FRM Part – I | Test ID – 0007 | Questions - 120

1 -Given: an 11% annual rate compounded quarterly for 2 years; compute the future value of $8,000
today.

A) $8,962.
B) $9,857.
C) $9,939.

2 -Which of the following is the most accurate statement about stated and effective annual interest
rates?

A) The stated rate adjusts for the frequency of compounding.

B) The stated annual interest rate is used to find the effective annual rate.
So long as interest is compounded more than once a year, the stated annual rate will
C)
always be more than the effective rate.

3 - The covariance of returns on two investments over a 10-year period is 0.009. If the variance of
returns for investment A is 0.020 and the variance of returns for investment B is 0.033, what is the
correlation coefficient for the returns?

A) 0.444.
B) 0.687.
C) 0.350.

4 -Suppose you are going to deposit $1,000 at the start of this year, $1,500 at the start of next year,
and $2,000 at the start of the following year in an savings account. How much money will you have at
the end of three years if the rate of interest is 10% each year?

A) $5,346.00.
B) $4,000.00.
C) $5,750.00.

5 -A local bank offers an account that pays 8%, compounded quarterly, for any deposits of $10,000 or
more that are left in the account for a period of 5 years. The effective annual rate of interest on this
account is:

A) 4.65%.
B) 8.24%.
C) 9.01%.

6 - Which of the following statements about kurtosis is least accurate? Kurtosis:

 measures the peakedness of a distribution reflecting a greater or lesser concentration of
A)
returns around the mean.
B) describes the degree to which a distribution is not symmetric about its mean.
C) is used to reflect the probability of extreme outcomes for a return distribution.

7 - Sarah Parker is buying a new $25,000 car. Her trade-in is worth $5,000 so she needs to borrow
$20,000. The loan will be paid in 48 monthly installments and the annual interest rate on the loan is
7.5%. If the first payment is due at the end of the first month, what is Sarah’s monthly car
payment?

A) $483.58.
B) $416.67.
C) $480.57.

8 - Portfolio A earned an annual return of 15% with a standard deviation of 28%. If the mean return on
Treasury bills (T-bills) is 4%, the Sharpe ratio for the portfolio is:

A) 0.54.
B) 1.87.
C) 0.39.

9 - Which of the following statements regarding making investment decisions using net present value
(NPV) and internal rate of return (IRR) is least accurate?

A) Projects with a positive NPVs increase shareholder wealth.

If two projects are mutually exclusive, one should always choose the project with the
B)
highest IRR.
If a firm undertakes a zero-NPV project, the firm will get larger, but shareholder wealth will
C)
not change.

10 - Joe Mayer, CFA, projects that XYZ Company's return on equity varies with the state of the
economy in the following way:

State of Economy Probability of Occurrence Company Returns

Good .20 20%
Normal .50 15%
Poor .30 10%

The standard deviation of XYZ's expected return on equity is closest to:

A) 1.5%.
B) 12.3%.
C) 3.5%.

11 - Consider the following graph of a distribution for the prices of various bottles of champagne.
Which of the following statements regarding the distribution is least accurate?

A) Point A represents the mode.

B) The distribution is negatively skewed.
C) The mean value will be less than the mode.

12 -An investor deposits $10,000 in a bank account paying 5% interest compounded annually.
Rounded to the nearest dollar, in 5 years the investor will have:

A) $12,500.
B) $12,763.
C) $10,210.

13 -The following table summarizes the results of a poll taken of CEO's and analysts concerning the
economic impact of a pending piece of legislation:

Think it will have a Think it will have a

Group Total
positive impact negative impact
CEO's 40 30 70
Analysts 70 60 130
110 90 200

What is the probability that a randomly selected individual from this group will be either an analyst or
someone who thinks this legislation will have a positive impact on the economy?

A) 0.75.
B) 0.85.
C) 0.80.

14 -Use the results from the following survey of 500 firms to answer the .

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 lower boundary of the fifth interval (class) is:

A) 800.
B) 700.
C) 701.

