Question 1

Which of the following best describes the components of the nominal rate of interest according to the formula shown in the image?

Accepted Answer

The nominal rate of interest is the sum of the real risk-free rate, inflation premium, default risk premium, liquidity premium, and maturity premium.

Question 2

Given the following annual returns for a stock: -9.34%, 23.45%, and 8.92%, what is the geometric mean return over the three-year period? Use the formula: $$R_{G} = \sqrt[3]{(1 + R_1$)(1 + R_2$)(1 + R_3$)} - 1.$$

Accepted Answer

6.82%

Question 3

An investor purchases a share for $$100 at t=0, buys another share for 120 at t=1$$, and sells both shares for $$130 each at t=2. Dividends of 2 $$per share are paid at the end of each year. What is the money-weighted rate of return (IRR) for this investment? (Use the cash flows: $$100 at t=0$$, $$118 at t=1$$, $$-264 at t=2.)$$

Accepted Answer

13.86%

Question 4

For the same investment scenario as above, what is the annual time-weighted rate of return? (Use the subperiod HPRs: 22% and 10%.)

Accepted Answer

15.84%

Question 5

If the present value of $1,000 to be received in one year is calculated at a 6% annual interest rate, what is the effect of increasing the compounding frequency from annual to daily?

Accepted Answer

The present value decreases as compounding frequency increases.

Question 6

Which of the following best describes the cash flow additivity principle?

Accepted Answer

The present value of any stream of cash flows equals the sum of the present values of the individual cash flows.

Question 7

Given the formula $$PV = \frac{FV}{(1 + r)^t}$$, what is the present value of $1,000 to be received in 3 years at an annual interest rate of 5%?

Accepted Answer

$$863.84$$

Question 8

Refer to the box-and-whisker plot shown. What does the box represent in this plot?

Accepted Answer

The interquartile range (middle 50% of the data)

Question 9

Given the returns: 30%, 12%, 25%, 20%, 23%, what is the mean absolute deviation (MAD) from the mean (22%)?

Accepted Answer

5.10%

Question 10

Which of the following statements about kurtosis is correct, based on the provided graph?

Accepted Answer

A leptokurtic distribution has fatter tails and a higher peak than a normal distribution.

Question 11

Which scatter plot best represents a strong positive linear relationship between two variables?

Accepted Answer

Plot b

Question 12

Given the formula for sample covariance: $$s_{XY} = \frac{\sum_{i=1}^n (X_i - \bar{X})(Y_i - \bar{Y})}{n-1}$$, what does a positive covariance indicate?

Accepted Answer

When one variable is above its mean, the other variable also tends to be above its mean.

CFA Quantitative Methods and Economics: Mini-Textbook Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards