CFA Program Level I for February 2024

Quantitative Methods (Solution)

1.
A. Incorrect because a point estimate is used to calculate a confidence interval; Point
estimate ± Reliability factor x Standard error = confidence interval.
B. Correct because a confidence interval for a parameter is calculated as: Point estimate ±
Reliability factor x Standard error, where standard error is the standard error of the sample
statistic providing the point estimate. Thus, sampling error is not part of the calculation.
Sampling error is the difference between the observed value of a statistic and the quantity it
is intended to estimate. It is because of sampling error that confidence intervals are used.
C. Incorrect because a reliability factor is used to calculate a confidence interval, Point
estimate ± Reliability factor x Standard error = confidence interval.
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

2.
A. Incorrect because it uses the forecasted value of the independent variable to construct
the prediction interval rather than the predicted value of the dependent variable. In other
words, it assumes that the interval is given by 𝑋𝑓 ± 𝑡𝑐𝑟𝑖𝑡𝑖𝑐𝑎𝑙 𝑓𝑜𝑟 𝑎/2 𝑆𝑡 : 3.5 % × 1.4% ≈
(0.7%, 6.3%).
B. Correct because a forecasted value of the dependent variable, 𝑌𝑓 , is determined using the
estimated intercept and slope, as well as the expected or forecasted independent variable,
𝑋𝑓 : 𝑌𝑓 = 𝑏0 + 𝐵𝑓 𝑋𝑓 " where 𝑏0 and 𝑏1 , are the estimated intercept and slope coefficients,
respectively. Hence, 𝑌𝑓 = 1.2% + 1.0 x 3.5% = 4.7%.

Next, the prediction interval is 𝑋𝑓 ± 𝑡𝑐𝑟𝑖𝑡𝑖𝑐𝑎𝑙 𝑓𝑜𝑟 𝑎/2 𝑆𝑡 " where 𝑆𝑓 , denotes the standard error
of the forecast. Hence, the prediction interval is given by: 4.7% ± 1.4% x 2.032 ≈ (1.9%,
7.5%).
C. Incorrect because it neglects the critical t - values when constructing the prediction
interval. In other words, it assumes that the interval is given by 𝑌𝑓 ± 𝑠𝑓 ; 4.7% ± 1.4% (3.3%,
6.1%).
Quantitative Methods: calculate and interpret the predicted value for the dependent
variable, and a prediction interval for it, given an estimated linear regression model and a
value for the independent variable

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CFA Program Level I for February 2024

3.
A. Incorrect because it incorrectly subtracts the dividend instead of adding it, and thus
calculates HPR = ($107 - $100 - $7)/$100= $0/$100 = 0%. The same result is obtained if the
holding period return is calculated as R = ($100 - $107 + $7)/$107= $0/S107 = 0%.
B. Incorrect because it omits the dividend and calculates R = ($107 - $100)/$100 = $7/$100 =
7%. It is also the ratio of the dividend received over the initial investment, $7/$100 = 7%.
C. Correct because a holding period return is the return earned from holding an asset for a
single specified period of time. This return can be generalized and shown as a mathematical
expression in which P is the price and I is the income: R = (P₁ - Po + D, VP, Thus, R = ($107 -
$100 + $7)/$100 = $14/$100 = 14%.
Quantitative Methods: calculate and interpret major return measures and describe their
appropriate uses

4.
A. Incorrect because we primarily use nonparametric procedures in four situations: (1) when
the data we use do not meet distributional assumptions, (2) when there are outliers, (3)
when the data are given in ranks or use an ordinal scale, or (4) when the hypotheses we are
addressing do not concern a parameter. This is one of the situations (situation 2) in which a
nonparametric test would be appropriate.
B. Incorrect because we primarily use nonparametric procedures in four situations: (1) when
the data we use do not meet distributional assumptions, (2) when there are outliers, (3)
when the data are given in ranks or use an ordinal scale, or (4) when the hypotheses we are
addressing do not concern a parameter. This is one of the situations (situation 3) in which a
nonparametric test would be appropriate.
C. Correct because a nonparametric test would be less appropriate compared to other
answers as in this case a parametric test can be used. We may want to test a hypothesis
concerning the mean of a population but believe that neither t - nor z - distributed tests are
appropriate because the sample is small and may come from a markedly non - normally
distributed population. In that case, we may use a nonparametric test. In our case, the data
sample is large, thus a parametric test can be used instead
Quantitative Methods: compare and contrast parametric and nonparametric tests, and
describe situations where each is the more appropriate type of test

