 6
Optimal Insurance is offering a deferred annuity that promises to pay 10% per annum with equal
annual payments beginning at the end of 10 years and continuing for a total of 10 annual payments.
For an initial investment of $100,000, what will be the amount of the annual payments?
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
$100,000 ? ? ? ? ? ? ? ? ? ?
A) $25,937.
B) $38,375.
C) $42,212.
Question 7
An investor invested $10,000 into an account five years ago. Today, the account value is $18,682.
What is the investor's annual rate of return on a continuously compounded basis?
A) 11.33%.
B) 12.50%.
C) 13.31%.
Finstructor.All Rights Reserved.
Question 8
Marc Schmitz borrows $20,000 to be paid back in four equal annual payments at an interest rate of
8%. The interest amount in the second years payment would be:
A) $1244.90.
B) $6038.40.
C) $1116.90.
Question 9
A local loan shark offers 4 for 5 on payday. What it involves is that you borrow $4 from him and repay
$5 on the next payday (one week later). What would the stated annual interest rate be on this loan,
with weekly compounding? Assuming 52 weeks in one year, what is the effective annual interest rate
on this loan? Select the respective answer choices closest to your numbers.
A) 25%; 1,300%.
B) 25%; 300%.
C) 1,300%; 10,947,544%.
Question 10
The probability of each of three independent events is shown in the table below. What is the
probability of A and C occurring, but not B?
Event Probability of Occurrence
A 25%
B 15%
C 42%
A) 10.5%.
B) 8.9%.
C) 3.8%.
Question 11
In order to calculate the net present value (NPV) of a project, an analyst would least likely need to
know the:
A) internal rate of return (IRR) of the project.
B) timing of the expected cash flows from the project.
C) opportunity cost of capital for the project.
Finstructor.All Rights Reserved.
Question 12
The respective arithmetic mean and geometric mean returns of the following series of stock market
returns are:
Year 1 14%
Year 2 6%
Year 3 5%
Year 4 20%
A)
8.75%;
8.34%.
B)
8.75%;
8.62%.
C)
8.90%;
8.62%.
Question 13
An investor buys a share of stock for $200.00 at time t = 0. At time t = 1, the investor buys an
additional share for $225.00. At time t = 2 the investor sells both shares for $235.00. During both
years, the stock paid a per share dividend of $5.00. What are the approximate time-weighted and
money-weighted returns respectively?
A) 10.8%; 9.4%.
B) 7.7%; 7.7%.
C) 9.0%; 15.0%.
Question 14
Use the following data to calculate the standard deviation of the return:
50% chance of a 12% return
30% chance of a 10% return
20% chance of a 15% return
A) 3.0%.
B) 2.5%.
C) 1.7%.
Question 15
Tully Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio
returns for two portfolios for their client under each scenario. Tullys economist has estimated the
Finstructor.All Rights Reserved.
probability of each scenario, as shown in the table below. Given this information, what is the standard
deviation of expected returns on Portfolio B?
Scenario Probability Return on Portfolio A Return on Portfolio B
A 15% 18% 19%
B 20% 17% 18%
C 25% 11% 10%
D 40% 7% 9%
A) 9.51%.
B) 12.55%.
C) 4.34%.
Question 16
The returns for individual assets in a portfolio are shown below:
Assets Return (%)
A 1.3
B 1.4
C 2.2
D 3.4
E 1.7
What is the population standard deviation of the returns?
A) 0.56%.
B) 0.77%.
C) 1.71%.
Question 17
The correlation coefficient for a series of returns on two investments is equal to 0.80. Their covariance
of returns is 0.06974 . Which of the following are possible variances for the returns on the two
investments?
A) 0.04 and 0.19.
B) 0.02 and 0.44.
C) 0.08 and 0.37.
Question 18
Claude Bellow, CFA, is an analyst with a real estate focused investment firm. He asks his assistant to
gather annual return information on a large office building and on a REIT (real estate investment trust)
with diverse holdings. The following tables summarize the information.
Table 1: Annual returns (in %)
Finstructor.All Rights Reserved.
Asset Year 1 Year 2 Year 3 Year 4 Year 5
REIT 25.0 20.0 5.0 -5.0 13.0
Office Building 15.0 5.0 -5.0 -2.0 13.0
Table 2: Mean and Dispersion Information
Asset Mean Return* Variance
REIT 11.6% 114.24
Office Building 5.2% 62.56
* Calculated using the arithmetic mean.
