QBank Review Quiz #1 Flashcards
For a positively skewed and negatively skewed distribution, what is the order of the mode median and mean?
For a positively skewed distribution, the mean is greater than the median, and the median is greater than the mode. Their order reverses for a negatively skewed distribution.
(Module 3.2, LOS 3.c)
What are the details of hypothesis testing?
The hypotheses are always stated in terms of a population parameter. Type I and Type II are the two types of errors you can make – reject a null hypothesis that is true or fail to reject a null hypothesis that is false. The alternative may be one-sided (in which case a > or < sign is used) or two-sided (in which case a ≠ is used).
(Module 8.1, LOS 8.a)
According to the Central Limit Theorem, the distribution of the sample means is approximately normal if:
The Central Limit Theorem states that if the sample size is sufficiently large (i.e. greater than 30) the sampling distribution of the sample means will be approximately normal.
How do you calculate quantiles from a set of data points?
The formula for determining quantiles is: Ly = (n + 1)(y) / (100). Here, we are looking for the seventh decile (70% of the observations lie below) and the formula is: (21)(70) / (100) = 14.7. The seventh decile falls between 141.0 and 142.0, the fourteenth and fifteenth numbers from the left. Since L is not a whole number, we interpolate as: 141.0 + (0.70)(142.0 – 141.0) = 141.7.
(Module 3.1, LOS 3.a)
Personal Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio returns for two portfolios for their client under each scenario. Personal’s economist has estimated the probability of each scenario as shown in the table below. Given this information, what is the covariance of the returns on Portfolio A and Portfolio B?
Scenario Probability Return on Portfolio A Return on Portfolio B
A 15% 18% 19%
B 20% 17% 18%
C 25% 11% 10%
D 40% 7% 9%
David Forsythe and Linda Novak are discussing the advantages and disadvantages of import restrictions. They state the following:
Forsythe: One of the groups that benefits from import restrictions is often the government that imposes them.
Novak: Import restrictions impose costs on specific groups, such as the country’s import industries, but these costs are more than offset by the benefits to other groups and to the economy as a whole.
With respect to these statements:
Forsythe is correct. A primary reason why trade restrictions remain widespread is the revenue that governments receive from tariffs. Novak is incorrect. Trade restrictions benefit specific groups, such as workers in the protected industries, but those benefits are most often less than the costs imposed on consumers and other industries as a whole.
(Module 17.1, LOS 17.b)
An economy’s long-term trend rate of real GDP growth is 3% and the central bank’s target inflation rate is 2%. If the policy rate is 6%, monetary policy is:
Monetary policy is contractionary when the policy rate is greater than the neutral rate, which is the sum of the real trend rate of economic growth and the target rate of inflation. Here, the neutral rate is 3% + 2% = 5% and the policy rate of 6% is greater than the neutral rate. Monetary policy is expansionary when the policy rate is less than the neutral interest rate.
(Module 15.2, LOS 15.c)
Returns for a portfolio over the last four years are shown below. Treating these returns as a sample, what is their coefficient of variation (CV)?
Year Return
1 17.0%
2 12.2%
3 3.9%
4 –8.4%
For two random variables, P(X = 20, Y = 0) = 0.4, and P(X = 30, Y = 50) = 0.6. Given that E(X) is 26 and E(Y) is 30, the covariance of X and Y is:
The covariance is COV(XY) = (0.4 × ((20 – 26) × (0 – 30))) + ((0.6 × (30 – 26) × (50 – 30))) = 120
(Module 5.1, LOS 5.b)
Bill Jones is creating a charitable trust to provide six annual payments of $20,000 each, beginning next year. How much must Jones set aside now at 10% interest compounded annually to meet the required disbursements?
N = 6, PMT = -$20,000, I/Y = 10%, FV = 0, Compute PV → $87,105.21.
(Module 2.1, LOS 2.a)
The mean and standard deviation of returns for three portfolios are listed below in percentage terms.
Portfolio X: Mean 5%, standard deviation 3%.
Portfolio Y: Mean 14%, standard deviation 20%.
Portfolio Z: Mean 19%, standard deviation 28%.
Using Roy’s safety-first criteria and a threshold of 4%, select the optimal portfolio.
Portfolio Z has the largest value for the SFRatio: (19 – 4) / 28 = 0.5357.
For Portfolio X, the SFRatio is (5 – 4) / 3 = 0.3333.
For Portfolio Y, the SFRatio is (14 – 4) / 20 = 0.5000.
(Module 5.1, LOS 5.c)
