Question #1 of 55 Question ID: 438742

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%

A) 9.25%.

B) 12.95%.
C) 11.55%.

D) 10.75%.

Question #2 of 55 Question ID: 438777

When the tails of a distribution are fatter than that implied by a normal distribution, we say that the distribution is:

A) platykurtic.

B) symmetrical.

C) leptokurtic.
D) skewed.

Question #3 of 55 Question ID: 438776

A distribution that has positive excess kurtosis:

 A) has thinner tails than a normal distribution.

B) is more skewed than a normal distribution.

C) is less peaked than a normal distribution.

D) is more peaked than a normal distribution.

Question #4 of 55 Question ID: 438766

An investor owns the following portfolio today.

Expected Annual
Stock Market Value
Return
R $2,000 17%
S $3,200 8%
T $2,800 13%

The investor's expected total rate of return (increase in market value) after three years is closest to:

A) 12.0%.

B) 40.5%.

C) 136.0%.

D) 36.0%.

Question #5 of 55 Question ID: 438781

If the variance of the sampling distribution of an estimator is smaller than all other unbiased estimators of the
parameter of interest, the estimator is:

A) consistent.

B) reliable.
C) efficient.

D) unbiased.

Question #6 of 55 Question ID: 438733

The variance of the sum of two independent random variables is equal to the sum of their variances:

A) minus a positive covariance term.

B) plus a positive covariance term.
 C) plus a non-zero covariance term.
D) plus zero.

Question #7 of 55 Question ID: 438736

Use the following probability distribution to calculate the standard deviation for the portfolio.

State of the Economy Probability Return on Portfolio

Boom 0.30 15%

Bust 0.70 3%

A) 6.0%.
B) 5.5%.

C) 7.0%.

D) 6.5%.

Question #8 of 55 Question ID: 438737

There is a 30% chance that the economy will be good and a 70% chance that it will be bad. If the economy is good,
your returns will be 20% and if the economy is bad, your returns will be 10%. What is your expected return?

A) 13%.

B) 15%.
C) 17%.
D) 18%.

Question #9 of 55 Question ID: 438770

An analyst is currently considering a portfolio consisting of two stocks. The first stock, Remba Co., has an expected
return of 12% and a standard deviation of 16%. The second stock, Labs, Inc., has an expected return of 18% and a
standard deviation of 25%. The correlation of returns between the two securities is 0.25.

If the analyst forms a portfolio with 30% in Remba and 70% in Labs, what is the portfolio's expected return?

A) 15.0%.
B) 17.3%.

C) 21.5%.
 D) 16.2%.

Question #10 of 55 Question ID: 438752

Consider the case when the Y variable is in U.S. dollars and the X variable is in U.S. dollars. The 'units' of the
covariance between Y and X are:

A) a range of values from −1 to +1.

B) squared U.S. dollars.

C) U.S. dollars.

D) the square root of U.S. dollars.

Question #11 of 55 Question ID: 438772

Andrew Dawns holds a large position in the common stock of Savory Doughnuts, Inc (Savory). After an extensive
executive search, Savory is about to announce a new CEO. There are three candidates for the CEO position, and
each is viewed differently by the market. Dawns estimates the following probabilities for the rate of return on Savory's
stock in the year following the announcement:

Candidate Probability of Being ChosenRate of Return if Chosen

One .50 10%
Two .15 -40%
Three .35 20%

Based on Dawn's estimates, the expected rate of return on Savory's stock following the announcement of the new
CEO is closest to:

A) 10%.
B) -2%.

C) 9%.

D) 6%.

Question #12 of 55 Question ID: 438748

The Y variable is regressed against the X variable resulting in a regression line that is flat with the plot of the paired
observations widely dispersed about the regression line. Based on this information, which statement is most
accurate?
 A) The R2 of this regression is close to 100%.

B) The correlation between X and Y is close to zero.

C) X is perfectly positively correlated to Y.
D) X is perfectly negatively correlated to Y.