Part 1)
Determine which of the following statements about the coefficient of variation of the two assets is
least accurate.
A)
There is more dispersion relative to the mean in the distribution of the REIT returns when
compared to the distribution of the returns for the office building.
B) The coefficient of variation of the office building returns is approximately 1.52.
C)
The mean of the squared deviations from the arithmetic mean of the office building is less
than that of the REIT.
Part 2)
A partner in the firm asks Bellow to calculate the Sharpe ratio for the REIT. If the risk-free rate is
5.0%, the Sharpe ratio is closest to:
A) 1.62.
B) 0.62.
C) 0.06.
Question 19
A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is the
money market yield?
A) 5.41%.
B) 2.04%.
C) 5.25%.
Question 20
A company says that whether it increases its dividends depends on whether its earnings increase.
From this we know:
A) P(both dividend increase and earnings increase) = P(dividend increase).
B) P(earnings increase | dividend increase) is not equal to P(earnings increase).
C) P(dividend increase | earnings increase) is not equal to P(earnings increase).
Finstructor.All Rights Reserved.
Question 21
An investor is considering purchasing ACQ. There is a 30% probability that ACQ will be acquired in
the next two months. If ACQ is acquired, there is a 40% probability of earning a 30% return on the
investment and a 60% probability of earning 25%. If ACQ is not acquired, the expected return is 12%.
What is the expected return on this investment?
A) 16.5%.
B) 12.3%.
C) 18.3%.
Question 22
What is the effective annual yield for a Treasury bill priced at $98,853 with a face value of $100,000
and 90 days remaining until maturity?
A) 1.16%.
B) 4.79%.
C) 4.64%.
Question 23
Use the results from the following survey of 500 firms to answer the question.
Number of Employees Frequency
300 up to 400 40
400 up to 500 62
500 up to 600 78
600 up to 700 101
700 up to 800 131
800 up to 900 88
The cumulative relative frequency of the second interval (400 to 500) is:
A) 12.4%.
B) 10.2%.
C) 20.4%.
Question 24
An investor who requires an annual return of 12% has the choice of receiving one of the following:
A. 10 annual payments of $1,225.00 to begin at the end of one year.
B. 10 annual payments of $1,097.96 beginning immediately.
Finstructor.All Rights Reserved.
Which option has the highest present value (PV) and approximately how much greater is it than the
other option?
A) Option B's PV is $27 greater than option A's.
B) Option A's PV is $42 greater than option B's.
C) Option B's PV is $114 greater than option A's.
Question 25
Given the following annual returns, what is the mean absolute deviation?
2000 2001 2002 2003 2004
15% 2% 5% -7% 0%
A) 3.0%.
B) 5.6%.
C) 22.0%.
Question 26
Which of the following statements regarding the money-weighted and time-weighted rates of return is
least accurate?
A)
The time-weighted rate of return reflects the compound rate of growth of one unit of
currency over a stated measurement period.
B)
The money-weighted rate of return removes the effects of the timing of additions and
withdrawals to a portfolio.
C) The time-weighted rate of return is the standard in the investment management industry.
Question 27
Claude Bellow, CFA, is an analyst with a real-estate focused investment firm. Today, one of the
partners e-mails Bellow the following table and requests that he run some numbers. The table below
gives five years of annual returns for Marley REIT (real estate investment trust) and a large urban
apartment building. Marley REIT invests in commercial properties. (Note: For this question, calculate
the mean returns using the arithmetic mean.)
Table 1: Annual returns (in %)
Asset Year 1 Year 2 Year 3 Year 4 Year 5
Marley REIT 15.0 8.0 13.0 9.0 13.0
Apartment Bldg 10.0 -1.0 8.0 8.0 9.0
One of the office assistants begins to run some numbers, but is then called away to an important
meeting. So far, the assistant calculated the variance of the apartment building returns at 15.76%. (He
assumed that the returns given represent the entire population of returns.) Now, Bellow must finish
the work.
Bellow should conclude that the standard deviation of the:
Finstructor.All Rights Reserved.
A) apartment building, if the given returns represent a sample of returns, is 19.70%.
