Extra questions i mess up 2 weeks before exam Flashcards
t the beginning of the year, Investor A purchased one share of a stock for $84. Investor B made the same investment, but borrowed half the necessary funds at an annual rate of 2.0%. At the end of the year, during which the stock paid no dividends, both investors sold their shares for $82. If inflation was -1.25% over the holding period, which of the following return measures for this investment was most likely highest?
A
Investor A’s real return
B
Investor A’s nominal return
C
Investor B’s nominal leveraged return
A
Investor A’s real return
Note that the nominal return is approximately equal to the sum of the real return and inflation. If inflation is negative, the real return is greater than the nominal return.
in a test concerning the value of a population variance, what is the appropriate test statistic to use?
what is the formula?
Chi square test
chi square = ((n - 1)*population variance)/(sample variance)
Data curation is most accurately described as the process of:
A
identifying and correcting for data errors.
B
formatting and summarizing data in graphical form.
C
transforming data into a format that can be used for analysis.
A
identifying and correcting for data errors.
The objective of the data curation process is to ensure high quality, accurate data.
Any errors in a dataset are identified and appropriate action is taken. For example, it may be necessary to make adjustments for missing data that was unavailable or had to be removed.
An analyst collects a sample of 12 monthly return datapoints that have been drawn from a larger population. Wanting to reduce the bias of the expected value based on this small sample size, the analyst decides to resample the data using the jackknife method. Which of the following statements regarding this resampling process is most accurate?
A
Each repetition will include 11 observations
B
The process will be completed in 11 repetitions
C
The sample for each of the 12 repetitions will be drawn with replacement
A
Each repetition will include 11 observations
The Jackknife resampling method repeatedly samples, leaving out one observation at a time. For the 12 monthly observations in the original sample from this example, the jackknife method will require 12 repetitions, each with 11 observations. The process is done without replacement, meaning that, after an observation has been excluded from one repetition, it is no longer eligible to be excluded from any subsequent repetitions.
In analyzing the volatility of mutual fund returns, your null hypothesis is that the standard deviation of monthly returns for Fund A is greater than 2.0%. Assuming that returns are normally distributed, this hypothesis would most likely be tested using a:
A
a t-test.
B
an F-test.
C
a chi-square test.
C
a chi-square test.
For hypotheses regarding the variance of a single normally distributed population, a chi-square test is used.
how to find the money-weighted return
example:
Initial cash outflow + (total cash outflow or inflow)/(1 + r) + (final cash outflow or inflow)/(1 + r)^2
In a linear regression with one independent variable, the correlation (r) is calculated how?
is calculated as the square root of the coefficient of determination (R^2)
If a distribution is positively skewed, which of the following measures of central tendency most likely has the lowest value?
A
Mean
B
Mode
C
Median
B
Mode
For a positively skewed distribution such as the one shown below, the mode (high point of the curve) is smaller than the median (50th percentile), which is smaller than the mean (average value).
The mode is small because of the high concentration of small data points. The mean is high because of the fat right tail.
Data generated by individuals are typically:
A
structured.
B
unstructured.
C
semi-structured.
B
unstructured.
Data generated by individuals are typically produced in the form of video, photos, text files, or audio files, which tend to be unstructured as they cannot be easily organized into tables.
By contrast, business process data tend to be structured.
Semi-structured data have both structured and unstructured qualities.
Text analytics is appropriate for application to:
A
economic trend analysis.
B
large, structured datasets.
C
public but not private information.
A
economic trend analysis.
A is correct. Through the text analytics application of NLP, models using NLP analysis might incorporate non-traditional information to evaluate what people are saying—via their preferences, opinions, likes, or dislikes—in the attempt to identify trends and short-term indicators about a company, a stock, or an economic event that might have a bearing on future performance.
Which of the following is most likely the “fourth V” that has become an increasingly important characteristic of Big Data as large datasets have been increasingly relied upon for predictive purposes?
A
Value
B
Veracity
C
Volatility
B
Veracity
Traditionally, Big Data datasets have been defined by three key characteristics: volume, velocity, and variety.
A fourth defining characteristic — veracity — has become increasing importance more recently as the reliability and credibility of data sources is essential when using Big Data as the basis for predictions and inferences.
All else equal, is specifying a smaller significance level in a hypothesis test likely to increase the probability of a Type I error and a Type II error?
A
Type I error: No ; Type II error: No
B
Type I error: No ; Type II error: Yes
C
Type I error: Yes ; Type II error: No
B
Type I error: No ; Type II error: Yes
Specifying a smaller significance level decreases the probability of a Type I error (rejecting a true null hypothesis) but increases the probability of a Type II error (not rejecting a false null hypothesis).
As the level of significance decreases, the null hypothesis is less frequently rejected.
Covariance formulas
Covariance = p * s1 * s2
Covariance (A, B) = E [[A - E(A)] * [B - E(B)]
Which of the following statements is most likely correct regarding the chi-square test of independence?
A
The test has a one-sided rejection region
B
The null hypothesis is that the two groups are dependent
C
If there are two categories, each with three levels or groups, there are six degrees of freedom
A
The test has a one-sided rejection region
A is correct. The test statistic comprises squared differences between the observed and expected values, so the test involves only one side, the right side.
The best approach for creating a stratified random sample of a population involves:
A
drawing an equal number of simple random samples from each subpopulation.
B
selecting every kth member of the population until the desired sample size is reached.
C
drawing simple random samples from each subpopulation in sizes proportional to the relative size of each subpopulation.
C
drawing simple random samples from each subpopulation in sizes proportional to the relative size of each subpopulation.
C is correct. Stratified random sampling involves dividing a population into subpopulations based on one or more classification criteria.
Then, simple random samples are drawn from each subpopulation in sizes proportional to the relative size of each subpopulation.