15 - What is the main difference between descriptive statistics and inferential statistics? Descriptive
statistics are:

used to summarize a large data set while inferential statistics involves procedures used to
A)
make forecasts or judgments about a large data set by examining a smaller sample.
used to summarize data while inferential statistics are used to obtain precise information
B)
about a large data set.
used to make forecasts about the likelihood of upcoming events while inferential statistics
C)
are used to summarize any data set.

16 - A firm wants to select a team of five from a group of ten employees. How many ways can the firm
compose the team of five?

A) 120.
B) 25.
C) 252.

17 - Calabash Crab House is considering an investment in mutually exclusive kitchen-upgrade

projects with the following cash flows:

Project A Project B
Initial Year -$10,000 -$9,000
Year 1 2,000 200
Year 2 5,000 -2,000
Year 3 8,000 11,000
Year 4 8,000 15,000

Assuming Calabash has a 12.5% cost of capital, which of the following investment decisions is most
appropriate?

A) Accept Project A because its internal rate of return is higher than that of Project B.
B) Accept both projects because they both have positive net present values.
C) Accept Project B because its net present value is higher than that of Project A.

18 - There is a 90% chance that the economy will be good next year and a 10% chance that it will be
bad. If the economy is good, there is a 60% chance that XYZ Incorporated will have EPS of $4.00 and
a 40% chance that their earnings will be $3.00. If the economy is bad, there is an 80% chance that
XYZ Incorporated will have EPS of $2.00 and a 20% chance that their earnings will be $1.00. What is
the firm’s expected EPS?
 A) $5.40.
B) $2.50.
C) $3.42.

19 - A distribution that has positive excess kurtosis is:

A) more peaked than a normal distribution.

B) more skewed than a normal distribution.
C) less peaked than a normal distribution.

20 -

Annual Returns on ABC Mutual Fund

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
11.0% 12.5% 8.0% 9.0% 13.0% 7.0% 15.0% 2.0% -16.5% 11.0%

Assuming a mean of 7.2%, what is the sample standard deviation of the returns for ABC Mutual Fund
for the period 1991-2000?

A) 7.8%.
B) 9.1%.
C) 9.8%.

21 - Let A and B be two mutually exclusive events with P(A) = 0.40 and P(B) = 0.20. Therefore:

A) P(B|A) = 0.20.
B) P(A and B) = 0.08.
C) P(A and B) = 0.

22 - With respect to the units each is measured in, which of the following is the most easily directly
applicable measure of dispersion? The:

A) covariance.
B) standard deviation.
C) variance.

23 - If the holding period yield on a Treasury bill (T-bill) with 197 days until maturity is 1.07%, what is
the effective annual yield?

A) 1.99%.
B) 0.58%.
C) 1.07%.
24 -The estimated annual after-tax cash flows of a proposed investment are shown below:

Year 1: $10,000
Year 2: $15,000
Year 3: $18,000

After-tax cash flow from sale of investment at the end of year 3 is $120,000

The initial cost of the investment is $100,000, and the required rate of return is 12%. The net present
value (NPV) of the project is closest to:

A) $63,000.
B) -$66,301.
C) $19,113.

25 - Given P(X = 20, Y = 0) = 0.4, and P(X = 30, Y = 50) = 0.6, then COV(XY) is:

A) 125.00.
B) 25.00.
C) 120.00.

26 - The mean monthly return on a sample of small stocks is 4.56% with a standard deviation of
3.56%. What is the coefficient of variation?

A) 128%.
B) 84%.
C) 78%.

27 - If the money market yield is 3.792% on a T-bill with 79 days to maturity, what is the holding
period yield?

A) 0.83%.
B) 0.77%.
C) 0.89%.

28 - According to Chebyshev’s Inequality, for any distribution, what is the minimum percentage of
observations that lie within three standard deviations of the mean?

A) 89%.
B) 94%.
C) 75%.