5.
A. Correct because for a Test of Mean Differences (Normally Distributed Populations,
Unknown Population Variances)... when we have data consisting of paired observations
from samples generated by normally distributed populations with unknown variances, a t -

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CFA Program Level I for February 2024

test is based on t = (d - d0)/s, with n - 1 degrees of freedom, where n is the number of paired
observations, d is the sample mean difference.... and s, is the standard error of d
B. Incorrect because for a Test of Mean Differences (Normally Distributed Populations,
Unknown Population Variances)... when we have data consisting of paired observations
from samples generated by normally distributed populations with unknown variances, a t -
test is based on t = (d - do)/s with n - 1 degrees of freedom, where n is the number of paired
observations, d is the sample mean difference..., and s, is the standard error of d. An F - test
can be appropriate for Tests Concerning Differences between the Variances of Two
Populations.
C. Incorrect because for a Test of Mean Differences (Normally Distributed Populations,
Unknown Population Variances)... when we have data consisting of paired observations
from samples generated by normally distributed populations with unknown variances, a t -
test is based on t = (d - Hdo)/s, with n - 1 degrees of freedom, where n is the number of
paired observations, d is the sample mean difference.... and s, is the standard error of d. In
tests concerning the variance of a single normally distributed population [not the mean
difference between two populations], we make use of a chi - square test statistic.
Quantitative Methods: construct hypothesis tests and determine their statistical
significance, the associated Type I and Type II errors, and power of the test given a
significance level

6.
A. Incorrect because it is the compound rate of return per month times 12; [(1 +
0.13100)(1/16) - 1] × 12 =0.0077236 x 12 = 0.09268~ 9.3%. This is also the geometric mean
return per month times 12.
B. Correct because a general equation to annualize returns is given, where c is the number
of periods in a year. For a quarter, c = 4 and for a month, c = 12: rannual = (1 + rperiod)c - 1. That
is, for 16 months, c = 12/16 = 0.75 and the annualized return is (1 + 0.13100)0.75 - 1 =
1.09672 - 1=0.09672 ~ 9.7%.
C. Incorrect because it is the arithmetic mean return per month times 12; (0.13100/16) x 12
= 0.0081875 x 12 = 0.09825~9.8%.
Quantitative Methods:calculate and interpret major return measures and describe their
appropriate uses

7.
A. Incorrect because it is important to note that many cryptocurrencies have experienced
high levels of price volatility. A lack of clear fundamentals underlying these currencies has
contributed to their volatility.

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CFA Program Level I for February 2024

B. Incorrect because many cryptocurrencies have a self - imposed limit on the total amount
of currency they may issue.
C. Correct because a cryptocurrency, also known as a digital currency, operates as electronic
currency and allows near - real - time transactions between parties without the need for an
intermediary, such as a bank.
Alternative Investments: describe financial applications of distributed ledger technology

8.
A. Correct because a growth rate (g) is calculated as g = (FV/PV)/N - 1, where FV is the future
value, PV is the present value and N is the number of periods. Here, g = (1.5/1) 1/4 - 1 =
0.10668~ 10.7%.
B. Incorrect because it is calculated as In(1 + 0.5/4) - 1= In(1.125) - 1=0.11778 ~11.8%.
C. Incorrect because it is calculated as: 50%/4 = 12.5%.
Quantitative Methods: calculate and interpret annualized return measures and
continuously compounded returns, and describe their appropriate uses

10.
A. Incorrect because the investor is foregoing higher rates of return by investing in the
security with the lowest return.
B. Incorrect because 1.1% is not the most the investor is foregoing; however, it is the
difference if incorrectly using the average return of the three securities.
C. Correct because all three securities have the same maturity and default risk so the
investor is forgoing 2.2% (4.4% - 2.2%) by investing in CD 1 rather than investing in CD 3.
Quantitative Methods: interpret interest rates as required rates of return, discount rates, or
opportunity costs and explain an interest rate as the sum of a real risk - free rate and
premiums that compensate investors for bearing distinct types of risk