Question #13 of 55 Question ID: 438775

Left-skewed distributions exhibit:

A) a longer tail to the right of the distribution.

B) greater mass to the right of the expected value.

C) greater mass close to the expected value.
D) greater mass to the left of the expected value.

Question #14 of 55 Question ID: 438769

As a fund manager, Bryan Cole, CFA, is responsible for assessing the risk and return parameters of the portfolios he
oversees. Cole is currently considering a portfolio consisting of only two stocks. The first stock, Remba Co., has an expected
return of 12 percent and a standard deviation of 16 percent. The second stock, Labs, Inc., has an expected return of 18
percent and a standard deviation of 25 percent. The correlation of returns between the two securities is 0.25.

Cole has the option of including a third stock in the portfolio. The third stock, Wimset, Inc., has an expected return of 8% and
a standard deviation of 10 percent. If Cole constructed an equally weighted portfolio consisting of all three stocks, the
portfolio's expected return would be closest to:

A) 13.9%.

B) 17.1%.

C) 12.7%.

D) 15.9%.
Questions #15-17 of 55

Use the following joint probability distribution to answer the questions below.

Y=1 Y=2 Y=3

X=1 0.05 0.05 0.10
X=2 0.05 0.10 0.15
X=3 0.15 0.15 0.20

Question #15 of 55 Question ID: 438739

The expected value of Y is closest to:

A) 1.0.
B) 2.3.

C) 2.2.

D) 0.2.

Question #16 of 55 Question ID: 438740

If you know that Y is equal to 2, the probability that X is equal to 1 is closest to:

A) 0.05.

B) 0.25.

C) 0.20.

D) 0.17.

Question #17 of 55 Question ID: 438741

The variance of X is closest to:

A) 0.74.

B) 0.61.

C) 0.54.
D) 0.67.

Question #18 of 55 Question ID: 438734

An investor is considering purchasing ACQ. There is a 30% probability that ACQ will be acquired in the next two
months. If ACQ is acquired, there is a 40% probability of earning a 30% return on the investment and a 60%
probability of earning 25%. If ACQ is not acquired, the expected return is 12%. What is the expected return on this
investment?
 A) 12.3%.

B) 18.3%.

C) 16.5%.

D) 17.4%.

Question #19 of 55 Question ID: 438755

The covariance:

A) must be less than +1.

B) can be positive or negative.

C) must be between -1 and +1.

D) must be positive.

Question #20 of 55 Question ID: 438768

An investor owns the following three-stock portfolio.

Stock Market Value Expected Return

A $5,000 12%
B $3,000 8%
C $4,000 9%

The expected return is closest to:

A) 9.67%.

B) 10.50%.

C) 10.00%.

D) 29.00%.

Question #21 of 55 Question ID: 438784

If Estimator A is a more efficient estimator than Estimator B, it will have:

A) a smaller mean and a larger variance.

B) a smaller mean and the same variance.
 C) the same mean and a larger variance.
D) the same mean and a smaller variance.

Question #22 of 55 Question ID: 438782

The sample mean is a consistent estimator of the population mean because the:

A) sample mean provides a more accurate estimate of the population mean as the sample
size increases.

B) expected value of the sample mean is equal to the population mean.

C) sampling distribution of the sample mean is normal.

D) sampling distribution of the sample mean has the smallest variance of any other unbiased
estimators of the population mean.

Question #23 of 55 Question ID: 438730

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 standard deviation of returns on portfolio A?

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%

A) 8.76%.

B) 5.992%.

C) 4.53%.
D) 1.140%.

Question #24 of 55 Question ID: 438773

Suppose you have chosen two stocks with an equity investment screener. The following data has been collected on these
two securities:
 Stock A Stock B

Expected Return 5% 8%

Variance 10% 16%

Covariance (A,B) 0.2

What is the mean and variance of the sum of the two stock's expected returns and variances assuming the returns are
independent of one another?

