Quantitative Methods

Question
1 of 30

When a security that was in an upward trend falls 1% below its trendline, a technical analyst
will most likely determine that:

a downward trend is beginning.

the upward trend is ending.

the trendline needs an adjustment.

Question not answered

When a security's price drops through the trendline by a significant amount (at least 5% to
10%), this decline signals that the uptrend has ended and further decline may follow. Minor
breakthroughs simply call for the trendline to be moderately adjusted over time. A security
falling 1% below its trendline is considered a minor breakthrough.

CFA Level I

"Technical Analysis," Barry M. Sine and Robert A. Strong

Section 3.2

Question
2 of 30

When testing the population mean, the use of a z-statistic is most appropriate when the:

variance is unknown and the sample size is small.

distribution is non-normal and the sample size is small.

variance is known and the sample is normally distributed.

Question not answered

If the population being sampled is normally distributed and has a known variance (both small
and large sample size), the z-test is the correct test to use.

CFA Level I

"Hypothesis Testing," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David
E. Runkle

Section 3.1
Question
3 of 30

An economist states that the probability of having the gross domestic product (GDP) of a
country higher than 3% is 0.20. What are the odds against a GDP higher than 3%?
5 to 1

6 to 1

4 to 1

Question not answered

Given the probability of an event, P (E), the odds against that event

are ,and using the input from the problem, Odds

against E = (1 - 0.2) / 0.2 = 4. This result means that given the
probability stated by the economist, the odds against a GDP higher
than 3% are 4 to 1.

CFA Level I
“Probability Concepts,” by Richard A. DeFusco, Dennis W. McLeavey,
Jerald E. Pinto, and David E. Runkle
Section 2

Question
4 of 30

An increase in which of the following items will most likely result in a wider confidence interval
for the population mean?

Degrees of freedom

Reliability factor

Sample size

Question not answered

An increase in the reliability factor (the degree of confidence) increases the width of the
confidence interval. Increasing the sample size and increasing the degrees of freedom both
shrink the confidence interval.
CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Sections 4.2, 4.3

Question
5 of 30

The following table represents the history of an investment in a company:

Time Activity Price per Dividends Paid

Share per Share
Beginning of Year 1 Purchase 10 shares €160
End of Year 1 Purchase 5 shares €168 €3.00
End of Year 2 €175 €4.00
End of Year 3 Sell 15 shares €165 €0.00
The investor does not reinvest the dividends that he receives. Ignoring taxes, the time-
weighted rate of return on this investment is closest to:

2.57%.

1.93%.

2.40%.

Question not answered

The portfolio value at the beginning and end of each period and the dividends received over
the three years are calculated as follows:

Year 1 Year 2 Year 3

Beginning value 10 × €160 = €1,600 15 × €168 = €2,520 15 × €175 = €2,625
Ending value 10 × €168 = €1,680 15 × €175 = €2,625 15 × €165 = €2,475
Dividend 10 × €3.00 = €30 15 × €4.00 = €60 15 × €0.00 = €0
received
The holding period return (HPR) for the three years is calculated as follows:

HPR = (Pt+1 – Pt + Dt+1)/Pt.

HPRYear 1 = (€1,680 – €1,600 + €30)/€1,600 = 6.88%.

HPRYear 2 = (€2,625 – €2,520 + €60)/€2,520 = 6.55%.

HPRYear 3 = (€2,475 – €2,625)/€2,625 = –5.71%.

The time-weighted return (TWR) is found by taking the geometric mean of the three holding
period returns:

TWR = [(1 + HPRYear 1) × (1 + HPRYear 2) × (1 + HPRYear 3)]1/3 – 1.

TWR = [(1 + 6.88%) × (1 + 6.55%) × (1 – 5.71%)]1/3 – 1 = 1.07381/3 – 1 = 2.40%.

Alternatively: TWR = {[(€168 + €3)/€160] × [(€175 + €4)/€168] × (€165/€175)}1/3 – 1 = (1.0688

× 1.0655 × 0.9429)1/3 – 1 = 2.40%.

CFA Level I
"Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Section 3.2

Question
6 of 30

When working backward from the nodes on a binomial tree diagram, the analyst is
attempting to calculate:
the number of potential outcomes.

the probability of a given scenario.

an expected value as of today.

Question not answered

In a tree diagram, a problem is worked backward to formulate an expected value as of today.

CFA Level I

"Probabilty Concepts", Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David
E. Runkle

Section 8.2

Question
7 of 30

A consumer purchases an automobile using a loan. The amount borrowed is €30,000, and
the terms of the loan call for the loan to be repaid over five years using equal monthly
payments with an annual nominal interest rate of 8% and monthly compounding. The monthly
payment is closest to:

€626.14.

€700.00.
 €608.29.

Question not answered

Using a financial calculator: N = 60, I/Y = 8/12, PV = €30,000, FV = 0, and compute PMT.

Note, 5 years = 60 months. The nominal rate of 8% must be divided by 12 to find the monthly
periodic rate of 0.6666667%. Alternatively, using the present value of an annuity formula,
solve:

CFA Level I
“The Time Value of Money,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Sections 6.1, 7.3

Question
8 of 30

When analyzing a head and shoulders pattern that represents the reversal of an upward
trend, the highest trading volume is most likely on the upward side of the:

right shoulder.

head.

left shoulder.

Question not answered

In the classic head and shoulders pattern, the left shoulder shows a strong rally on strong
volume, followed by a reversal back to the price level where it started. The head is a more
pronounced version of the left shoulder but on lower volume. The right shoulder is a mirror
image of the left shoulder, also on lower volume.

CFA Level I

"Technical Analysis," Barry M. Sine and Robert A. Strong

Section [Link]

Question
9 of 30

Which of the following tests should be used to evaluate the difference between the means of
two normally distributed populations?
A paired comparison test if the two samples are independent and the population
variances are unknown.
An approximate t-test if the population variances are unknown and assumed unequal
and the samples are assumed to be independent.
An approximate t-test that involves the calculation of a pooled estimator of the
population variances which are assumed unequal.

Question not answered

An approximate t-test is used to test the differences between means of two populations when
the unknown population variances cannot be assumed to be equal.

CFA Level I

"Hypothesis Testing", Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David
E. Runkle

Section 3.2-3.3

Question
10 of 30

An analyst determines that approximately 99% of the observations

of daily sales for a company are within the interval from $230,000 to
$480,000 and that daily sales for the company are normally
distributed. If approximately 99% of all the observations fall in the
interval μ±3σ, then using the approximate z-value rather than the precise table, the
standard deviation of daily sales for the company is closest to:
$62,500.

$83,333.

$41,667.

Question not answered

Given that sales are normally distributed, the mean is centered in the interval. MeanUnder a
normal distribution, 99% of the observations will be approximately plus or minus three
standard deviations. Next, use the following formula:

Z=(X-μ)/σ
or, by rearranging:
σ=(X-μ)/Z,
where Z = 3,
X = $480,000, and
μ = $355,000.

Thus, ($480,000 – $355,000)/3.0 = $41,667.

Alternatively, use Z = –3, X = $230,000, and μ = $355,000: ($230,000 – $355,000)/(–3.0) =

$41,667.

CFA Level I
“Common Probability Distributions,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Section 3.2

Question
11 of 30

The sampling error is best described as the:

sum of squared deviations from the mean divided by the sample size minus one.

difference between the observed value of a statistic and the quantity it is intended to
estimate.
sample standard deviation divided by the square root of the sample size.

Question not answered

The sampling error is the difference between the observed value of a statistic and the quantity
it is intended to estimate.

CFA Level I
"Sampling and Estimation," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 2.1

Question
12 of 30

It is most likely that the distance between the outer bands of Bollinger Bands will be farthest
apart when:

the moving average period is longer.

price volatility is higher.

 trading volume is higher.

Question not answered

Bollinger Bands consist of a moving average price plus a higher line representing the moving
average plus a set number of standard deviations from the average price and a lower line that
is the moving average minus the same set number of standard deviations. Higher price
volatility increases the standard deviation, making the bands wider.