11.
A. Correct because algorithmic trading requires access to low - latency networks, and with
the wide - spread adoption of algorithmic trading, the need for low - latency networks has
grown Low - latency systems - systems that operate on networks that communicate high
volumes of data with minimal delay (latency) - are essential for automated trading
applications that make decisions based on real - time prices and market events. In contrast,
high - latency systems do not require access to real - time data and calculations. High -
frequency trading is a form of algorithmic trading that makes use of vast quantities of

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CFA Program Level I for February 2024

granular financial data (tick data, for example) to automatically place trades when certain
conditions are met. Trades are executed on ultra - high - speed, low - latency networks in
fractions of a second.
B. Incorrect because global financial markets have undergone substantial change as markets
have fragmented into multiple trading destinations consisting of electronic exchanges,
alternative trading systems, and so - called dark pools, and average trade sizes have fallen.
C. Incorrect because, although algorithmic trading is increasingly used to execute large
institutional orders, it is slicing orders into smaller pieces and executing across different
exchanges and trading venues. Global financial markets have undergone substantial change
as markets have fragmented into multiple trading destinations consisting of electronic
exchanges, alternative trading systems, and so - called dark pools, and average trade sizes
have fallen.
Quantitative Methods: describe applications of Big Data and Data Science to investment
management

12.
A. Incorrect because underfitting also results in this problem. Underfitted models will
typically fail to fully discover patterns that underlie the data" and thus may not be able to
accurately predict outcomes. ML involves splitting the dataset into three distinct subsets: a
training dataset, a validation dataset, and a test dataset. Once an algorithm has been
trained, validated, and tested, the ML model can be used to predict outcomes based on
other datasets. ML models also require sufficiently large amounts of data and may not
perform well where there may not be enough available data to train and validate the model.
B. Incorrect because overfitting also results in this problem. An ML model that has been
overfitted is not able to accurately predict outcomes using a different dataset and may be
too complex.
C. Correct because an ML model that has been overfitted is not able to accurately predict
outcomes using a different dataset and may be too complex. Also, underfitted models will
typically fail to fully discover patterns that underlie the data and thus may not be able to
accurately predict outcomes.
Quantitative Methods:describe Big Data, artificial intelligence, and machine learning

13.
A. Incorrect because it recognizes the investment as a delayed annuity, but it wrongly
assumes that the first annuity payment for an ordinary annuity starts immediately instead of
one period away. Thus, it computes the present value of an ordinary annuity at t = 3 as PV2
=A[1 - 1/(1 + r)N]/r= $1,000 × [1 - 1/(1 + 0.06)5/0.06 = $4,212.36.

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CFA Program Level I for February 2024

Using the present value formula for a lump sum to bring the single cash flow from t = 3 to 1=
0, PV2 = FVN(1 + r) N = $4,212.36 (1 + 0.06) - 3= $3,536.78 ~ $3,537.
Calculator Solution:
(1) END mode: N = 5; 1= 6%, PMT= - 1,000; FV = 0; solve for PV = 4,212.36.
(1) END mode; N = 3; 1= 6%; PMT = 0; FV = 4,212.36; solve for PV = 3,536.78 ~3,537.
B. Correct because by drawing a time line, the investment is recognized as a delayed annuity
with the first payment starting at t=3.
The first step is to compute the present value of an ordinary annuity at t = 2 because the
first annuity payment is
then one period away, as PV2 =A[1 - 1/(1 + r)N] / r = $1,000 x [1 - 1/(1 + 0.06)5/0.06 =
$4,212.36.
Using the present value formula for a lump sum to bring the single cash flow from t = 2 to
t=0, PV=FVM(1 + r) -
N = $4,212.36 (1 + 0.06) - 2= $3,748.99 ~ $3,749.
Calculator solution:
(1) END mode; N=5; 1= 6%; PMT= - 1,000; FV = 0; solve for PV = 4,212.36.
(2) END mode; N = 2; 1= 6%; PMT = 0; FV = 4,212.36, solve for PV = 3,748.99 - 3,749.
A second method to compute the present value of the investment is to recognize it as an
annuity due with first payment at f = 3, and then discount back three periods using the
present value formula for a lump sum. PV3= {A[1 − 1/(1 + r)N]/r}(1 + r) = $1,000 × ([1 - 1/(1 +
0.06)5/0.06) × (1 + 0.06) = $4,465.11.
Using the present value formula for a lump sum to bring the single cash flow from t=3 to
t=0, PV=FVN(1 + r) -
N = $4,465.11 (1 + 0.06) - 3= $3,748.99 ~ $3,749.
Calculator Solution:
(1) BGN mode; N = 5; 1= 6%; PMT= - 1,000; FV = 0; solve for PV = 4,465.11.
(2) END mode; N = 3; 1= 6%; PMT = 0; FV = 4,465.11; solve for PV=3,748.99 - 3,749.
Another method to compute the Correct answer is to calculate the present value of a series
of equal cash flows, with the first cash flow in the third year. Using a calculator with CF0=0,
CF1,=0, CF2=0, CF3=1000, CF4=1000, CF5=1000, CF6=1000, CF7=1000; I=6%; solve for NPV=
3,748.99 ~ 3,749.
C. Incorrect because it is the present value of the investment as t = 2 instead of t = 0, and it
is an intermediate step in the correct calculation. It computes present value of an ordinary
annuity at f = 3 as PV,= A[1 - 1/(1 + r)N]/r= $1,000 × [1 - 1/(1 + 0.06)5/0.06 = $4,212.36.

