QBank Review Quiz #2

Question 1

An investor with a buy-and-hold strategy who makes quarterly deposits into an account should most appropriately evaluate portfolio performance using the portfolio’s

Answer 1

Geometric mean return (time-weighted return) is the most appropriate method for performance measurement as it does not consider additions to or withdrawals from the account.

(Module 1.3, LOS 1.e)

Question 2

Which of the following statements about the costs and benefits of international trade is most accurate?

Answer 2

The benefits of trade are greater than the costs for the overall economy, but those in domestic industries competing with imports may suffer costs in the form of reduced profits or employment.

(Module 17.1, LOS 17.a)

Question 3

To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank’s policy rate to the:

Answer 3

The neutral interest rate is the sum of the trend rate of real economic growth and the target inflation rate. Monetary policy is expansionary if the policy rate is less than the neutral interest rate and contractionary if the policy rate is greater than the neutral interest rate.

(Module 15.2, LOS 15.c)

Question 4

To account for logarithmic variables, functional forms of simple linear regressions are available if:

Answer 4

Either or both of the dependent and independent variables are logarithmic.

A log-lin model is appropriate if the dependent variable is logarithmic, while the independent variable is linear. A lin-log model is appropriate if the independent variable is logarithmic, while the dependent variable is linear. A log-log model is appropriate if both the independent and dependent variables are logarithmic.

(Module 10.3, LOS 10.f)

Question 5

An investor expects a stock currently selling for $20 per share to increase to $25 by year-end. The dividend last year was $1 but he expects this year’s dividend to be $1.25. What is the expected holding period return on this stock?

Answer 5

Return = [dividend + (ending value – beginning value)] / beginning price value

= [1.25 + (25 – 20)] / 20 = 6.25 / 20 = 0.3125

Question 6

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

Answer 6

In a negatively skewed distribution, the mean is less than the median, which is less than the mode.

(Module 3.2, LOS 3.c)

Question 7

Which of the following statements about hypothesis testing is most accurate?

Answer 7

Z = (6 - 3)/2 = 1.5. A Type II error is failing to reject the null hypothesis when it is false. The null hypothesis that the population mean is less than or equal to 5 should be rejected when the sample Z-statistic is greater than the critical Z-statistic.

(Module 8.1, LOS 8.a)

Question 8

Which of the following policy combinations would most likely lead to private sector growth and a decreasing government share of GDP?

Answer 8

Contractionary fiscal policy combined with expansionary monetary policy is more likely to increase private sector growth and decrease the government share of GDP than the other policy combinations.

(Module 15.2, LOS 15.d)

Question 9

A simple linear regression is performed to quantify the relationship between the return on the common stocks of medium-sized companies (mid-caps) and the return on the S&P 500 index, using the monthly return on mid-cap stocks as the dependent variable and the monthly return on the S&P 500 as the independent variable. The results of the regression are shown below:

Coefficient Standard Error of Coefficient t-Value
Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
Coefficient of determination = 0.599

The strength of the relationship, as measured by the correlation coefficient, between the return on mid-cap stocks and the return on the S&P 500 for the period under study was:

Answer 9

We are given the coefficient of determination of 0.599 (R2) and are asked to find the correlation coefficient (r), which is the square root of the coefficient of determination for a simple regression:

√0.599 = 0.774

(Module 10.2, LOS 10.c)

Question 10

Two countries trade freely with each other and have agreed to specific tariffs on imports from other countries. The workers in either country may freely cross the common border to work in the other country. The two countries have agreed to common economic policies, but they use separate currencies. This type of cooperation is best described as a(n):

Answer 10

The two countries are a part of an economic union. In an economic union, there is (1) free trade among members, (2) common restrictions (tariffs) on imports from non-members, (3) free movement of production factors (labor), and (4) common economic institutions and coordination of economic policies. While a customs union has common tariffs on imports from non-union countries and free trade, it does not allow workers to cross the borders freely and does not have common economic institutions. A monetary union requires all of the listed items and a common currency.