29 -Which one of the following alternatives best describes the primary use of descriptive statistics?
Descriptive statistics are used to:

obtain data about the characteristics of any data set that can be used to assess the
A)
likelihood of the occurrence of future events.
 B) summarize important characteristics of large data sets.
arrive at estimates regarding a large set of data regarding the statistical characteristics of
C)
a smaller sample.

30 - An investor has a $12,000 portfolio consisting of $7,000 in stock A with an expected return of
20% and $5,000 in stock B with an expected return of 10%. What is the investor’s expected
return on the portfolio?

A) 12.2%.
B) 15.0%.
C) 15.8%.

31 -A recent ad for a Roth IRA includes the statement that if a person invests $500 at the beginning
of each month for 35 years, they could have $1,000,000 for retirement. Assuming monthly
compounding, what annual interest rate is implied in this statement?

A) 7.625%.
B) 7.411%.
C) 6.988%.

32 -If the historical mean return on an investment is 2.0% and the standard deviation is 8.8%, what is
the coefficient of variation (CV)?

A) 4.40.
B) 1.76.
C) 6.80.

33 - Find the mean, median, and mode, respectively, of the following data:

3, 3, 5, 8, 9, 13, 17

A) 8; 8.28; 3.
B) 3; 8.28; 8.
C) 8.28; 8; 3.

34 -The probability of a new Wal-Mart being built in town is 64%. If Wal-Mart comes to town, the
probability of a new Wendy’s restaurant being built is 90%. What is the probability of a new Wal-
Mart and a new Wendy’s restaurant being built?

A) 0.675.
B) 0.306.
C) 0.576.
 35 -A Treasury bill, with 80 days until maturity, has an effective annual yield of 8%. Its holding period
yield is closest to:

A) 1.70%.
B) 1.72%.
C) 1.75%.

36 - The following table summarizes the availability of trucks with air bags and bucket seats at a
dealership.

Bucket seats No Bucket Seats Total

 Air Bags 75 50 125
 No Air Bags 35 60 95
 Total 110 110 220

What is the probability of randomly selecting a truck with air bags and bucket seats?

A) 0.34.
B) 0.28.
C) 0.16.

37 -If $1,000 is invested at the beginning of the year at an annual rate of 48%, compounded quarterly,
what would that investment be worth at the end of the year?

A) $1,048.
B) $4,798.
C) $1,574.

38 -Thomas Baynes has applied to both Harvard and Yale. Baynes has determined that the
probability of getting into Harvard is 25% and the probability of getting into Yale (his father’s alma
mater) is 42%. Baynes has also determined that the probability of being accepted at both schools is
2.8%. What is the probability of Baynes being accepted at either Harvard or Yale?

A) 7.7%.
B) 10.5%.
C) 64.2%.

39 -The returns on assets C and D are strongly correlated with a correlation coefficient of 0.80. The
variance of returns on C is 0.0009, and the variance of returns on D is 0.0036. What is the covariance
of returns on C and D?

A) 0.40110.
B) 0.00144.
C) 0.03020.
40 - A higher Sharpe ratio indicates:

A) lower volatility of returns.

B) a lower risk per unit of return.
C) a higher excess return per unit of risk.

41 -A Treasury bill with a face value of $1,000,000 and 45 days until maturity is selling for $987,000.
The Treasury bill’s bank discount yield is closest to:

A) 10.54%.
B) 7.90%.
C) 10.40%.

42 - Nortel Industries has a preferred stock outstanding that pays (fixed) annual dividends of $3.75 a
share. If an investor wants to earn a rate of return of 8.5%, how much should he be willing to pay for a
share of Nortel preferred stock?

A) $31.88.
B) $42.10.
C) $44.12.

43 -An investor sold a 30-year bond at a price of $850 after he purchased it at $800 a year ago. He
received $50 of interest at the time of the sale. The annualized holding period return is:

A) 6.25%.
B) 12.5%.
C) 15.0%.

44 -A local bank advertises that it will pay interest at the rate of 4.5%, compounded monthly, on
regular savings accounts. What is the effective rate of interest that the bank is paying on these
accounts?