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CFA Program Level I for February 2024

Calculator solution:
END mode; N = 5; 1=6%; PMT = - 1,000; FV = 0; solve for PV = 4,212.36 - 4,212.
Quantitative Methods: calculate and interpret the present value (PV) of fixed - income and
equity instruments based on expected future cash flows

14.
A. Incorrect because robo - advisers typically have low fees and low account minimums,
implementing their recommendations with low - cost, diversified index mutual funds or
exchange - traded funds (ETFs). Fully automated digital wealth managers are one type of
service in the robo - advice sector. The fully automated model does not rely on assistance
from a human financial adviser. These services seek to offer a low - cost solution to investing
and recommend an investment portfolio, which is often composed of ETFS.
B. Incorrect because [t]he service package [offered by fully automated digital wealth
managers] may include direct deposits, periodic rebalancing, and dividend reinvestment
options.
C. Correct because as the complexity and size of an investor's portfolio grows, robo -
advisers may not be able to sufficiently address the particular preferences and needs of the
investor. In the case of extremely affluent investors who may own a greater number of asset
types including Alternative Investments (e.g., venture capital, private equity, hedge funds,
and real estate) in addition to global stocks and bonds and have greater demands for
customization, the need for a team of human advisers, each with particular areas of
investment or wealth - management expertise, is likely to endure.
Quantitative Methods: describe Big Data, artificial intelligence, and machine learning

15.
A. Incorrect because p ≤ 0 is the null and not the alternative hypothesis in this test. We state
the null and alternative hypotheses such that they account for all possible values of the
parameter. Since the alternative hypothesis is formulated using the "suspected" condition p
> 0, the null hypothesis should be formulated using the condition μ ≤ 0.
B. Incorrect because the "suspected " condition in this test is p > 0, not μ ≥ 0. The best
formulation of the alternative hypothesis uses the 'suspected' or 'hoped for condition.
C. Correct because despite the different ways to formulate hypotheses, we always conduct
a test of the null hypothesis at the point of equality, = 0. We may have a 'suspected' or
'hoped for condition for which we want to find supportive evidence. In that case, we can
formulate the alternative hypothesis as the statement that this condition is true; the null

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CFA Program Level I for February 2024

hypothesis that we test is the statement that this condition is not true. Here, the
"suspected" condition is that the population's mean is greater than zero (μ > 0).
Quantitative Methods: explain hypothesis testing and its components , including statistical
significance, Type I and Type II errors, and the power of a test.