A) Mean = 13%; Variance = 26.4%.

B) Mean = 6.5%; Variance = 13.4%.

C) Mean = 13%; Variance = 26.0%.
D) Mean = 6.5%; Variance = 13.0%.

Question #25 of 55 Question ID: 438764

Thomas Manx is attempting to determine the correlation between the number of times a stock quote is requested on his firm's
website and the number of trades his firm actually processes. He has examined samples from several days trading and
quotes and has determined that the covariance between these two variables is 88.6, the standard deviation of the number of
quotes is 18, and the standard deviation of the number of trades processed is 14. Based on Manx's sample, what is the
correlation between the number of quotes requested and the number of trades processed?

A) 0.98.

B) 0.78.

C) 0.18.

D) 0.35.

Question #26 of 55 Question ID: 438749

Which model does not lend itself to correlation coefficient analysis?

A) Y = X3.

B) Y = X + 2.

C) X = Y × 2.

D) Y - X = 2.

Question #27 of 55 Question ID: 438761

For two (possibly dependent) random variables, X and Y, an upper bound on the covariance of X and Y is:

A) σ(X) • σ(Y).

B) there is no upper bound unless the variables are independent.

C) 1.
D) zero.

Question #28 of 55 Question ID: 438780

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

A) Mode, mean, median.

B) Median, mode, mean.

C) Mean, median, mode.

D) Median, mean, mode.

Question #29 of 55 Question ID: 438785

Shawn Choate is thinking about his graduate thesis. Still in the preliminary stage, he wants to choose a variable of study
that has the most desirable statistical properties. The statistic he is presently considering has the following characteristics:

The expected value of the sample mean is equal to the population mean.
The variance of the sampling distribution is smaller than that for other estimators of the parameter.
As the sample size increases, the standard error of the sample mean rises and the sampling distribution is centered
more closely on the mean.

Select the best choice. Choate's estimator is:

A) unbiased and efficient.

B) efficient and consistent.

C) unbiased, efficient, and consistent.

D) unbiased and consistent.

Question #30 of 55 Question ID: 438767

A security has the following expected returns and probabilities of occurrence:

Return Probability
 10% 40%

12% 40%

15% 20%

What is the expected return of the security?

A) 11.4%.

B) 12.4%.

C) 11.8%.

D) 12.2%.

Question #31 of 55 Question ID: 438783

The sample mean is an unbiased estimator of the population mean because the:

A) expected value of the sample mean is equal to the population mean.

B) sample mean provides a more accurate estimate of the population mean as the sample
size increases.

C) sampling distribution of the sample mean is normal.

D) sampling distribution of the sample mean has the smallest variance of any other unbiased
estimators of the population mean.

Question #32 of 55 Question ID: 438763

The covariance of returns on two investments over a 10-year period is 0.009. If the variance of returns for investment
A is 0.020 and the variance of returns for investment B is 0.033, what is the correlation coefficient for the returns?

A) 0.444.
B) 0.350.
C) 0.687.

D) 0.785.

Question #33 of 55 Question ID: 438754

The correlation coefficient for two dependent random variables is equal to:

A) the covariance between the random variables divided by the product of the variances.
 B) the product of the standard deviations for the two random variables divided by the
covariance.
C) the absolute value of the difference between the means of the two variables divided by the
product of the variances.

D) the covariance between the random variables divided by the product of the standard
deviations.

Question #34 of 55 Question ID: 438751

Which of the following statements about the correlation coefficient is TRUE? The correlation coefficient is:

A) bounded between 0 and +1.

B) boundless.
C) bounded between -1 and 0.

D) bounded between -1 and +1.

Question #35 of 55 Question ID: 438732

The characteristic function of the product of independent random variables is equal to the:

A) square root of the product of the individual characteristic functions.

B) sum of the individual characteristic functions.

C) product of the individual characteristic functions.

D) exponential root of the product of the individual characteristic functions.

