QUANT LOS REVIEW

Question 1

Describe the 5 risks that make up the required rate of return for a security.

Answer 1

= Real Risk-Free Rate
 \+ Expected Inflation
 \+ Default Risk Premium
 \+ Liquidity Premium
 \+ Maturity Risk Premium

(REDLM)

Question 2

Describe Baye’s Formula

Answer 2

Probability of I given O is equal to the Probability of O given I over the probability of O multiplied by the probability of I.

P (I | O) =[ P(O | I ) / P (O) ] x P(I)

Question 3

Describe Baye’s Formula as it applies to a probability tree.

Answer 3

The probability of A given C is equal to the probability of AC over The probability of AC plus the probability of BC.

P(A | C) = P(AC) / P(AC) + P(BC)

Question 4

When solving a counting problem, and order matters, use (combination/permutation)

When solving a counting problem, and order does not matter, use (combination/permutation)

Answer 4

Permutation

Combination