16.
A. Incorrect because this is the result if the candidate uses r + c - 2=5 + 4 - 2=7, instead of
the correct (r - 1)(c - 1). The incorrect formula is similar to the degrees of freedom for a test
of the difference in means, which is n, + n₂ - 2.
B. Correct because for a contingency table we can perform a test of independence using a
nonparametric test statistic that is chi - square distributed this test statistic has (r - 1)(c - 1)
degrees of freedom, where r is the number of rows and c is the number of columns. Here, r
= 5 and c = 4, so degrees of freedom = (5 - 1)(4 - 1)=4x3=12.
C. Incorrect because this is the result if the candidate omits ' - 1' in both factors, i.e. rc = 5 x
4 = 20, instead of the correct (r - 1)(c - 1).
Quantitative Methods: explain tests of independence based on contingency table data

17.
A. Incorrect because this is the result if the positions of √(1 - 2) and √(n - 2) are swapped, i.e.
the formula used is
N(1 - r2)/ √(n - 2) = (0.6)√(1 - 0.36)/ √ (51 - 2) = (0.6) (0.8)/7 = 0.06857 ~ 0.07.
B. Correct because for a Parametric Test of a Correlation if the two variables are normally
distributed, we can test to determine whether the null hypothesis (Ho: p = 0) should be
rejected using the sample correlation, r. The formula for the t - test is
N√(n - 2)/√(1 - 2)" = (0.6)√(51 - 2)/ √(1 - 0.36) = (0.6)(7)/0.8 = 5.25.
C. Incorrect because this is the result if the r in the denominator is not squared, i.e.
(n - 2)/(1 - r) = (0.6)√(51 - 2)/(1 - 0.6)=(0.6)(7)/0.63246 = 6.6408 ~ 6.64.
Quantitative Methods: explain parametric and nonparametric tests of the hypothesis that
the population correlation coefficient equals zero, and determine whether the hypothesis is
rejected at a given level of significance

18.
A. Incorrect because the mode, not the mean, is the measure with the highest value for a
continuous negatively skewed unimodal distribution.

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CFA Program Level I for February 2024

B. Correct because for the continuous negatively skewed unimodal distribution, the mean is
less than the median, which is less than the mode. Therefore, the mode has the highest
value.
C. Incorrect because the mode, not the median, is the measure with the highest value for a
continuous negatively skewed unimodal distribution.
Quantitative Methods: interpret and evaluate measures of skewness and kurtosis to
address an investment problem

19.
A. Incorrect because Portfolio 1 has the highest expected return and the highest difference
between expected return and standard deviation, but not the highest safety - first ratio.
B. Incorrect because Portfolio 2 has the lowest standard deviation of returns, but not the
highest safety - first ratio. Portfolio 2 also has the highest ratio of expected return to
standard deviation (ie., when the return threshold is omitted); Portfolio 1: 23%/15% ~ 1.53:
Portfolio 2: 12%/6% = 2.00; Portfolio 3: 15%/8% ~ 1.88.
C. Correct because if returns are normally distributed, the safety - first optimal portfolio
maximizes the safety - first ratio. SFRatio = [E(Rp) - R]/op. Where E(Rp) is the expected
portfolio return, R, is the investor's minimum acceptable return, and a, is the standard
deviation of portfolio returns. The minimum acceptable return is 5% (= €5,000/€100,000) as
the investor needs to withdraw €5,000 without invading initial capital
SFP1, = (23% - 5%)/ 15% = 1.20:
SFP2 = (12% - 5%) / 6% ~ 1.17;
SFP3 (15% - 5%) / 8% = 1.25.
Therefore, Portfolio 3 is the safety - first optimal portfolio. "The portfolio for which E(R) - Rl ,
is largest relative to standard deviation minimizes P(Rp< R₁).
Quantitative Methods: define shortfall risk, calculate the safety - first ratio, and identify an
optimal portfolio using Roy's safety - first criterion

20.
A. Incorrect because the assumption of normality requires that the residuals be normally
distributed. This does not mean that the dependent and independent variables must be
normally distributed.
B. Incorrect because for simple linear regression we assume that the observations (Y and X
pairs) are uncorrelated with one another, meaning they are independent. If there is
correlation between observations (that is, autocorrelation), they are not independent and
the residuals will be correlated. As the pairs are uncorrelated, a transformation is not

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CFA Program Level I for February 2024

needed because independence (uncorrelated pairs of observations) is an assumption of

simple linear regression.
C. Correct because if the relationship between the independent variable and the dependent
variable is not linear, we can often transform one or both of these variables to convert this
relation to a linear form, which then allows the use of simple linear regression.
Quantitative Methods: describe different functional forms of simple linear regressions