Question #36 of 55 Question ID: 438760

A scatter plot is a collection of points on a graph where each point represents the values of two variables (i.e., an X/Y
pair). The pattern of data points will illustrate a correlation between these two variables that is between:

A) slope of -1 and slope of +1.

B) -0.7 and +0.7.

C) -1 to +1.

D) 0 and +1.
Question #37 of 55 Question ID: 438747

A bond analyst is looking at historical returns for two bonds, Bond 1 and Bond 2. Bond 2's returns are much more
volatile than Bond 1. The variance of returns for Bond 1 is 0.012 and the variance of returns of Bond 2 is 0.308. The
correlation between the returns of the two bonds is 0.79, and the covariance is 0.048. If the variance of Bond 1
increased to 0.026 while the variance of Bond B decreased to 0.188 and the covariance remains the same, the
correlation between the two bonds will:

A) increase.
B) the values given are not plausible.

C) remain the same.

D) decrease.

Question #38 of 55 Question ID: 438757

In order to have a negative correlation between two variables, which of the following is most accurate?

A) The covariance must be negative.

B) Either the covariance or one of the standard deviations must be negative.

C) The covariance can never be negative.

D) Both the covariance and at least one of the standard deviations must be negative.

Question #39 of 55 Question ID: 438774

Mike Palm, CFA, is an analyst with a large money management firm. Currently, Palm is considering the risk and
return parameters associated with Alux, a small technology firm. After in depth analysis of the firm and the economic
outlook, Palm estimates the following return probabilities:

Probability (Pi) Return (Ri)

0.3 -5%

0.5 15%

0.2 25%

Palm's objective is to quantify the risk/return relationship for Alux.

Given the returns and probability estimates above, what is the expected return for Alux?
 A) 45%.

B) 15%.
C) 11%.
D) 9%.

Question #40 of 55 Question ID: 438731

An analyst has knowledge of the beginning-of-period expected returns, standard deviations of return, and market
value weights for the assets that comprise a portfolio. The analyst does not require the covariances of returns
between asset pairs to calculate the:

A) reduction in risk due to diversification.

B) correlations between asset pairs.

C) variance of the return on the portfolio.

D) expected return on the portfolio.

Questions #41-43 of 55

Y=1 Y=2 Y=3

X=1 0.05 0.15 0.20

X=2 0.15 0.15 0.30

Question #41 of 55 Question ID: 438744

The expected value of X is closest to:

A) 1.8

B) 1.5
C) 1.2

D) 1.6

Question #42 of 55 Question ID: 438745

If you know that X is equal to 1, the probability that Y is equal to 2 is closest to:
 A) 0.15

B) 0.30
C) 0.38
D) 0.50

Question #43 of 55 Question ID: 438746

The variance of Y is closest to:

A) 1.51
B) 0.61

C) 0.76

D) 2.27

Question #44 of 55 Question ID: 438771

A security has the following expected returns and probabilities of occurrence:

Return Probability

6.1% 10%

7.5% 40%

9.2% 50%

What is the expected return of the security?

A) 7.8%.

B) 8.4%.

C) 8.2%.

D) 7.6%.

Question #45 of 55 Question ID: 438735

A two-sided but very thick coin is expected to land on its edge twice out of every 100 flips. And the probability of face
up (heads) and the probability of face down (tails) are equal. When the coin is flipped, the prize is $1 for heads, $2
for tails, and $50 when the coin lands on its edge. What is the expected value of the prize on a single coin toss?

A) $26.50.
 B) $2.47.
C) $1.50.

D) $17.67.

Question #46 of 55 Question ID: 438762

SCU and QXA are two stocks in the same industry. The variance of returns for each stock is 0.3025 and the returns
are perfectly positively correlated. The covariance between the returns is closest to:

A) 0.1000.

B) 0.3025.
C) 0.2525.
D) 0.5500.

Question #47 of 55 Question ID: 438753

Which of the following statements is least accurate regarding covariance?