(Module 17.1, LOS 17.c)

Question 11

Consider the following analysis of variance (ANOVA) table:

Source Sum of squares Degrees of freedom Mean sum of squares
Regression 550 1 550.000
Error 750 38 19.737
Total 1,300 39
The F-statistic for the test of the fit of the model is closest to:

Answer 11

F = sum of squares regression / mean squared error = 550 / 19.737 = 27.867.

(Module 10.2, LOS 10.d)

Question 12

Tully Advisers, Inc., has determined four possible economic scenarios and has projected the portfolio returns for two portfolios for their client under each scenario. Tully’s economist has estimated the probability of each scenario as shown in the table below. Given this information, what is the expected return on Portfolio A?

Scenario Probability Return on Portfolio A Return on Portfolio B
A 15% 17% 19%
B 20% 14% 18%
C 25% 12% 10%
D 40% 8% 9%

Answer 12

Question 13

Using a constant growth dividend discount model (DDM), an analyst assumes a required return on equity of 9.75%. The current stock price is $30 per share, and the next period’s dividend is $2.40 per share. The constant growth rate implied in the model is closest to:

Answer 13

Question 14

In a simple regression model, the least squares criterion is to minimize the sum of squared differences between:

Answer 14

The least squares criterion defines the best-fitting linear relationship as the one that minimizes the sum of squared errors, the squared vertical distances between the predicted and actual values of the dependent variable.

(Module 10.1, LOS 10.a)

Question 15

The open market sale of Treasury securities by the Federal Reserve is least likely to result in:

Answer 15

When the Fed sells Treasuries, it causes both short- and long-term interest rates to increase. This rate increase causes the dollar to appreciate, which reduces foreign demand for domestic goods, causing exports to decline. The interest rate increase also puts downward pressure on price levels, which causes inflation to slow.

(Module 15.1, LOS 15.b)

Question 16

An advantage of the bootstrap method of estimating the standard error of sample means, compared to estimating it based on a sample variance, is that the bootstrap method:

Answer 16

Calculating the standard error of sample means based on a single sample variance is most appropriate when the sample is unbiased and the population is approximately normally distributed. When these conditions do not hold, the bootstrap method may be more appropriate. This method is more computationally demanding in that it requires the analyst to calculate the means of multiple samples from the full dataset.

(Module 7.1, LOS 7.c)

Question 17

The most accurate description of the relative roles played by the International Monetary Fund, World Bank, and World Trade Organization is that the only one explicitly focused on:

Answer 17

The World Bank has the explicit mission of fighting poverty. Both the WTO and IMF work to expand international trade. Both the World Bank and IMF provide funds to member nations, the World Bank for development and the IMF when member nations experience balance of payments difficulties.

(Module 16.1, LOS 16.c)

Question 18

Answer 18

Question 19

The quick ratio is considered a more conservative measure of liquidity than the current ratio because the quick ratio excludes:

Answer 19

The quick ratio is usually defined as (current assets – inventories) / current liabilities. The quick ratio excludes inventories from current assets because inventories are not necessarily liquid. It is a more restrictive measure of liquidity than the current ratio, which equals current assets / current liabilities. Current assets that remain in the numerator of the quick ratio include cash and cash equivalents, accounts receivable, and short-term marketable securities.

(Module 23.1, LOS 23.b)

Question 20

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:

Answer 20

He needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value. Thus, in this context the rate is best viewed as a discount rate.

(Module 1.1, LOS 1.a)

Question 21

If a calculated net present value is negative, the discount rate used is:

Answer 21

When NPV = 0, the discount rate used is equal to the IRR. If a discount rate is used that is higher than the IRR, the NPV will be negative. Conversely, if a discount rate is used that is lower than the IRR, the NPV will be positive.

(Module 24.1, LOS 24.b)

Question 22

To test a hypothesis that the population correlation coefficient of two variables is equal to zero, an analyst collects a sample of 24 observations and calculates a sample correlation coefficient of 0.37. Can the analyst test this hypothesis using only these two inputs?

Answer 22