These samples are then pooled to form a stratified random sample.
Which of the following tests of a hypothesis concerning the population mean is most appropriate?
A
A z-test if the population variance is unknown and the sample is small
B
A z-test if the population is normally distributed with a known variance
C
A t-test if the population is non-normally distributed with unknown variance and a small sample
B
A z-test if the population is normally distributed with a known variance
B is correct. The z-test is theoretically the correct test to use in those limited cases when testing the population mean of a normally distributed population with known variance.
A distribution with fat tails is most accurately described as:
A
leptokurtic.
B
platykurtic.
C
mesokurtic.
A
leptokurtic.
If you flip a coin twice and count the number of heads, the outcome is a random variable. How many possible outcomes can that random variable have?
A
2
B
3
C
4
B
3
If you flip the coin twice, there are only four possible scenarios:
Given these possible scenarios, there are three possible outcomes for the random variable, which is the total number of heads:
Heads Tails Outcome 1 0 2 Outcome 2 1 1 Outcome 3 2 0
n analyst observes the benchmark Indian NIFTY 50 stock index trading at a forward price-to-earnings ratio of 15. The index’s expected dividend payout ratio in the next year is 50 percent, and the index’s required return is 7.50 percent. If the analyst believes that the NIFTY 50 index dividends will grow at a constant rate of 4.50 percent in the future, which of the following statements is correct?
A
The analyst should view the NIFTY 50 as overpriced.
B
The analyst should view the NIFTY 50 as underpriced.
C
The analyst should view the NIFTY 50 as fairly priced.
B
The analyst should view the NIFTY 50 as underpriced.
15 < 50% / (7.5% - 4.5%) = 16.67
The above inequality implies that the analyst should view the NIFTY 50 as priced too low. The fundamental inputs into the equation imply a forward price to earnings ratio of 16.67 rather than 15.
When working with sample data taken from a population that is believed to be non-normally distributed, the most appropriate statistic to measure the strength of a linear relationship between two variables is the:
A
bivariate corelation coefficient.
B
Pearson correlation coefficient.
C
Spearman rank correlation coefficient.
C
Spearman rank correlation coefficient.
The Spearman rank correlation coefficient is used for non-parametric tests of correlation when working with data from a population that is believed to deviate significantly from an assumed normal distribution.
The Pearson (or bivariate) correlation coefficient is used to perform parametric tests if the population data is assumed to be normally distributed.
The kurtosis of the normal distribution is closest to:
A
0
B
1
C
3
C
3
The kurtosis of the normal distribution is 3.
Its excess kurtosis is zero.
he collection and transformation of data into a format that can be used by the analytical process is most accurately described as:
A
data capture.
B
data storage.
C
data curation.
A
data capture.
Data capture is the method of collecting and transforming data to be analyzed by low-latency systems.
Data curation is the process of cleaning data to ensure its quality and accuracy.
The data storage process involves designing databases so that data can be recorded, archived, and accessed.
Compared with bootstrap resampling, jackknife resampling:
A
is done with replacement.
B
usually requires that the number of repetitions is equal to the sample size.
C
produces dissimilar results for every run because resamples are randomly drawn.
B
usually requires that the number of repetitions is equal to the sample size.
B is correct. For a sample of size n, jackknife resampling usually requires n repetitions. In contrast, with bootstrap resampling, we are left to determine how many repetitions are appropriate.
A machine learning model that has been underfit will most likely:
A
treat noise in a training dataset as true parameters.
B
fail to recognize true relationships in a training dataset.
C
identify relationships in a training dataset that are not found in the validation dataset.
B
fail to recognize true relationships in a training dataset.
Underfit models are overly simplistic and can fail to identify true relationships that are present in a training dataset.
By contrast, a model is described as overfit when it treats noise in the training dataset as true parameters, but it is unable to find the same relationships in the validation dataset.
Based on 30 years of quarterly data, an analyst calculates a sample correlation of 0.68 between real estate returns and inflation. The analyst hypothesizes a statistically significant relationship at the 5% level of significance between these two variables in the population. All else equal, reducing the number of observations in the sample will most likely increase the:
A
critical value of the t-statistic.
B
t-statistic’s degrees of freedom.
C
likelihood of rejecting the null hypothesis.
A
critical value of the t-statistic.
The critical value of the t-statistic. is determined by the degrees of freedom and the level of significance.
For a given level of significance, reducing the number of observations will reduce the number of degrees of freedom (n - 2) , which will result in a higher critical value for the t-statistic.
This will also reduce the calculated value of the t-statistic, which will reduce the likelihood of rejecting the null hypothesis that the linear relationship between the two variables is not statistically significant.
The real return formula is:
r real = (1 + r nominal) / (1 + r inflation) - 1
Over the past 100 months, the standard deviation of a mutual fund’s monthly returns has been 1.5%. If your null hypothesis is that this standard deviation is equal to or greater than 2.0% at the 0.05 level of significance, the test statistic that you would use is closest to:
which test statistic would you use in this case?
The test statistic for the variance of a population is the chi-square measure, which is calculated using the following formula:
chi-square = ((n - 1) * sample variance) / hypothesized variance
hich of the following is most likely a potential problem with interpreting a correlation coefficient?
A
Outliers
B
Spurious correlation
C
Both outliers and spurious correlation
C
Both outliers and spurious correlation
Both outliers and spurious correlation are potential problems with interpreting correlation coefficients.
Which of the following statements about machine learning is most likely correct?
A
Algorithms are not explicitly programmed
B
The data given to algorithms are explicitly labeled as either inputs or outputs
C
Relationships between inputs and outputs are initially identified in an evaluation dataset
A
Algorithms are not explicitly programmed
Algorithms are not explicitly programmed, which can result in outcomes that are not easily understood.