A) 4.65%.
B) 4.59%.
C) 4.50%.

45 - The financial manager at IBFM, a farm implement distributor, is contemplating the following three
mutually exclusive projects. IBFM’s required rate of return is 9.5%. Based on the information
provided, which should the financial manager select and why?

Project Investment at t = 0 Cash Flow at t = 1 IRR NPV @ 9.5%

A $10,000 $11,300 13.00 $320
B $25,000 $29,000 16.00 $1,484
C $35,000 $40,250 15.00 $1,758
A) Project C with the highest net present value.
B) Project A with the lowest initial investment.
 All of the projects, because they all earn more than
C)
9.5%.

46 - How much should an investor have in a retirement account on his 65th birthday if he wishes to
withdraw $40,000 on that birthday and each of the following 14 birthdays, assuming his retirement
account is expected to earn 14.5%?

A) $234,422.
B) $272,977.
C) $274,422.

47 - A portfolio of options had a return of 22% with a standard deviation of 20%. If the risk-free rate is
7.5%, what is the Sharpe ratio for the portfolio?

A) 0.725.
B) 0.568.
C) 0.147.

48 - The joint probability function for returns on an equity index (RI) and returns on a stock (RS)is
given in the following table:

 Returns on Index (RI)

Return on stock (RS) RI = 0.16 RI = 0.02 RI = −0.10
RS = 0.24 0.25 0.00 0.00
RS = 0.03 0.00 0.45 0.00
RS = −0.15 0.00 0.00 0.30

Covariance between stock returns and index returns is closest to:

A) 0.019.
B) 0.014.
C) 0.029.

49 - After repeated experiments, the average of the outcomes should converge to:

A) the expected value.

B) the variance.
C) one.

50 - If 10 equal annual deposits of $1,000 are made into an investment account earning 9% starting
today, how much will you have in 20 years?

A) $35,967.
B) $42,165.
C) $39,204.
51 - Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in
Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to
determine how much of the money must be set aside and held for the trip, he should use the 5% as a:

A) required rate of return.

B) discount rate.
C) opportunity cost.

52 - What is the total present value of $200 to be received one year from now, $300 to be received 3
years from now, and $600 to be received 5 years from now assuming an interest rate of 5%?

A) $919.74.
B) $980.89.
C) $905.87.

53 -Financial managers should always select the project that provides the highest net present value
(NPV) whenever NPV and IRR methods conflict, because maximizing:

A) shareholder wealth is the goal of financial management.

B) the shareholders' rate of return is the goal of financial management.
C) revenues is the goal of financial management.

54 - Which of the following statements regarding skewness is least accurate?

A) A distribution that is not symmetrical has skew not equal to zero.

In a skewed distribution, 95% of all values will lie within plus or minus two standard
B)
deviations of the mean.
A positively skewed distribution is characterized by many small losses and a few extreme
C)
gains.

55 -

Use the results from the following survey of 500 firms to answer the .
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 number of classes in this frequency table is:

A) 600.
B) 5.
C) 6.

56 -
The bank discount of a $1,000,000 T-bill with 135 days until maturity that is currently selling for
$979,000 is:

A) 6.1%.
B) 5.8%.
C) 5.6%.

57 - Given P(X = 2) = 0.3, P(X = 3) = 0.4, P(X = 4) = 0.3. What is the variance of X?

A) 3.0.
B) 0.6.
C) 0.3.

58 - It will cost $20,000 a year for four years when an 8-year old child is ready for college. How much
should be invested today if the child will make the first of four annual withdrawals 10-years from
today? The expected rate of return is 8%.

A) $66,243.
B) $33,138.
C) $30,683.

59 - Fifty mutual funds are ranked according to performance. The five best performing funds are
assigned the number 1, while the five worst performing funds are assigned the number 10. This is an
example of a(n):

A) interval scale.
B) ordinal scale.
C) nominal scale.

60 - A distribution of returns that has a greater percentage of small deviations from the mean and a
greater percentage of large deviations from the mean compared to a normal distribution:

A) is positively skewed.
B) has positive excess kurtosis.
C) has negative excess kurtosis.