CFA Level I

"Technical Analysis," Barry M. Sine and Robert A. Strong

Section [Link]

Question
13 of 30

Over a four-year period, a portfolio has returns of 10%, –2%, 18%, and –12%. The geometric
mean return across the period is closest to:

2.9%.

8.1%.

3.5%.

Question not answered

The geometric mean return is calculated as follows:

CFA Level I
“Statistical Concepts and Market Returns,” Richard A. DeFusco, Dennis W. McLeavey, Jerald
E. Pinto, and David E. Runkle
Section 5.4.2

Question
14 of 30

When considering two mutually exclusive capital budgeting projects with conflicting rankings,
the most appropriate conclusion is to choose the project with the:
 shorter payback.

higher net present value (NPV).

higher internal rate of return (IRR).

Question not answered

The project with the higher NPV should be undertaken because it

measures the increase in wealth as a result of taking the project. For
mutually exclusive projects, IRR may give incorrect decisions as a
result of scale and/or cash flow timing effects. Payback is not an
economically sound method for evaluation of capital projects.

CFA Level I
“Discounted Cash Flow Applications,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald
E. Pinto, and David E. Runkle
Section 2.3

“Capital Budgeting,” by John D. Stowe and Jacques R. Gagné

Section 4

Question
15 of 30

A bank offers an effective annual rate (EAR) of 12%. Assuming quarterly compounding, the
stated annual interest rate is closest to:
12.55%.

11.49%.

11.66%.

Question not answered

EAR=(1+ Periodic interest rate)m-1

12.00% = (1+ Periodic interest rate)4 - 1

Stated annual interest rate = Periodic interest rate × m =

2.873734% × 4 = 11.49%.
CFA Level I
“The Time Value of Money,” by Richard A. DeFusco, Dennis W.
McLeavey, Jerald E. Pinto, and David E. Runkle
Section 3.2

Question
16 of 30

A sample of 438 observations is randomly selected from a population. The mean of the
sample is 382 and the standard deviation is 14. Based on Chebyshev's inequality, the
endpoints of the interval that must contain at least 88.89% of the observations are closest to:

354 and 410.

396 and 480.

340 and 424.

Question not answered

According to Chebyshev's inequality, the proportion of the observations within k standard

deviations of the arithmetic mean is at least 1 – 1/k2 for all k >1. For k =3, that proportion is 1
– 1/32, which is 88.89%. The lower endpoint is, therefore, the mean (382) minus 3 times 14
(the standard deviation), and the upper endpoint is 382 plus 3 times 14 (i.e., 340 and
424,respectively).

CFA Level I
"Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald
E. Pinto, and David E. Runkle
Section 7.6

Question
17 of 30

The returns of a fund are as follows:

Yea Return (%)

r
1 –20.60
2 15.00
3 0.50
4 9.80
5 4.60
The mean absolute deviation (MAD) of returns for the fund is closest to:
 11.91%.

13.69%.

9.53%.

Question not answered

The MAD for a sample is calculated as follows:

Deviations from Mean Absolute Deviation (%)

–20.60% – 1.86% 22.46
15.00% – 1.86% 13.14
0.50% – 1.86% 1.36
9.80% – 1.86% 7.94
4.60% – 1.86% 2.74
Total 47.64
MAD = 47.64/5 9.53
CFA Level I
"Statistical Concepts and Market Returns, " Richard A. DeFusco, Dennis W. McLeavey,
Jerald E. Pinto, and David E. Runkle
Section 7.2

Question
18 of 30

An analyst develops the following capital market projections.

Stocks Bonds
Mean Return 10% 2%
Standard Deviation 15% 5%
 Assuming the returns of the asset classes are described by normal distributions, which of the
following statements is correct?
The probability of a bond return ≤ 3% is determined using a Z-score of 0.25.

On average 99% of stock returns will fall within +/– 30% from the mean.

Bonds have a higher probability of a negative return than do stocks.