Supervised learning involves explicitly labeling data as either inputs or outputs. However, it is not essential to label outputs. In unsupervised learning, relationships are identified without any prior labeling of the outputs to be linked to the inputs.
The lognormal distribution is a more accurate model for the distribution of stock prices than the normal distribution because stock prices are most likely:
A
symmetrical.
B
unbounded.
C
non-negative.
C
non-negative.
A lognormal distributed variable has a lower bound of zero. The lognormal distribution is also right skewed, which is a useful property in describing asset prices.
The standard error of the sample mean is calculated using the following formula:
standard error of sample mean
population standard deviation
/
sqrt (n)
researcher would like to gather a sample of fifty people. He divides the range of the people’s heights into ten intervals of equal length and randomly selects two people from each interval. This is most likely an example of:
A
cluster sampling.
B
stratified sampling.
C
systematic sampling.
B
stratified sampling.
Stratified sampling divides the population into subpopulations (strata) based on a criteria (i.e., height in this problem). Then, simple random samples are drawn from each stratum in proportion to the size of the stratum relative to the population.
Cluster sampling involves selecting only a few of the subgroups instead of all intervals.
Since exactly two people are selected from each interval, this is more likely to be stratified sampling.
how to find the continuously compounded return over any given period
he continuously compounded return of an asset over a period is equal to the natural log of the asset’s price change during the period. In this case, ln(120/112) = 6.90%.
the t-statistic for the correlation (r) between two variables is:
t = (r * sqrt(n - 2)) / sqrt(1 - r^2)
r = correlation coefficient
Which of the following is a data visualization tool that is most likely used to display relationships between words that appear in textual data files?
A
Mind map
B
Tag cloud
C
Neural network
A
Mind map
Unlike a tag cloud, which displays words in varying sizes according to the frequency that they are used in a textual data file, a mind map is a data visualization technique that shows how different concepts are related to each other.
The power of a hypothesis test is most likely:
A
equivalent to the level of significance.
B
the probability of not making a Type II error.
C
unchanged by increasing a small sample size.
B
the probability of not making a Type II error.
B is correct. The power of a hypothesis test is the probability of correctly rejecting the null when it is false.
Failing to reject the null when it is false is a Type II error. Thus, the power of a hypothesis test is the probability of not committing a Type II error.
Perkiomen Kinzua, a seasoned auditor, is auditing last year’s transactions for Conemaugh Corporation. Unfortunately, Conemaugh had a very large number of transactions last year, and Kinzua is under a time constraint to finish the audit. He decides to audit only the small subset of the transaction population that is of interest and to use sampling to create that subset.
The most appropriate sampling method for Kinzua to use is:
A
judgmental sampling.
B
systematic sampling.
C
convenience sampling.
A
judgmental sampling.
A is correct. With judgmental sampling, Kinzua will use his knowledge and professional judgment as a seasoned auditor to select transactions of interest from the population. This approach will allow Kinzua to create a sample that is representative of the population and that will provide sufficient audit coverage.
Judgmental sampling is useful in cases that have a time constraint or in which the specialty of researchers is critical to select a more representative sample than by using other probability or non-probability sampling methods.
Judgement sampling, however, entails the risk that Kinzua is biased in his selections, leading to skewed results that are not representative of the whole population.
HTML code is most accurately classified as:
A
structured data.
B
unstructured data.
C
semistructured data.
C
semistructured data.
HTML code is an example of semistructured data, which has attributes of both structured and unstructured data.
Structured data can be organized in tables and stored in databases.
By contrast, unstructured data comes from sources such as text, audio files, and pictures and typically must be cleansed with specialized applications before it can be used by investment professionals.
The holding period return can be calculated from the continuously compounded return as:
rh = e^r - 1
All else equal, an increase in which of the following will most likely result in a lower F-statistic?
A
Residual sum of squares
B
Number of observations
C
Mean regression sum of squares
A
Residual sum of squares
For a linear regression with one independent variable, the F-statistic is calculated as follows:
F = Mean regression sum of squares / MSE
Mean regression sum of squares = RSS / 1
MSE = SSE / (N - 2)
RSS = the regression sum of squares
SSE = sum of squared errors
In the use of ML:
A
some techniques are termed “black box” due to data biases.
B
human judgment is not needed because algorithms continuously learn from data.
C
training data can be learned too precisely, resulting in inaccurate predictions when used with different datasets.
C
training data can be learned too precisely, resulting in inaccurate predictions when used with different datasets.
C is correct. Overfitting occurs when the ML model learns the input and target dataset too precisely. In this case, the model has been “over trained” on the data and is treating noise in the data as true parameters.
An ML model that has been overfitted is not able to accurately predict outcomes using a different dataset and might be too complex.
Retail point-of-sale scanner data are most accurately classified as:
A
sensor data.
B
corporate exhaust.
C
part of the Internet of Things.
B
corporate exhaust.
Retail point-of-sale scanner data are an example of corporate exhaust that is generated by business processes to provide a real-time indication of business performance.
Safety-first rules are most likely to be used by investors who:
A
consider risk symmetrically.
B
are concerned about shortfall risk.
C
do not consider the correlations of returns on assets within a portfolio.
B
are concerned about shortfall risk.
Safety-first rules are designed to address shortfall risk, which is the possibility that portfolio returns will fail to meet a specified threshold.
Data curation is most accurately described as the process of:
A
identifying and correcting for data errors.
B
formatting and summarizing data in graphical form.
C
transforming data into a format that can be used for analysis.
A
identifying and correcting for data errors.
The objective of the data curation process is to ensure high quality, accurate data.
Any errors in a dataset are identified and appropriate action is taken. For example, it may be necessary to make adjustments for missing data that was unavailable or had to be removed.