61 - Last year, the average salary increase for poultry research assistants was 2.5%. Of the 10,000
poultry research assistants, 2,000 received raises in excess of this amount. The odds that a randomly
selected poultry research assistant received a salary increase in excess of 2.5% are:

A) 1 to 4.
B) 20%.
C) 1 to 5.
62 -Which of the following is an example of a parameter?

A) Sample standard deviation.

B) Population variance.
C) Sample mean.

63 -Which of the following statements concerning kurtosis is least accurate?

A) A leptokurtic distribution has excess kurtosis less than zero.

B) A distribution that is more peaked than a normal distribution is leptokurtic.
C) A leptokurtic distribution has fatter tails than a normal distribution.

64 - An investment with a cost of $5,000 is expected to have cash inflows of $3,000 in year 1, and
$4,000 in year 2. The internal rate of return (IRR) for this investment is closest to:

A) 25%.
B) 15%.
C) 30%.

65 -Find the future value of the following uneven cash flow stream. Assume end of the year
payments. The discount rate is 12%.

Year 1 -2,000
Year 2 -3,000
Year 3 6,000
Year 4 25,000
Year 5 30,000
A $65,144.33
) .
B $58,164.58
) .
C $33,004.15
) .

66 - A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is
the effective annual yield (EAY)?

A) 2.04%.
B) 5.14%.
C) 5.41%.
67 -

The financial manager at Kyser Jones is considering two mutually exclusive projects with the following
projected cash flows:

Projected Cash Flows

Year Project M Project Z
0 -$60,000 -$60,000
1 22,500 0
2 22,500 0
3 22,500 0
4 22,500 111,000

If Kyser Jones’ required rate of return is 11%, which project would be chosen and why?

A) Project M, because it has the higher internal rate of return.

B) Both projects because their net present values are positive.
C) Project Z, because it has the higher net present value.

68 - Given the following table about employees of a company based on whether they are smokers or
nonsmokers and whether or not they suffer from any allergies, what is the probability of being either a
nonsmoker or not suffering from allergies?

Suffer from Don't Suffer from

Total
Allergies Allergies
 Smoker 35 25 60
 Nonsmoker 55 185 240
 Total 90 210 300
A) 0.88.
B) 0.38.
C) 0.50.

69 - In the most recent four years, an investment has produced annual returns of 4%, –1%, 6%, and
3%. The most appropriate estimate of the next year’s return, based on these historical returns, is
the:

A) arithmetic mean.
B) geometric mean.
C) harmonic mean.

70 -A Treasury bill has 40 days to maturity, a par value of $10,000, and is currently selling for $9,900.
Its effective annual yield is closest to:

A) 1.00%.
B) 9.00%.
C) 9.60%.
71 - Which of the following statements about compounding and interest rates is least accurate?

A) Present values and discount rates move in opposite directions.

B) All else equal, the longer the term of a loan, the lower will be the total interest you pay.
On monthly compounded loans, the effective annual rate (EAR) will exceed the annual
C)
percentage rate (APR).

72 -

Use the following probability distribution to calculate the expected return for the portfolio.

State of the Economy Probability Return on Portfolio

Boom 0.30 15%
Bust 0.70 3%
A) 8.1%.
B) 6.6%.
C) 9.0%.

73 - An investor has two stocks, Stock R and Stock S in her portfolio. Given the following information
on the two stocks, the portfolio's standard deviation is closest to:

 σR = 34%
 σS = 16%
 rR,S = 0.67
 W R = 80%
 W S = 20%

A) 29.4%.
B) 7.8%.
C) 8.7%.

74 -If two fair coins are flipped and two fair six-sided dice are rolled, all at the same time, what is the
probability of ending up with two heads (on the coins) and two sixes (on the dice)?

A) 0.0069.
B) 0.8333.
C) 0.4167.

75 - A very large company has twice as many male employees relative to female employees. If a
random sample of four employees is selected, what is the probability that all four employees selected
are female?