Question not answered

A negative return is any return that is less than zero. The chance of a negative return falls in
the area to the left of 0% under a standard normal curve. By standardizing the returns and
standard deviations of the two assets, the likelihood of either asset experiencing a negative
return may be determined: Z-score (standardized value) = (X – µ)/σ

Z-score for a bond return of 0% = (0 – 2)/5 = –0.40.

Z-score for a stock return of 0% = (0 – 10)/15 = –0.67.

For bonds, a 0% return falls 0.40 standard deviations below the mean return of 2%. In
contrast, for stocks, a 0% return falls 0.67 standard deviations below the mean return of 10%.
0.40 of a standard deviation is less than 0.67 of a standard deviation. Negative returns
therefore occupy more of the left tail of the bond distribution than the stock distribution. Thus,
bonds are more likely than stocks to experience a negative return.

CFA Level I

"Common Probability Distributions", Richard A. DeFusco, Dennis W. McLeavey, Jerald E.

Pinto, and David E. Runkle

Section 3.2

Question
19 of 30

A random variable with a finite number of equally likely outcomes is best described by a:

binomial distribution.

continuous uniform distribution.

discrete uniform distribution.

Question not answered

A random variable has a discrete uniform distribution when there are a finite number of
equally likely specified outcomes.

CFA Level I
“Common Probability Distributions,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Section 2.1

Question
20 of 30

An investor in Abco stock forecasts the probability that Abco exceeded, met or fell short of
consensus expectations for free cash flow (FCF) during the prior quarter:

 P(FCF exceeded consensus) = 0.50

 P(FCF met consensus) = 0.35
 P(FCF fell short of consensus) = 0.15

While waiting for Abco to release last quarter’s FCF data, the investor learns that Abco will
acquire a competitor. Believing that the upcoming acquisition makes it more likely that last
quarter’s FCF will exceed the consensus, the investor generates a list of FCF events that may
have influenced the acquisition:

 P(Acquisition│FCF exceeded consensus) = 0.40

 P(Acquisition│FCF met consensus) = 0.25
 P(Acquisition│FCF fell short of consensus) = 0.35

Using Bayes’ Formula, calculate the probability that Abco is likely to exceed consensus FCF
expectations for last quarter given the acquisition. P(FCF exceeded consensus
│Acquisition) is closest to:
34%.

59%.

27%.

Question not answered

The updated probability P(FCF exceeded consensus │Acquisition) is 59%.

1. Calculate the unconditional probability that Abco will acquire the competitor firm:
P(Acquisition) = (0.50 × 0.40) + (0.35 × 0.25) + (0.15 × 0.35) = 0.34, or 34%.
 2. Calculate the updated probability that Abco exceeded consensus expectations for
FCF given that they acquire the competitor firm: P(FCF exceeded
consensus│Acquisition) =
[P(Acquisition│FCF exceeded consensus)/P(Acquisition)] x P(FCF exceeded consensus) =
(0.40 / 0.34) × (0.50) = 0.59 or 59%

CFA Level I

"Probabilty Concepts", Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David
E. Runkle

Section 8.2

Question
21 of 30

A mutual fund manager wants to create a fund based on a high-grade corporate bond index.
She first distinguishes between utility bonds and industrial bonds; she then, for each segment,
defines maturity intervals of less than 5 years, 5 to 10 years, and greater than 10 years. For
each segment and maturity level, she classifies the bonds as callable or noncallable. She
then randomly selects bonds from each of the subpopulations she has created. For the
manager’s sample, which of the following best describes the sampling approach?
Stratified random

Systematic

Simple random

Question not answered

In stratified random sampling, one divides the population into

subpopulations and randomly samples from within the
subpopulations.

CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto,
and David E. Runkle
Section 2.2

Question
22 of 30

The following 10 observations are a sample drawn from a normal population: 25, 20, 18, –5,
35, 21, –11, 8, 20, and 9. The mean of the sample is closest to:
 17.20.

15.56.

14.00.

Question not answered

The sum of the 10 numbers is 140. Dividing by 10 gives the mean of 14.