Mean Absolute Deviation formula (MAD)
Same thing as standard deviation, but you just find the absolute value of (X - Mean). Additionally, you don’t square it and you divide by n, not n - 1
when the mode is higher than the median, and subsequently, than the mean, the distribution is said to be?
Negatively skewed
A mesokurtic distribution is most likely characterized by:
A
no excess kurtosis.
B
positive excess kurtosis.
C
negative excess kurtosis.
A
no excess kurtosis.
A mesokurtic (meso = middle) distribution has no excess kurtosis, which is any value greater than 3.
If excess kurtosis is positive, the function is leptokurtic.
A platykurtic distribution has negative excess kurtosis.
An analyst calculated the excess kurtosis of a stock’s returns as -0.75. From this information, we conclude that the distribution of returns is most likely:
A
1%
normally distributed.
B
thin-tailed compared to the normal distribution.
C
fat-tailed compared to the normal distribution.
B
thin-tailed compared to the normal distribution.
B is correct. The distribution is thin-tailed relative to the normal distribution because the excess kurtosis is less than zero.
Which of the following statements is most likely accurate?
A
Unlike the correlation coefficient, covariance is not bounded by –1 and 1
B
One benefit of using the correlation coefficient is that it is less sensitive to outliers
C
If the correlation coefficient equals 0.5, that means every increase in one variable corresponds to a 0.5 increase in another variable
A
Unlike the correlation coefficient, covariance is not bounded by –1 and 1
Answer choice A is correct. A correlation coefficient can only be between –1 and +1, but covariance is not subject to the same constraint.
Answer choice C is incorrect. The correlation coefficient only measures the degree of linear association between two variables. It does not explain the amount each variable changes.
Which of the following statements is most accurate? A correlation coefficient of zero allows us to conclude that two random variables:
A
have no linear or non-linear relationship.
B
are necessarily independent of each other.
C
may have a significant non-linear relationship.
C
may have a significant non-linear relationship.
Two random variables are independent if there is no linear or non-linear relationship.
By contrast, correlation coefficients only address linear relationships.
Two independent variables with zero correlation may still have a significant non-linear relationship.
he kurtosis of the normal distribution is closest to:
A
0
B
1
C
3
C
3
The kurtosis of the normal distribution is 3.
Its excess kurtosis is zero.
The best approach for creating a stratified random sample of a population involves:
A
drawing an equal number of simple random samples from each subpopulation.
B
selecting every kth member of the population until the desired sample size is reached.
C
drawing simple random samples from each subpopulation in sizes proportional to the relative size of each subpopulation.
C
drawing simple random samples from each subpopulation in sizes proportional to the relative size of each subpopulation.
C is correct. Stratified random sampling involves dividing a population into subpopulations based on one or more classification criteria. Then, simple random samples are drawn from each subpopulation in sizes proportional to the relative size of each subpopulation. These samples are then pooled to form a stratified random sample.
Perkiomen Kinzua, a seasoned auditor, is auditing last year’s transactions for Conemaugh Corporation. Unfortunately, Conemaugh had a very large number of transactions last year, and Kinzua is under a time constraint to finish the audit. He decides to audit only the small subset of the transaction population that is of interest and to use sampling to create that subset.
The most appropriate sampling method for Kinzua to use is:
A
judgmental sampling.
B
systematic sampling.
C
convenience sampling.
A
judgmental sampling.
A is correct. With judgmental sampling, Kinzua will use his knowledge and professional judgment as a seasoned auditor to select transactions of interest from the population. This approach will allow Kinzua to create a sample that is representative of the population and that will provide sufficient audit coverage. Judgmental sampling is useful in cases that have a time constraint or in which the specialty of researchers is critical to select a more representative sample than by using other probability or non-probability sampling methods. Judgement sampling, however, entails the risk that Kinzua is biased in his selections, leading to skewed results that are not representative of the whole population.
F test formula
Variance 1 / variance 2
Which of the following statements regarding a one-tailed hypothesis test is most likely correct?
A
The rejection region increases in size as the level of significance becomes smaller.
B
A one-tailed test more strongly reflects the beliefs of the researcher than a two-tailed test.
C
The absolute value of the rejection point is larger than that of a two-tailed test at the same level of significance.
B
A one-tailed test more strongly reflects the beliefs of the researcher than a two-tailed test.
B is correct. One-tailed tests in which the alternative is “greater than” or “less than” represent the beliefs of the researcher more firmly than a “not equal to” alternative hypothesis.
In the step “stating a decision rule” in testing a hypothesis, which of the following elements most likely must be specified?
A
Critical value
B
Power of a test
C
Value of a test statistic
A
Critical value
B is correct. The critical value in a decision rule is the rejection point for the test. It is the point with which the test statistic is compared to determine whether to reject the null hypothesis, which is part of the fourth step in hypothesis testing.
An analyst is examining the monthly returns for two funds over one year. Both funds’ returns are non-normally distributed. To test whether the mean return of one fund is greater than the mean return of the other fund, the analyst can most likely use:
A
a parametric test only.
B
a nonparametric test only.
C
both parametric and nonparametric tests.
B is correct.
There are only 12 (monthly) observations over the one year of the sample and thus the samples are small.
Additionally, the funds’ returns are non-normally distributed.
Therefore, the samples do not meet the distributional assumptions for a parametric test. The Mann–Whitney U test (a nonparametric test) could be used to test the differences between population means.
In which of the following situations would a nonparametric test of a hypothesis most likely be used?
A
The sample data are ranked according to magnitude.
B
The sample data come from a normally distributed population.
C
The test validity depends on many assumptions about the nature of the population.
A
The sample data are ranked according to magnitude.
A is correct. A nonparametric test is used when the data are given in ranks.