A) 0.3333.
B) 0.0123.
C) 0.0625.
76 -If a distribution is skewed:

it will be more or less peaked reflecting a greater or lesser concentration of returns

A)
around the mean.
B) each side of a return distribution is the mirror image of the other.
the magnitude of positive deviations from the mean is different from the magnitude of
C)
negative deviations from the mean.

77 - In a skewed distribution, what is the minimum proportion of observations between +/- two
standard deviations from the mean?

A) 95%.
B) 75%.
C) 84%.

78 - A distribution with a mean that is less than its median most likely:

A) is positively skewed.
B) is negatively skewed.
C) has negative excess kurtosis.

79 - In a positively skewed distribution, what is the order (from lowest value to highest) for the
distribution’s mode, mean, and median values?

A) Mode, median, mean.

B) Mean, median, mode.
C) Mode, mean, median.

80 - A distribution that is more peaked than normal is:

A) skewed.
B) leptokurtic.
C) platykurtic.

81 - Which probability rule determines the probability that two events will both occur?

A) The multiplication rule.

B) The addition rule.
C) The total probability rule.
 82 - Banca Hakala purchases two front row concert tickets over the Internet for $90 per seat. One
month later, the rock group announces that it is dissolving due to personality conflicts and the concert
that Hakala has tickets for will be the “farewell― concert. Hakala sees a chance to raise some
quick cash, so she puts the tickets up for sale on the same internet site. The auction closes at $250
per ticket. After paying a 10% commission to the site on the amount of the sale and paying $10 in
shipping costs, Hakala’s one-month holding period return is approximately:

A) 44%.
B) 144%.
C) 139%.

83 - Which of the following statements about histograms and frequency polygons is least accurate?

A frequency polygon is constructed by plotting the midpoint of each interval on the

A)
horizontal axis.
A histogram and a frequency polygon both plot the absolute frequency on the vertical
B)
axis.
C) A histogram connects points with a straight line.

84 - The effective annual yield (EAY) for a T-bill maturing in 150 days is 5.04%. What are the holding
period yield (HPY) and money market yield (MMY) respectively?

A) 2.04%; 4.90%.
B) 5.25%; 2.04%.
C) 2.80%; 5.41%.

85 -An investor buys four shares of stock for $50 per share. At the end of year one she sells two
shares for $50 per share. At the end of year two she sells the two remaining shares for $80 each. The
stock paid no dividend at the end of year one and a dividend of $5.00 per share at the end of year
two. What is the difference between the time-weighted rate of return and the money-weighted rate of
return?

A) 20.52%.
B) 14.48%.
C) 9.86%.

86 - Consider the following graph of a distribution for the prices for various bottles of California-
produced wine.
Which of the following statements about this distribution is least accurate?

A) The graph could be of the sample $16, $12, $15, $12, $17, $30 (ignore graph scale).
B) The distribution is positively skewed.
C) Approximately 68% of observations fall within one standard deviation of the mean.

87 -An analyst managed a portfolio for many years and then liquidated it. Computing the internal rate
of return of the inflows and outflows of a portfolio would give the:

A) time-weighted return.
B) money-weighted return.
C) net present value.

88 - An investor purchases a 10-year, $1,000 par value bond that pays annual coupons of $100. If the
market rate of interest is 12%, what is the current market value of the bond?

A) $1,124.
B) $950.
C) $887.

89 -The money-weighted return also is known as the:

A) return on invested capital.

B) internal rate of return (IRR) of a portfolio.
C) measure of the compound rate of growth of $1 over a stated measurement period.

90 - A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is
its holding period yield?

A) 2.04%.
B) 5.25%.
C) 5.14%.
91 - The financial manager at Johnson & Smith estimates that its required rate of return is 11%.
Which of the following independent projects should Johnson & Smith accept?

Project A requires an up-front expenditure of $1,000,000 and generates an NPV of -

A)
$4,600.
Project B requires an up-front expenditure of $800,000 and generates a positive IRR of
B)
10.5%.
Project C requires an up-front expenditure of $600,000 and generates a positive internal
C)
rate of return of 12.0%.