21.
A. Correct because for a continuous positively skewed unimodal distribution, the mode is
less than the median, which is less than the mean.
B. Incorrect because for a continuous positively skewed unimodal distribution, the mode is
less than the median, which is less than the mean. For the continuous negatively skewed
unimodal distribution, the mean is less than the median, which is less than the mode.
C. Incorrect because for a continuous positively skewed unimodal distribution, the mode is
less than the median, which is less than the mean.
Quantitative Methods: interpret and evaluate measures of skewness and kurtosis to
address an investment problem

22.
A. Incorrect because the term Big Data has been in use since the late 1990s and refers to the
vast amount of data being generated by industry, governments, individuals, and electronic
devices. The term fintech is much broader.
B. Incorrect because automated trading, not fintech, refers to executing investment
decisions through computer algorithms or automated trading applications. The term fintech
is much broader.
C. Correct because in its broadest sense, the term 'fintech' generally refers to technology -
driven innovation occurring in the financial services industry. For the purposes of this
reading, fintech refers to technological innovation in the design and delivery of financial
services and products. Note, however, that in common usage, fintech can also refer to
companies (often new, startup companies) involved in developing the new technologies and
their applications, as well as the business sector that comprises such companies.
Quantitative Methods: describe aspects of "fintech" that are directly relevant for the
gathering and analyzing of financial data.

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CFA Program Level I for February 2024

23.
A. Incorrect because it is the F - statistic calculated as MSR/MSE, 25/10 = 2.5. For a simple
linear regression, the F - Statistic is MSR divided by MSE, where the mean square regression
(MSR) is the same as the sum of squares regression [SSR] and the mean square error (MSE)
is calculated as the sum of squares error (SSE) adjusted by its degrees of freedom, SSE / (n -
2); 280/(30 - 2)= 10.
B. Correct because it is the standard error of the estimate calculated as the square root of
the mean square error, (10)0.5=3.2. The mean square error (MSE) is calculated as SSE/(n - 2):
280/(30 - 2)= 10.0, where SSE is the sum of squares error.
C. Incorrect because it is the mean square error (MSE) calculated as SSE / (n - 2), where SSE
is the sum of squares error, 280/(30 - 2)=10.0.
Quantitative Methods: describe the use of analysis of variance (ANOVA) in regression
analysis, interpret ANOVA results, and calculate and interpret the standard error of estimate
in a simple linear regression

24.
A. Correct because in bootstrap, we repeatedly draw samples from the original sample, and
each resample is of the same size as the original sample. Note that each item drawn is
replaced for the next draw (i.e., the identical element is put back into the group so that it
can be drawn more than once) Assuming we are looking to find the standard error of
sample mean, we take many resamples and then compute the mean of each resample.
B. Incorrect because in cluster sampling, elements are selected from the population not an
original sample. The population is divided into clusters, each of which is essentially a mini -
representation of the entire populations. Then certain clusters are chosen as a whole using
simple random sampling.
C. Incorrect because in convenience sampling, elements are selected from the population
not from an original sample. An element is selected from the population based on whether
or not it is accessible to a researcher or on how easy it is for a researcher to access the
element. Because the samples are selected conveniently, they are not necessarily
representative of the entire population, and hence the level of the sampling accuracy could
be limited.
Quantitative Methods: describe the use of bootstrap resampling in conducting a simulation
based on observed data in investment applications

25.
A. Incorrect because interest rates can be considered opportunity costs. The real risk - free
interest rate is the single - period interest rate for a completely risk - free security if no