A pooled estimator is most likely used when testing a hypothesis concerning the:
A
equality of the variances of two normally distributed populations.
B
difference between the means of two at least approximately normally distributed populations with unknown but assumed equal variances.
C
difference between the means of two at least approximately normally distributed populations with unknown and assumed unequal variances.
B
difference between the means of two at least approximately normally distributed populations with unknown but assumed equal variances.
B is correct. The assumption that the variances are equal allows for the combining of both samples to obtain a pooled estimate of the common variance.
For a small sample from a normally distributed population with unknown variance, the most appropriate test statistic for the mean is the:
A. Z test
B. T test
C. Chi Square test
B is correct.
A T-statistic is the most appropriate for hypothesis tests of the population mean when the variance is unknown and the sample is small but the population is normally distributed.
A chi-square test is most appropriate for tests concerning:
A
a single variance.
B
differences between two population means with variances assumed to be equal.
C
differences between two population means with variances assumed to not be equal.
A
a single variance.
A is correct. A chi-square test is used for tests concerning the variance of a single normally distributed population.
A sample is taken from a normally distributed population with known variance. The observations in this sample are sorted according to an ordinal scale. To test a hypothesis regarding the sample mean, an analyst would most likely use a:
A
t-test.
B
z-test.
C
nonparametric test.
C
nonparametric test.
When data is ranked, such as when it has been sorted according to an ordinal scale, the assumptions of parametric tests (ex: t-test and z-test) do not hold and a nonparametric test should be used.
Parametric tests require a stronger measurement scale.
A sample of 20 months of normally distributed returns has a mean of 0.7% and a standard deviation of 3.5%. The population variance is unknown. To test the null hypothesis that the mean return for the population is less than 1.0%, which of the following tests is most likely appropriate?
A. t-test
B. z-test
C. Either t-test or z-test
A. t-test
Because the sample size in this example is small (less than 30) and the population variance is unknown, it is inappropriate to use a z-test.
The t-test is always considered more appropriate in such circumstances.
The probability of correctly rejecting the null hypothesis is most likely the:
A
p-value.
B
power of a test.
C
level of significance.
B
power of a test.
The power of a test is the probability of rejecting the null hypothesis when it is false.
When evaluating mean differences between two dependent samples, the most appropriate test is a:
A
z-test.
B
chi-square test.
C
paired comparisons test.
C
paired comparisons test.
A paired comparisons test is appropriate to test the mean differences of two samples believed to be dependent.
The probability of correctly rejecting the null hypothesis is most likely the:
A
p-value.
B
power of a test.
C
level of significance.
B
power of a test.
The power of a test is the probability of rejecting the null hypothesis when it is false.
All else equal, is specifying a smaller significance level in a hypothesis test likely to increase the probability of a Type I error and a Type II error?
A
Type I error: No ; Type II error: No
B
Type I error: No ; Type II error: Yes
C
Type I error: Yes ; Type II error: No
B
Type I error: No ; Type II error: Yes
B is correct. Specifying a smaller significance level decreases the probability of a Type I error (rejecting a true null hypothesis) but increases the probability of a Type II error (not rejecting a false null hypothesis).
As the level of significance decreases, the null hypothesis is less frequently rejected.
In analyzing the volatility of mutual fund returns, your null hypothesis is that the standard deviation of monthly returns for Fund A is greater than 2.0%. Assuming that returns are normally distributed, this hypothesis would most likely be tested using a:
A
a t-test.
B
F-test.
C
a chi-square test.
C
a chi-square test.
For hypotheses regarding the variance of a single normally distributed population, a chi-square test is used.
In the step “stating a decision rule” in testing a hypothesis, which of the following elements most likely must be specified?
A
Critical value
B
Power of a test
C
Value of a test statistic
A
Critical value
B is correct. The critical value in a decision rule is the rejection point for the test.
It is the point with which the test statistic is compared to determine whether to reject the null hypothesis, which is part of the fourth step in hypothesis testing.
A chi-square test is most appropriate for tests concerning:
A
a single variance.
B
differences between two population means with variances assumed to be equal.
C
differences between two population means with variances assumed to not be equal.
A
a single variance.
A is correct. A chi-square test is used for tests concerning the variance of a single normally distributed population.
Which of the following statements is most likely correct regarding the chi-square test of independence?
A
The test has a one-sided rejection region
B
The null hypothesis is that the two groups are dependent
C
If there are two categories, each with three levels or groups, there are six degrees of freedom
A
The test has a one-sided rejection region
A is correct. The test statistic comprises squared differences between the observed and expected values, so the test involves only one side, the right side.
B is incorrect because the null hypothesis is that the groups are independent.
A country that maintains a target exchange rate is most likely to have which outcome when its inflation rate rises above the level of the inflation rate in the target country?
A
An increase in short-term interest rates
B
An increase in the domestic money supply
C
An increase in its foreign currency reserves
A
An increase in short-term interest rates
A is correct. Interest rates are expected to rise to protect the exchange rate target.
What will be the effect on a direct exchange rate quote if the domestic currency appreciates?
A
Increase
B
Decrease
C
No change
B
Decrease
B is correct. In the case of a direct exchange rate, the domestic currency is the price currency (the numerator) and the foreign currency is the base currency (the denominator).
If the domestic currency appreciates, then fewer units of the domestic currency are required to buy 1 unit of the foreign currency and the exchange rate (domestic per foreign) declines.
For example, if sterling (GBP) appreciates against the euro (EUR), then euro–sterling (GBP/EUR) might decline from 0.8650 to 0.8590.
A country’s disposable income is most accurately described as national income:
A
minus taxes plus transfer benefits.
B
minus taxes and transfer benefits.
C
multiplied by one plus the net tax rate.
A
minus taxes plus transfer benefits.