92 -When Annette Famigletti hears that a baseball-loving friend is coming to visit, she purchases two
premium-seating tickets for $45 per ticket for an evening game. As the date of the game approaches,
Famigletti’s friend telephones and says that his trip has been cancelled. Fortunately for
Famigletti, the tickets she holds are in high demand as there is chance that the leading Major League
Baseball hitter will break the home run record during the game. Seeing an opportunity to earn a high
return, Famigletti puts the tickets up for sale on an internet site. The auction closes at $150 per ticket.
After paying a 10% commission to the site (on the amount of the sale) and paying $8 total in shipping
costs, Familgletti’s holding period return is approximately:

A) 191%.
B) 182%.
C) 202%.

93 - Given the following annual returns, what is the range?

2000 2001 2002 2003 2004

15% 2% 5% –7% 0%
A) 3.0%.
15.0%
B)
.
22.0%
C)
.

94 -Given the following sample data, find the sample standard deviation of returns for Stock A and for
Stock B.

< >> Stock A Stock B

Year 1 16% 20%
Year 2 20% 24%
Year 3 12% 10%
Std. Dev. A Std. Dev. B
A) 4.0% 5.9%
B) 4.0% 7.2%
C) 3.3% 5.9%
95 - What is the effective annual rate if the stated rate is 12% compounded quarterly?

A) 12.55%.
B) 57.35%.
C) 12.00%.

96 - Which of the following is an a priori probability?

For a stock, based on prior patterns of up and down days, the probability of the stock
A)
having a down day tomorrow.
B) The probability the Fed will lower interest rates prior to the end of the year.
On a random draw, the probability of choosing a stock of a particular industry from the
C)
S&P 500.

97 -Which of the following statements is least accurate regarding covariance?

A) Covariance can only apply to two variables at a time.

B) Covariance can exceed one.
C) The covariance of a variable with itself is one.

98 - If an investor puts $5,724 per year, starting at the end of the first year, in an account earning 8%
and ends up accumulating $500,000, how many years did it take the investor?

A) 87 years.
B) 27 years.
C) 26 years.

99 -Jamie Morgan needs to accumulate $2,000 in 18 months. If she can earn 6% at the bank,
compounded quarterly, how much must she deposit today?

A) $1,829.08.
B) $1,832.61.
C) $1,840.45.

100 - Wei Zhang has funds on deposit with Iron Range bank. The funds are currently earning 6%
interest. If he withdraws $15,000 to purchase an automobile, the 6% interest rate can be best thought
of as a(n):

A) opportunity cost.
B) financing cost.
C) discount rate.

101 - Use the following probability distribution to calculate the standard deviation for the portfolio.

State of the Economy Probability Return on Portfolio

Boom 0.30 15%
Bust 0.70 3%
A) 5.5%.
B) 6.0%.
C) 6.5%.

102 -The following stream of cash flows will occur at the end of the next five years.

Yr 1 -2,000
Yr 2 -3,000
Yr 3 6,000
Yr 4 25,000
Yr 5 30,000

At a discount rate of 12%, the present value of this cash flow stream is closest to:

A) $36,965.
B) $33,004.
C) $58,165.

103 - The "likelihood" of an event occurring refers to a:

A) joint probability.
B) conditional probability.
C) unconditional probability.

104 - A local bank offers a certificate of deposit (CD) that earns 5.0% compounded quarterly for three
and one half years. If a depositor places $5,000 on deposit, what will be the value of the account at
maturity?

A) $5,931.06.
B) $5,875.00.
C) $5,949.77.

105 - Twenty Level I CFA candidates in a study group took a practice exam and want to determine
the distribution of their scores. When they grade their exams they discover that one of them skipped
an ethics and subsequently filled in the rest of his answers in the wrong places, leaving him with a
much lower score than the rest of the group. If they include this candidate’s score, their
distribution will most likely:

A) have a mode that is less than its median.

