Chapter One

Question 1

What is data mining?

Answer 1

Sorting through large amounts of information looking for anything that is relevant.

Question 2

What is more risky - interpolation or extrapolation?

Answer 2

Interpolation is less risky than extrapolation

Question 3

Does strong correlation prove cause and effect?

Answer 3

No it does not

Question 4

When is least squares regression applicable?

Answer 4

Only to linear relationships

Question 5

What is plotted on y-axis?

Answer 5

Dependent variable

Question 6

What is b?

Answer 6

The slope

Question 7

How are regression coefficients calculated?

Answer 7

Using the least squares method

Question 8

In a positively skewed distribution, what holds true?

Answer 8

Mean > median > mode

Question 9

What is mean a measure of?

Answer 9

Location

Question 10

Is the IQR affected by extremes?

Answer 10

No it is unaffected by extremes

Question 11

Is the range a fuction of extremes?

Answer 11

Yes

Question 12

If the plot of two variables X and Y results in a horizontal line, this tells us?

Answer 12

They have zero correlation as the value of the y variables is independent from the value of the x variable, it does not change regardless of the value of x

Question 13

Why will interpolated results from a line of best fit not be accurate?

Answer 13

Since the line of best fit may not be very accurate

Question 14

Why does regression analysis not highlight spurious relationships between two variables?

Answer 14

It does not in itself prove causality

Question 15

With a positively skewed distribution…

Answer 15

The mean is most distorted by extreme values

Question 16

Dividing the variance by the standard deviation for a sample would give

Answer 16

Standard deviation, as the variance is standard deviation squared

Question 17

Describe R-squared

Answer 17

1. R-squared expresses the goodness of fit of a regression model
2. It’s the correlation coefficient squared so is on a scale of 0 to 1

Question 18

Describe correlation coefficient

Answer 18

1. The correlation coefficient is on a scale of -1 to 1
2. The correlation coefficient does show strength; the closer to +/-1 the closer the individual observations are to the line of best fit

Question 19

What does CNX Nifty represent?

Answer 19

The performance of the largest 50 stocks in India

Question 20

What would be appropriate as a benchmark for a broadly based portfolio of UK and US shares?

Answer 20

The respective broad-based equity indices of both markets: S&P 500 and FTSE All Share

Question 21

A disadvantage of the geometric index

Answer 21

It cannot be used as a meaningful benchmark as, through its mathematical construction, it cannot fairly reflect achievable portfolio returns

Question 22

Name 3 value-weighted indices

Answer 22

1. S&P 500
2. FTSE 100
3. FTSE All Share

Question 23

Is Nikkei 225 value-weighted?

Answer 23

No, it is a price-weighted index as it is not weighted by market cap. Therefore, each security contributes an equal share towards the index value

Question 24

What is a price-weighted index also referred to as?

Answer 24

An equally weighted index

Question 25

How is DAX calculated?

Answer 25

It is arithmetically calculated and weighted by market cap

Question 26

How is Nikkei 225 Index calculated?

Answer 26

It is arithmetically calculated however it is equally weighted as each share contributes an equal share

Question 27

Which FTSE index is price-weighted?

Answer 27

The FT ordinary is made up of 30 UK shares representing the breadth of UK industry. Size is not the primary consideration, although companies are also in the FTSE 100.

Question 28

UK indices weighted by market cap

Answer 28

1. FTSE all share 2. FTSE 100 3. FTSE 250

Question 29

The majority of worldwide indices that are used for performance measurement are described as

Answer 29

Value-weighted by market cap, more specifically using the free float, artihmetically calculated

Question 30

Give three equally weighted indices

Answer 30

1. Dow Jones 2. FTSE ordinary 3. Nikkei 225

Question 31

Describe the FT ordinary index

Answer 31

It is equally weighted, but geometrically calculated

Question 32

What is the name of indices designed to reflect price movements in the bond markets?

Answer 32

FTSE Actuaries UK Gilts Indices and comprise various indives covering the market for conventional UK Government bonds and also index-linked securities

Question 32

How are UK Government indices divided?

Answer 32

By maturity categories: 1. Up to 5 years 2. 5 to 10 years 3. 5 to 15 years 4. 10 to 15 years 5. Over 15 years

Question 33

Are geometric indices less sensitive to large changes in constituent prices?

Answer 33

Yes

Question 34

Will geometric indices always underestimate the performance of the constituents?

Answer 34

Yes

Question 35

Are geometric indices the preferred method of index construction?

Answer 35

No, very few are calculated using the geometric construction method, the only exception is the FT 30

Question 36

Are individual firms or investors able to affect the price of funds?

Answer 36

No

Question 37

Which projects should be accepted by an investor?

Answer 37

Only projects generating positive NPV

Question 38

What does NPV assume?

Answer 38

That any surplus funds can be reinvested at the same rate of return as the required rate of return

Question 39

Is autocorrelation a characterstic of the normal distribution?

Answer 39

No it is not, autocorrelation suggests that returns from one period are in some way connected to those of another but is unrelated to normal distributions

Question 40

What is snowball sampling?

Answer 40

A technique that is applied when investigating a characteristic that is quite rare or is hidden within the population, characteristics that make it both difficult and costly to located items with such characteristics

Question 41

When will NPV and IRR provide the same conclusion of the viability of investments?

Answer 41

Where capital is freely available and investment opportunities only have a single IRR

Question 42

What does IRR disregard?

Answer 42

The scale of any investment opportunity

Question 43

What investment cannot have multiple IRRs?

Answer 43

A simple investment that, once bought, only provides positive returns