A country’s disposable income, YD, is calculated as national income, Y, minus net taxes, which is total taxes net of transfer benefits.
Mathematically, disposable income is calculated as national income minus taxes plus transfer benefits.
Intra-industry trade is most accurately described as trading between:
A
two countries within the same industry.
B
two peer companies within the same industry.
C
two companies at different points in the same supply chain.
A
two countries within the same industry.
Intra-industry trade occurs between two countries within the same industry.
For example, despite having a large domestic automobile manufacturing sector, Germany imports Japanese vehicles while Japan also imports vehicles from Germany.
Which of the following is a limitation on the ability of central banks to stimulate growth in periods of deflation?
A
Ricardian equivalence.
B
The interaction of monetary and fiscal policy.
C
The fact that interest rates cannot fall significantly below zero.
C
The fact that interest rates cannot fall significantly below zero.
C is correct. Deflation poses a challenge to conventional monetary policy because once the central bank has cut nominal interest rates to zero (or slightly less than zero) to stimulate the economy, they cannot cut them further.
The most likely reason that forward currency exchange rates are considered to be poor predictors of future spot rates is:
A
systematic over-estimation.
B
systematic under-estimation.
C
the margin of error is too great.
C
the margin of error is too great.
The demand curve for each firm in the monopolistic competition market structure is most accurately described as being:
A
horizontal.
B
not well-defined.
C
downward sloping.
C
downward sloping.
The number of forward points equals:
Forward rate - spot rate
A liquidity trap will most likely occur if the:
A
supply curve for money is vertical.
B
demand curve for money is vertical.
C
demand curve for money is horizontal.
C
demand curve for money is horizontal.
A liquidity trap can happen when the demand for money is completely elastic. Graphically, this situation is captured by a horizontal demand curve.
In such circumstances, an increase in the money supply will not reduce interest rates or increase real economic activity.
In international currency markets, triangular arbitrage opportunities are most likely:
A
observed very infrequently.
B
more common than bilateral arbitrage opportunities.
C
more commonly observed on electronic trading platforms.
A
observed very infrequently.
Because human traders and algorithms are prepared to act quickly on any mispricings that may emerge in the FX market, triangular arbitrage opportunities are very uncommon.
Which of the following statements is most accurate? Once the economy moves into the contraction phase of a typical business cycle, inflation:
A
eventually decelerates, but with a lag.
B
remains moderate and may continue to fall.
C
continues the decelerating trend that began in the slowdown phase.
A
eventually decelerates, but with a lag.
A weakening economy and activity measures that are below potential signal the beginning of the contraction phase of the business cycle.
After achieving its fastest rate of growth during the slowdown phase, inflation eventually begins to decelerate during the contraction phase, but with a la
The least likely explanation for why fiscal policy cannot stabilize aggregate demand completely is that:
A
private sector behavior changes over time.
B
policy changes are implemented very quickly.
C
fiscal policy focuses more on inflation than on unemployment.
B
policy changes are implemented very quickly.
B is correct. Fiscal policy is subject to recognition, action, and impact lags.
Which of the following archetypes is most likely closest to multilateralism on the nationalism-globalization axis of the geopolitical risk framework?
A
Autarky
B
Hegemony
C
Bilateralism
B
Hegemony
Like multilateralism, hegemony falls on the globalization end of the nationalism-globalization axis.
By contrast, autarky and bilateralism are closer to the nationalism/anti-globalization end of the spectrum.
he role of the International Development Association (IDA) is most accurately described as:
A
resolving global economic imbalances.
B
facilitating the coordination of trade policies.
C
lending to countries with developing economies.
C
lending to countries with developing economies.
he IDA operates as a not-for-profit bank, providing low-interest or no-interest loans to countries with limited access to international debt markets. It is closely affiliated with the World Bank.
Resolving global economic imbalances is part of the International Monetary Fund’s mandate, while the World Trade Organization seeks to facilitate the coordination of trade policies among its member states.
Economic and financial sanctions are most accurately classified in which quadrant of the geopolitical risk assessment framework?
A
Globalization/Cooperation
B
Nationalism/Non-cooperation
C
Globalization/Non-cooperation
C
Globalization/Non-cooperation
Sanctions are a financial tool that counties use in pursuit of geopolitical objectives. This tool is located in the Globalization/Non-cooperation quadrant of the geopolitical risk assessment framework and is most consistent with a hegemonic approach.
Which of the following scenarios will produce the highest fiscal multiplier?
Scenario Tax rate Vs Marginal propensity to consume
1 35% 90%
2 30% 90%
3 30% 85%
A
Scenario 1
B
Scenario 2
C
Scenario 3
B
Scenario 2
The fiscal multiplier is calculated as follows:
1 / (1 - c * (1 - t))
c = marginal propensity to consume
t = rate
Which of the following is not a condition of an ideal currency regime?
A
Fully convertible currencies.
B
Fully independent monetary policy.
C
Independently floating exchange rates.
C
Independently floating exchange rates.
C is correct. An ideal currency regime would have credibly fixed exchange rates among all currencies.
This would eliminate currency-related uncertainty with respect to the prices of goods and services as well as real and financial assets.
A forward premium indicates:
A
an expected increase in demand for the base currency.
B
the interest rate is higher in the base currency than in the price currency.
C
the interest rate is higher in the price currency than in the base currency.
C
the interest rate is higher in the price currency than in the base currency.
C is correct. To eliminate arbitrage opportunities, the spot exchange rate (S), the forward exchange rate (F), the interest rate in the base currency (ib), and the interest rate in the price currency (ip) must satisfy:
F / S = (1 + ip) / (1 + ib)
According to this formula, the base currency will trade at forward premium (F > S) if, and only if, the interest rate in the price currency is higher than the interest rate in the base currency (ip > ib).