B) have a mean that is less than its median.
C) be positively skewed.
 106 - In 10 years, what is the value of $100 invested today at an interest rate of 8% per year,
compounded monthly?

A) $216.
B) $180.
C) $222.

107 - If given the standard deviations of the returns of two assets and the correlation between the two
assets, which of the following would an analyst least likely be able to derive from these?

A) Strength of the linear relationship between the two.

B) Covariance between the returns.
C) Expected returns.

108 -he value in 7 years of $500 invested today at an interest rate of 6% compounded monthly is
closest to:

A) $780.
B) $760.
C) $750.

109 - A bond that pays $100 in interest each year was purchased at the beginning of the year for
$1,050 and sold at the end of the year for $1,100. An investor's holding period return is:

A) 10.5%.
B) 14.3%.
C) 10.0%.

110 -The covariance:

A) must be between -1 and +1.

B) can be positive or negative.
C) must be positive.

111 - Which of the following sets of numbers does NOT meet the requirements for a set of
probabilities?

A) (0.10, 0.20, 0.30, 0.40, 0.50).

B) (0.50, 0.50).
C) (0.10, 0.20, 0.30, 0.40).

112 - Given the following frequency distribution:

Interval Frequency
10 up to 30 5
30 up to 50 10
 50 up to 70 15
70 up to 90 5

Which of the following statements is least accurate?

A) The relative frequency of the second interval is less than 15.

B) The absolute frequency of the third interval is 15.
C) The number of observations is greater than 30.

113 - A stock is currently worth $75. If the stock was purchased one year ago for $60, and the stock
paid a $1.50 dividend over the course of the year, what is the holding period return?

A) 27.5%.
B) 22.0%.
C) 24.0%.

114 - For the investments shown in the table below, what are the respective mean, median, and
mode of the returns?

Investment Return (%)

A 12
B 14
C 9
D 13
E 7
F 8
G 12
12.00%; 12%;
A)
12%.
10.71%; 12%;
B)
12%.
C) 10.71%; 9%; 13%.

115 -If a firm is going to create three teams of four from twelve employees. Which approach is the
most appropriate for determining how the twelve employees can be selected for the three teams?

A) Labeling formula.
B) Permutation formula.
C) Combination formula.

116 -Why is the time-weighted rate of return the preferred method of performance measurement?

A) Time-weighted returns are not influenced by the timing of cash flows.

Time weighted allows for inter-period measurement and therefore is more flexible in
B)
determining exactly how a portfolio performed during a specific interval of time.
C) There is no preference for time-weighted versus money-weighted.
 117 -A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is
the bank discount yield?

A) 5.41%.
B) 4.18%.
C) 5.14%.

118 -An investor is considering two investments. Stock A has a mean annual return of 16% and a
standard deviation of 14%. Stock B has a mean annual return of 20% and a standard deviation of
30%. Calculate the coefficient of variation (CV) of each stock and determine if Stock A has less
dispersion or more dispersion relative to B. Stock A's CV is:

A) 1.14, and thus has more dispersion relative to the mean than Stock B.
B) 1.14, and thus has less dispersion relative to the mean than Stock B.
C) 0.875, and thus has less dispersion relative to the mean than Stock B.

119 -Given the following annual returns, what are the geometric and arithmetic mean returns,
respectively?

2002 2003 2004 2005 2006

15% Â 2% 5% -7% 0%
2.75%;
A)
3.00%.
2.75%;
B)
5.80%.
1.45%;
C)
3.00%.

120.

Annual Returns on ABC Mutual Fund

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
11.0% 12.5% 8.0% 9.0% 13.0% 7.0% 15.0% 2.0% -16.5% 11.0%

What is the respective arithmetic mean return and the geometric mean return for ABC Mutual Fund
for the period 1991-2000?

A) 8.2%; 6.8%.
B) 7.2%; 5.6%.
C) 7.2%; 6.8%.

The day you take complete responsibility for yourself, the day you stop
making any excuses, that’s the day you start to the top. – O.J. Simpson