CFA Level I
"Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald
E. Pinto, and David E. Runkle
Section 5.1.2

Question
23 of 30

An analyst gathered the following information about a stock index:

Mean net income for all companies in the index $2.4 million

Standard deviation of net income for all companies in the index $3.2 million

If the analyst takes a sample of 36 companies from the index, the standard error of the
sample mean is closest to:

$88,889.

$533,333.

$400,000.

Question not answered

The standard error of the sample mean is equal to the population standard deviation (s)
divided by the square root of the number of observations in the sample (n):
CFA Level I
“Sampling and Estimation,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Section 3.1

Question
24 of 30

The joint probability of events A and B is 32%, with the probability of

event A being 60% and the probability of event B being 50%. On the
basis of this information, the conditional probability of event A given
that event B occurs is closest to:
64.0%.

53.3%.

30.0%
.

Question not answered

The conditional probability of A given that B has occurred is equal to

the joint probability of A and B divided by the probability of B. In this

case, .

CFA Level I
“Probability Concepts,” by Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 2

Question
25 of 30

Common stock prices are approximately lognormally distributed. Therefore, it is most

likely that conventional (discrete) common stock prices are:
skewed to the right.
 leptokurtic.

skewed to the left.

Question not answered

The lognormal distribution is truncated at zero and skewed to the

right (positively skewed).

CFA Level I
“Statistical Concepts and Market Returns,” by Richard A. DeFusco,
Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Sections 8–9

“Common Probability Distributions,” by Richard A. DeFusco, Dennis

W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 3.4

Question
26 of 30

The liquidity premium can best be described as compensation to investors for the:

risk of loss relative to an investment's fair value if the investment needs to be converted
to cash quickly.
possibility that the borrower will fail to make a promised payment at the contracted time
and in the contracted amount.
increased sensitivity of the market value of debt to a change in market interest rates as
maturity is extended.

Question not answered

The liquidity premium compensates investors for the risk of loss relative to an investment's
fair value if the investment needs to be converted to cash quickly.

CFA Level I
"The Time Value of Money," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 2

Question
27 of 30

If the price of a stock goes from $15.00 to $16.20 in one year, the continuously compounded
rate of return is closest to:
 8.00%.

8.33%.

7.70%.

Question not answered

CFA Level I
“Common Probability Distributions,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Pinto, and David E. Runkle
Section 3.4

Question
28 of 30

A major investment data service provides information on analysts’ performance using the
following scale:

Outstanding Strong Average Below Average Poor

1 2 3 4 5

The most appropriate test to determine whether the analysts’ average performance differed
between two consecutive 10-year periods is a:

Wilcoxon signed-rank test.

sign test.

Mann-Whitney U-test.

Question not answered

The Mann-Whitney U-test is most appropriate for tests of differences
in means for nonparametric data such as analysts’ rankings.

CFA Level I
“Hypothesis Testing,” by Richard A. DeFusco, Dennis W. McLeavey,
Jerald E. Pinto, and David E. Runkle
Section 5

Question
29 of 30

Consider the following 20 items listed in ascending order:

–41 –18 –17 –9 –8 –6 –5 3 3 3

5 5 7 7 11 12 20 21 21 61
The median value of the items is closest to:

4.

5.

3.

Question not answered

The median is the value of the middle item of a set of items that has been sorted into
ascending or descending order. In an even-numbered sample, we define the median as the
mean of the values of items occupying the n/2 and (n +2)/2 positions (the two middle items).
The n/2 item is the 10th item and the (n +2)/2 item is the 11th item. The value of the 10th item
is 3; the value of the 11th item is 5. The mean of 3 and 5 is 4.

CFA Level I
"Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald
E. Pinto, and David E. Runkle
Section 5.2

Question
30 of 30

Which type of triangle pattern most likely exhibits a horizontal trendline connecting the high
prices?

Ascending

Symmetrical
 Triple top

Question not answered

In an ascending triangle pattern, the trendline connecting the high prices is horizontal, as
shown in Figure A.

Figure A: Ascending Triangle Figure B: Descending Triangle

CFA Level I

"Technical Analysis," Barry M. Sine and Robert A. Strong

Section [Link]