Which stage of a typical business cycle is most likely characterized by an above-average rate of economic growth and a positive output gap?
A
Recovery
B
Slowdown
C
Expansion
C
Expansion
If a country has a trade surplus, which of the following must be true?
A
The government is running a fiscal surplus
B
The country’s excess savings are greater than its fiscal deficit
C
The country relies on foreign capital to meet its domestic investment needs
B
The country’s excess savings are greater than its fiscal deficit
The relationship between a country’s trade balance and its expenditure/saving decisions is captured by the following equation:
X - M = (S - I) + (T - G)
If a country has a trade surplus (X > M), it must be true that the amount of excess domestic savings (S > I) is greater than the country’s fiscal deficit (T < G).
In a recession, companies are most likely to adjust their stock of physical capital by:
A
selling it at fire sale prices.
B
not maintaining equipment.
C
quickly canceling orders for new construction equipment.
B
not maintaining equipment.
B is correct. Physical capital adjustments to downturns come through aging of equipment plus lack of maintenance
In which of the following market structures are sellers least likely to use advertising to increase sales?
A
Oligopoly
B
Monopoly
C
Perfect competition
C
Perfect competition
In perfectly competitive markets, sellers have no pricing power and non-price competition (e.g., advertising) is absent.
Advertising is used by sellers in both oligopolies and monopolies.
What most likely happens in a monopolistically competitive industry as the market moves toward a long-run equilibrium?
A
New entrants come in and take away customers, reducing economic profits for incumbents
B
The number of incumbents will be reduced as larger companies acquire smaller competitors
C
The long-run level of output will approach the quantity produced by a perfectly competitive market
A
New entrants come in and take away customers, reducing economic profits for incumbents
The long run outlook of a company in a monopolistically competitive industry is very similar to that in a purely competitive industry – other companies see the profits, join the market, take away customers, and economic profits are reduced to zero.
Which of the following international trade bodies was the only multilateral body governing international trade from 1948 to 1995?
A
World Trade Organization (WTO).
B
International Trade Organization (ITO).
C
General Agreement on Tariffs and Trade (GATT).
C
General Agreement on Tariffs and Trade (GATT).
C is correct. The GATT was the only multilateral body governing international trade from 1948 to 1995. It operated for almost half a century as a quasi-institutionalized, provisional system of multilateral treaties and included several rounds of negotiations.
A country is most likely to implement countervailing duties in response to a trading partner’s use of:
A
tariffs.
B
import quotas.
C
export subsidies.
C
export subsidies.
Export subsidies are payments made by governments to domestic firms with the objective of stimulating exports.
Firms have an incentive to sell their products internationally, increasing the country’s share of the global market.
Trading partners often response by imposing countervailing duties on subsidized exports.
he basic geopolitical risk type most likely in comparison to have the smallest degree of uncertainty is:
A
event risk.
B
thematic risk.
C
exogenous risk.
A
event risk.
A is correct. Event risk evolves around set dates, such as elections or new legislation, or other date-driven milestones, such as holidays or political anniversaries. Analysts can thus look to political calendars as a predictable starting point for determining the occurrence of event risk, with time to devise a suitable response.
B is incorrect because thematic risks are known risks that evolve and expand over a period of time. Climate change, pattern migration, the rise of populist forces, and the ongoing threat of terrorism fall into this category. These are more foreseeable than exogenous risks, but with their extended interval of exposure, planned responses will likely require continuing adjustments.
C is incorrect because exogenous risk is sudden and unanticipated. Examples include sudden uprisings, invasions, or the aftermath of natural disasters. The timing and range of its effects thus have the greatest unknowns.
The use of voluntary export restraints is an economic tool that is most closely associated with which geopolitical model?
A
Autarky
B
Hegemony
C
Bilateralism
A
Autarky
Voluntary export restraints (VERs) are implemented unilaterally to advance a county’s economic interest. This tool falls in the non-cooperation/nationalism quadrant of the geopolitical risk assessment framework, which is aligned with the autarky model.
Quantitative easing, the purchase of government or private securities by the central banks from individuals and/or institutions, is an example of which monetary policy stance?
A
Neutral
B
Expansionary
C
Contractionary
B
Expansionary
B is correct. Quantitative easing is an example of an expansionary monetary policy stance. It attempts to spur aggregate demand by drastically increasing the money supply.
The International Monetary Fund’s functions most likely include:
A
regulating cross-border trade relationships.
B
lending foreign exchange reserves to countries that have current account imbalances.
C
providing low-interest loans to countries that have limited access to international credit markets.
B
lending foreign exchange reserves to countries that have current account imbalances.
Among its other functions, the International Monetary Fund (IMF) makes temporary loans of foreign exchange reserves to assist member countries that have incurred balance of payments problems.
Cross-border trade relationships are regulated by the World Trade Organization.
Providing low-interest loans to countries that have limited access to international credit markets is one of the World Bank’s functions.
Which of the following trading arrangements most likely requires the greatest level of integration?
A
Customs union
B
Economic union
C
Common market
B
Economic union
A customs union is a free trade agreement with a common external trade policy. A common market expands on a customs union by allowing free movement of the factors of production.
However, an economic union involves further integration with common economic institutions designed to coordinate the economic policies of member states.
Which of these is likely lowest on a country’s hierarchy of interests?
A
Tariff harmonization
B
Military determination
C
Cultural program development
C
Cultural program development
C is correct. Cultural program development is likely lowest on a country’s hierarchy of interests.
Military determination (B) is often a primary source of national security and key to a country’s national interest.
Tariff harmonization (A) may improve economic activity and improve cooperation. Cultural programs are important and influential but likely lower priority compared to A and B.
The free exchange of currency across borders is most accurately classified as which type of geopolitical tool?
A
Financial
B
Economic
C
National security
A
Financial
A is correct. The free exchange of currency across borders is a financial tool.
Last year, Alphaton and Betaville established a customs union.
Previously, Alphaton imposed a 15% tariff on copper imports from all countries. Upon entering the customs union, Alphaton eliminated tariffs on products and services imported from Betaville while maintaining its existing tariffs for other countries. In the year before this trade arrangement came into effect, Alphaton imported 10 million tons of copper from Gammaland. which has a lower cost of production than either Alphaton or Betaville. Over the first year of the customs union, Alphaton imported 6 million tons of copper from Betaville and 4 million tons from Gammaland.
The change in Alphaton’s copper purchasing is most accurately classified as:
A
trade creation.
B
trade diversion.
C
comparative advantage.
B
trade diversion.
The replacement of low-cost imports from non-member countries with costlier imports from members of a trade agreement is known as trade diversion.
Extopia, a large, developed country, is world’s largest producer of cotton. In order to stimulate the country’s export sector, Extopia’s government will be implementing an export subsidy of $0.20 per pound of cotton. If the current global market price of cotton is $1.40 per pound, the most likely outcome after the implementation of this export subsidy is that:
A
the global market price of cotton will decrease below $1.40 per pound.
B
the domestic price of cotton will increase to $1.60 per pound in Extopia.
C
Extopia will increase its share of the global cotton trade at the current market price of $1.40 per pound.
A
the global market price of cotton will decrease below $1.40 per pound.
As a large economy and the world’s largest producer of cotton, Extopia has the ability to influence the commodity’s price.
Export subsidies will allow domestic producers to remain profitable while charging lower prices in order to increase their share of the global market. As a result, the price of cotton will fall below its current level of $1.40 per pound.
Which of the following statements is most accurate? The process of globalization:
A
requires the harmonization of rules.
B
is independent of political cooperation.
C
cannot be advanced without the support of state actors.
B
is independent of political cooperation.
While globalization can be facilitated and accelerated by political cooperation, it is an independent process that can be driven even without government support or harmonized rules.
Non-state actors can advance the process of globalization through exchanges of products, technologies, ideas, etc.
Under the gold standard, a country that increased its trade surplus would most likely experience:
A
a reduction in its domestic money supply.
B
no change in its domestic money supply.
C
an increase in its domestic money supply.
C
an increase in its domestic money supply.
Under the classic gold standard, more formally known as the price-specie flow mechanism, trade imbalances directly impacted the flow of capital (i.e., gold).
As a country’s trade surplus increased, it would accumulate more gold as payment.
This accumulation of gold increased the domestic money supply by the amounts prescribed by the gold standard’s fixed conversion rates, putting upward pressure on domestic prices and ultimately reducing the country’s exports.
For the following contrasting pairs of archetypes of globalization and cooperation, which one best reflects the greatest differences in country behavior?
A
Bilateralism vs. autarky
B
Multilateralism vs. autarky
C
Multilateralism vs. hegemony
B
Multilateralism vs. autarky
B is correct. Multilateralism describes countries that participate in mutually beneficial trade relationships and extensive rules harmonization. Autarky describes countries seeking political self-sufficiency with little or no external trade or finance. In the Exhibit 6 display of these behavior patterns, these choices are most widely separated on both the globalization and cooperation continuums.
A is incorrect because bilateral or regional approaches describe those countries leveraging regional trade relationships and may face the world as a group. Bilateralism shares with autarky a bias against globalization. These approaches diverge, however, regarding cooperation, with autarky being more non-cooperative.
C is incorrect because multilateralism describes countries that participate in mutually beneficial trade relationships and extensive rules harmonization. Hegemony represents countries exerting political or economic influence of others to control resources. Multilateralism shares with hegemony an inclination towards globalization, as shown in Exhibit 6, but diverges from hegemony regarding cooperation; hegemony is more non-cooperative.
A decrease in the real exchange rate (quoted in terms of domestic currency per unit of foreign currency) is most likely to be associated with an increase in which of the following?
A
Foreign price level.
B
Domestic price level.
C
Nominal exchange rate.
B
Domestic price level.
B is correct. The real exchange rate (quoted in terms of domestic currency per unit of foreign currency) is given by:
Real exchange rate (d/f) = S d/f * (Pf / Pd)
A market structure with relatively few sellers of a homogeneous or standardized product is best described as:
A
oligopoly.
B
monopoly.
C
perfect competition.
A
oligopoly.
Under conditions of perfect competition, a company will break even when market price is equal to the minimum point of the:
A
average total cost curve.
B
average variable cost curve.
C
short-run marginal cost curve.
A
average total cost curve.
A is correct. A company is said to break even if its total revenue is equal to its total cost. Under conditions of perfect competition, a company will break even when market price is equal to the minimum point of the average total cost curve.
Collusion is least likely in a market when:
A
the product is homogeneous.
B
companies have similar market shares.
C
the cost structures of companies are similar.
B
companies have similar market shares.
B is correct. When companies have similar market shares, competitive forces tend to outweigh the benefits of collusion.
If a country has a trade surplus, which of the following must be true?
A
The government is running a fiscal surplus
B
The country’s excess savings are greater than its fiscal deficit
C
The country relies on foreign capital to meet its domestic investment needs
B
The country’s excess savings are greater than its fiscal deficit
The shape of the demand curve faced by a firm selling a good in a perfectly competitive market is most likely:
A
vertical.
B
horizontal.
C
upward-sloping.
B
horizontal.
In a perfectly competitive market, demand is perfectly elastic. In such conditions, the demand curve is horizontal because the same price is paid for any quantity sold. A seller cannot obtain a higher price than the market price because goods are perfect substitutes.