B) REIT, assuming the given returns represent the entire population, is 2.97%.
C) apartment building, if the given returns represent a sample of returns, is 4.44%.
Question 28
A Treasury bill, with 45 days until maturity, has an effective annual yield of 12.50%. The bill's holding
period yield is closest to:
A) 1.57%.
B) 1.46%.
C) 1.54%.
Question 29
The historical return for each of a portfolios four positions is shown below. Using the population
standard deviation, what is the coefficient of variation (CV) for these returns?
Position Return
A 17.0%
B 12.2%
C 3.9%
D 8.4%
A) 3.12.
B) 1.89.
C) 1.56.
Question 30
The Night Raiders, an expansion team in the National Indoor Football League, is having a challenging
first season with a current win loss record of 0 and 4. However, the team recently signed four new
defensive players and one of the team sponsors (who also happens to hold a CFA charter) calculates
the probability of the team winning a game at 0.40. Assuming that whether the team wins a game is
independent of whether it wins any other game, the probability that the team will win 6 out of the next
10 games is closest to:
A) 0.417.
B) 0.350.
C) 0.112.
Question 31
Over a period of one year, an investors portfolio has declined in value from 127,350 to 108,427. What
is the continuously compounded rate of return?
Finstructor.All Rights Reserved.
A) -13.84%.
B) -16.09%.
C) -14.86%.
Question 32
For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one bond
defaults is independent of whether another bond defaults. For a portfolio of five of these junk bonds,
what is the probability that zero or one bond of the five defaults in the year ahead?
A) 0.0819.
B) 0.4096.
C) 0.7373.
Question 33
Simone Mak is a television network advertising executive. One of her responsibilities is selling
commercial spots for a successful weekly sitcom. If the average share of viewers for this season
exceeds 8.5%, she can raise the advertising rates by 50% for the next season. The population of
viewer shares is normally distributed. A sample of the past 18 episodes results in a mean share of
9.6% with a standard deviation of 10.0%. If Mak is willing to make a Type 1 error with a 5%
probability, which of the following statements is most accurate?
A)
With an unknown population variance and a small sample size, Mak cannot test a
hypothesis based on her sample data.
B) Mak cannot charge a higher rate next season for advertising spots based on this sample.
C)
The null hypothesis Mak needs to test is that the mean share of viewers is greater than
8.5%.
Question 34
Which of the following is least likely a step in stratified random sampling?
A) The size of each sub-sample is selected to be the same across strata.
B) The population is divided into strata based on some classification scheme.
C) The sub-samples are pooled to create the complete sample.
Question 35
Maria Huffman is the Vice President of Human Resources for a large regional car rental company.
Last year, she hired Graham Brickley as Manager of Employee Retention. Part of the compensation
package was the chance to earn one of the following two bonuses: if Brickley can reduce turnover to
less than 30%, he will receive a 25% bonus. If he can reduce turnover to less than 25%, he will
receive a 50% bonus (using a significance level of 10%). The population of turnover rates is normally
distributed. The population standard deviation of turnover rates is 1.5%. A recent sample of 100
branch offices resulted in an average turnover rate of 24.2%. Which of the following statements is
most accurate?
Finstructor.All Rights Reserved.
A)
For the 50% bonus level, the critical value is -1.65 and Huffman should give Brickley a
50% bonus.
B) Brickley should not receive either bonus.
C)
For the 50% bonus level, the test statistic is -5.33 and Huffman should give Brickley a 50%
bonus.
Question 36
George Appleton believes that the average return on equity in the amusement industry, , is greater
than 10%. What is the null (H0) and alternative (Ha) hypothesis for his study?
A) H0: > 0.10 versus Ha: 0.10.
B) H0: > 0.10 versus Ha: < 0.10.
C) H0: 0.10 versus Ha: > 0.10.
Question 37
Which of the following statements about test statistics is least accurate?
A)
In a test of the population mean, if the population variance is unknown and the sample is
small, we should use a z-distributed test statistic.
B)
In the case of a test of the difference in means of two independent samples, we use a t-
distributed test statistic.
C)
In a test of the population mean, if the population variance is unknown, we should use a t-
distributed test statistic.