A) Covariance can be negative.

B) A covariance of zero rules out any relationship.

C) Covariance can exceed one.

D) Covariance can only apply to two variables at a time.

Question #48 of 55 Question ID: 438756

If X and Y are independent random variables:

A) the correlation between the two variables is equal to zero.

B) the variables are perfectly correlated.

C) The covariance between the two variables is equal to zero and the correlation between the
two variables is equal to zero.

D) the covariance between the two variables is equal to zero.

Question #49 of 55 Question ID: 438765

Rafael Garza, CFA, is considering the purchase of ABC stock for a client's portfolio. His analysis includes calculating
the covariance between the returns of ABC stock and the equity market index. Which of the following statements
regarding Garza's analysis is most accurate?

A) The covariance of two variables is an easier measure to interpret than the correlation
coefficient.

B) The actual value of the covariance is not very meaningful because the measurement is
very sensitive to the scale of the two variables.

C) The covariance measures the strength of the linear relationship between two variables.
D) A covariance of +1 indicates a perfect positive covariance between the two variables.

Question #50 of 55 Question ID: 438750

Suppose the covariance between Y and X is 12, the variance of Y is 25, and the variance of X is 36. What is the
correlation coefficient (r), between Y and X?

A) 0.400.

B) 0.000.

C) 0.160.

D) 0.013.

Question #51 of 55 Question ID: 438758

Determine and interpret the correlation coefficient for the two variables X and Y. The standard deviation of X is 0.05,
the standard deviation of Y is 0.08, and their covariance is −0.003.

A) −1.33 and the two variables are negatively associated.

B) +1.33 and the two variables are positively associated.

C) +0.75 and the two variables are positively associated.

D) −0.75 and the two variables are negatively associated.

Question #52 of 55 Question ID: 438759

For the case of simple linear regression with one independent variable, which of the following statements about the
correlation coefficient is least accurate?

A) The correlation coefficient can vary between −1 and +1.

B) If the regression line is flat and the observations are dispersed uniformly about the line, the
correlation coefficient will be +1.
 C) The correlation coefficient describes the strength of the relationship between the X variable
and the Y variable.
D) If the correlation coefficient is negative, it indicates that the regression line has a negative
slope coefficient.

Question #53 of 55 Question ID: 438778

It is often said that stock returns are leptokurtic. If this is true, relative to a normal distribution of the same mean and
variance, the distribution of stock returns is:

A) positively skewed.
B) thin-tailed.

C) fat-tailed.

D) negatively skewed.

Question #54 of 55 Question ID: 438779

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

A) Mean, median, mode.

B) Median, mean, mode.

C) Mode, mean, median.

D) Mode, median, mean.

Question #55 of 55 Question ID: 438624

Gregg Goebel and Mason Erikson are studying for the Level I CFA examination. They have just started the section
on Portfolio Management and Erikson is having difficulty with the equations for the covariance (cov1,2) and the
correlation coefficient (r1,2) for two-stock portfolios. Goebel is confident with the material and creates the following
quiz for Erikson. Using the information in the table below, he asks Erickson to fill in the question marks.

Portfolio J Portfolio K Portfolio L

Number of Stocks 2 2 2

Covariance ? cov1,2 = 0.020 cov1,2 = 0.003

Correlation coefficient r1,2 = 0.750 ? ?

Risk measure Stock 1 Std. Deviation1 = 0.08 Std. Deviation1 = 0.20 Std. Deviation1 = 0.18

Risk measure Stock 2 Std. Deviation2 = 0.18 Std. Deviation2 = 0.12 Variance2 = 0.09

Which of the following choices correctly gives the covariance for Portfolio J and the correlation coefficients for
Portfolios K and L?

Portfolio J Portfolio K Portfolio L

A) 0.011 0.002 0.076

B) 1.680 0.833 0.056

C) 1.680 0.002 0.076

D) 0.011 0.833 0.056