Question 38
A pitching machine is calibrated to deliver a fastball at a speed of 98 miles per hour. Every day, a
technician samples the speed of twenty-five fastballs in order to determine if the machine needs
adjustment. Today, the sample showed a mean speed of 99 miles per hour with a standard deviation
of 1.75 miles per hour. Assume the population is normally distributed. At a 95% confidence level, what
is the t-value in relation to the critical value?
A) The t-value exceeds the critical value by 0.8 standard deviations.
B) The critical value exceeds the t-value by 1.3 standard deviations.
C) The t-value exceeds the critical value by 1.5 standard deviations.
Question 39
Which of the following portfolios provides the optimal safety first return if the minimum acceptable
return is 9%?
Portfolio Expected Return (%) Standard Deviation (%)
1 13 5
2 11 3
Finstructor.All Rights Reserved.
3 9 2
A) 1.
B) 2.
C) 3.
Question 40
A nursery sells trees of different types and heights. Suppose that 75 trees chosen at random are sold
for planting at City Hall. These 75 trees average 60 inches in height with a standard deviation of 16
inches.
Using this information, construct a 95% confidence interval for the mean height of all trees in the
nursery.
A) 60 + 1.96(16).
B) 0.8 + 1.96(16).
C) 60 + 1.96(1.85).
Question 41
If a two-tailed hypothesis test has a 5% probability of rejecting the null hypothesis when the null is
true, it is most likely that the:
A) probability of a Type I error is 2.5%.
B) significance level of the test is 5%.
C) power of the test is 95%.
Question 42
Closing prices for a commodity were 21.4 on Monday, 22.2 on Tuesday, 21.8 on Wednesday, 22.4 on
Thursday, and 23.2 on Friday. The five-day standard deviation is 0.7 and the 30-day standard
deviation is 1.0. On Friday, five-day Bollinger bands using two standard deviations are closest to:
A) 23.6 and 20.8.
B) 24.6 and 21.8.
C) 24.2 and 20.2.
Question 43
Which of the following could be the set of all possible outcomes for a random variable that follows a
binomial distribution?
A) (-1, 0, 1).
B) (0, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11).
C) (1, 2).
Finstructor.All Rights Reserved.
Question 44
A survey is taken to determine whether the average starting salaries of CFA charterholders is equal to
or greater than $58,500 per year. What is the test statistic given a sample of 175 newly acquired CFA
charterholders with a mean starting salary of $67,000 and a standard deviation of $5,200?
A) -1.63.
B) 21.62.
C) 1.63.
Question 45
Which of the following could least likely be a probability function?
A) X:(1,2,3,4) p(x) = 0.2.
B) X:(1,2,3,4) p(x) = (x x) / 30.
C) X:(1,2,3,4) p(x) = x / 10.
Question 46
Which of the following statements about probability distributions is least accurate?
A)
A discrete random variable is a variable that can assume only certain clearly separated
values resulting from a count of some set of items.
B) A binomial probability distribution is an example of a continuous probability distribution.
C) The skewness of a normal distribution is zero.
Question 47
An analyst wants to generate a simple random sample of 500 stocks from all 10,000 stocks traded on
the New York Stock Exchange, the American Stock Exchange, and NASDAQ. Which of the following
methods is least likely to generate a random sample?
A)
Assigning each stock a unique number and generating a number using a random number
generator. Then selecting the stock with that number for the sample and repeating until
there are 500 stocks in the sample.
B) Using the 500 stocks in the S&P 500.
C)
Listing all the stocks traded on all three exchanges in alphabetical order and selecting
every 20th stock.
Question 48
In order to test if the mean IQ of employees in an organization is greater than 100, a sample of 30
employees is taken and the sample value of the computed test statistic, tn-1 = 1.2. If you choose a
5% significance level you should:
Finstructor.All Rights Reserved.
A)
fail to reject the null hypothesis and conclude that the population mean is not greater than
100.
B) reject the null hypothesis and conclude that the population mean is greater than 100.
C) fail to reject the null hypothesis and conclude that the population mean is greater than 100.
Question 49
Which of the following statements about sample statistics is least accurate?
A)
The z-statistic is used to test normally distributed data with a known variance, whether
testing a large or a small sample.
B)
The z-statistic is used for nonnormal distributions with known variance, but only for large
samples.
C)
There is no sample statistic for non-normal distributions with unknown variance for either
small or large samples.
Question 50
A Type II error:
A) fails to reject a true null hypothesis.
B) rejects a true null hypothesis.
C) fails to reject a false null hypothesis.
Question 51
In addition to the usual parameters that describe a normal distribution, to completely describe 10
random variables, a multivariate normal distribution requires knowing the:
A) 45 correlations.
B) overall correlation.
C) 10 correlations.
Question 52
In order to test if Stock A is more volatile than Stock B, prices of both stocks are observed to construct
the sample variance of the two stocks. The appropriate test statistics to carry out the test is the:
A) Chi-square test.
B) t test.
C) F test.
Finstructor.All Rights Reserved.
Question 53
Suppose the mean debt/equity ratio of the population of all banks in the United States is 20 and the
population variance is 25. A banking industry analyst uses a computer program to select a random
sample of 50 banks from this population and compute the sample mean. The program repeats this
exercise 1000 times and computes the sample mean each time. According to the central limit
theorem, the sampling distribution of the 1000 sample means will be approximately normal if the
population of bank debt/equity ratios has:
A) a normal distribution, because the sample is random.
B) any probability distribution.
C) a Student's t-distribution, because the sample size is greater than 30.
Question 54
Given a mean of 10% and a standard deviation of 14%, what is a 95% confidence interval for the
return next year?
A) -17.44% to 37.44%.
B) -4.00% to 24.00%.
C) -17.00% to 38.00%.
Question 55
The owner of a bowling alley determined that the average weight for a bowling ball is 12 pounds with
a standard deviation of 1.5 pounds. A ball denoted heavy should be one of the top 2% based on
weight. Assuming the weights of bowling balls are normally distributed, at what weight (in pounds)
should the heavy designation be used?
A) 15.08 pounds.
B) 14.22 pounds.
C) 14.00 pounds.
Question 56
Monthly sales of hot water heaters are approximately normally distributed with a mean of 21 and a
standard deviation of 5. What is the probabilility of selling 12 hot water heaters or less next month?
A) 1.80%.
B) 96.41%.
C) 3.59%.
Finstructor.All Rights Reserved.
Question 57
In order to test whether the mean IQ of employees in an organization is greater than 100, a sample of
30 employees is taken and the sample value of the computed test statistic, tn-1 = 3.4. The null and
alternative hypotheses are:
A) H0: = 100; Ha: 100.
B) H0: X 100; Ha: X > 100.
C) H0: 100; Ha: > 100.
Question 58
Given Y is lognormally distributed, then ln Y is:
A) a lognormal distribution.
B) normally distributed.
C) the antilog of Y.
Question 59
If the threshold return is higher than the risk-free rate, what will be the relationship between Roys
safety-first ratio (SF) and Sharpes ratio?
A) The SF ratio may be higher or lower depending on the standard deviation.
B) The SF ratio will be lower.
C) The SF ratio will be higher.
Finstructor.All RightsReserved.
CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or
servicesofferedbyFinstructor. CFAInstitute, CFAandCharteredFinancial Analystaretrademarks
ownedby the CFA Institute.
GARPdoes not endorse, promote, reviewor warrant the accuracyof the products or servicesoffered
by Finstructor of FRM related information, nor does it endorse any pass rates claimed by the
provider. Further, GARPis not responsiblefor anyfeesor costspaidbytheuser toFinstructor nor is
GARP responsiblefor anyfeesor costsof anypersonor entityprovidinganyservicesto Ace3Levels
Financial FRM, GARPandGlobal Associationof RiskProfessionalsaretrademarksownedbythe
Global Associationof Risk Professionals, Inc.
CAIAA does not endorse, promote, review or warrant the accuracy of the products or services
offered by Finstructor nor does it endorse any pass rates claimed by the provider. CAIAA is not
responsiblefor anyfees or costspaidby theuser toFinstructor nor isCAIAAresponsiblefor anyfees
or costs of any person or entity providing any services Finstructor. CAIA

, CAIA Association

,
Chartered Alternative Investment Analyst , and Chartered Alternative Investment Analyst
Association

, are service marks and trademarks owned by CHARTEREDALTERNATIVE INVESTMENT

ANALYST ASSOCIATION, INC., of Amherst, Massachusetts, and are used by permission.