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CFA Program Level I for February 2024

inflation were expected. In economic theory, the real risk - free rate reflects the time
preferences of individuals for current versus future real consumption. The sum of the real
risk - free interest rate and the inflation premium is the nominal risk - free interest rate. As
the inflation premium is 2%, the 1% real risk - free rate is not the opportunity cost of buying
the US T - bill.
B. Incorrect because interest rates can be considered opportunity costs. The inflation
premium compensates investors for expected inflation. The real risk - free interest rate is
the single - period interest rate for a completely risk - free security if no inflation were
expected. In economic theory, the real risk - free rate reflects the time preferences of
individuals for current versus future real consumption. The sum of the real risk - free
interest rate and the inflation premium is the nominal risk - free interest rate. As the real
risk - free rate is 1%, the 2% inflation premium is not the opportunity cost of buying the US T
- bill.
C. Correct because interest rates can be considered opportunity costs. The real risk - free
interest rate is the single - period interest rate for a completely risk - free security if no
inflation were expected. In economic theory, the real risk - free rate reflects the time
preferences of individuals for current versus future real consumption. The sum of the real
risk - free interest rate and the inflation premium is the nominal risk - free interest rate.
Many countries have governmental short - term debt whose interest rate can be considered
to represent the nominal risk - free interest rate in that country. The interest rate on a 90 -
day US Treasury bill (T - bill), for example, represents the nominal risk - free interest rate
over that time horizon. Therefore, the opportunity cost of this investment is 1% + 2% = 3%.
Quantitative Methods: interpret interest rates as required rates of return, discount rates, or
opportunity costs and explain an interest rate as the sum of a real risk - free rate and
premiums that compensate investors for bearing distinct types of risk

26.
A. Incorrect because it is the money - weighted return when the dividend is reinvested.
Calculator Solution: CF0 = - 100, CF1 = 0, CF2 = 109, compute IRR = 4.403% ~ 4.4%. The
answer is also the geometric mean return; [(1 + 0.09)(1 + 0.00) ^0.5 - 1=0.04403 ~ 4.4%.
B. Incorrect because it is the arithmetic mean return; (0.09 + 0.00)/2 = 0.045 = 4.5%. The
arithmetic or mean return is denoted by R, and given by the following equation for asset i,
where R, is the return in period t and T is the total number of periods: R= (R/ + R/2 + ... +
R)/T. The returns in Year 1 and Year 2 are calculated as (100 - 100 + 9)/100 = 0.09 and (100 -
100 + 0)/100 = 0.00, respectively.
C. Correct because it is the money - weighted return when the dividend is not reinvested.
Calculator Solution: CF0 = - 100, CF1 = 9, CF2 = 100, compute IRR = 4.601% ~4.6%.
Quantitative Methods: compare the money - weighted and time - weighted rates of return
and evaluate the performance of portfolios based on these measures

12
CFA Program Level I for February 2024

27.
A. Correct because in regression analysis, we can use an F - distributed test statistic to test
whether the slopes in a regression are equal to zero, with the slopes designated as b,
against the alternative hypothesis that at least one slope is not equal to zero for simple
linear regression, these hypotheses simplify to H0: b1 = 0. Ha b₁ ≠0.
B. Incorrect because in regression analysis, we can use an F - distributed test statistic to test
whether the slopes in a regression are equal to zero, with the slopes designated as b,
against the alternative hypothesis that at least one slope is not equal to zero for simple
linear regression, these hypotheses simplify to H0 b₁ = 0. Ha b₁ ≠0.
C. Incorrect because in regression analysis, we can use an F - distributed test statistic to test
whether the slopes in a regression are equal to zero, with the slopes designated as b,
against the alternative hypothesis that at least one slope is not equal to zero for simple
linear regression, these hypotheses simplify to H, b₁ = 0. Ha b₁ ≠ 0.
Quantitative Methods: calculate and interpret measures of fit and formulate and evaluate
tests of fit and of regression coefficients in a simple linear regression

28.
A. Incorrect because a tree - map is a graphical tool to display categorical data. It consists of
a set of colored rectangles to represent distinct groups, and the area of each rectangle is
proportional to the value of the corresponding group. Additional dimensions of categorical
data can be displayed by nested rectangles.
B. Correct because probabilities for different scenarios and different outcomes are best
represented using a tree diagram,
C. Incorrect because the probability estimates are for two discrete random variables, not
one continuous random variable. A probability function specifies the probability that the
random variable takes on a specific value. For continuous random variables, the probability
function is called the probability density function (pdf), or just the density.
Quantitative Methods: formulate an investment problem as a probability tree and explain
the use of conditional expectations in investment application

29.
A. Incorrect because tokenization is the process of representing ownership rights to physical
assets on a blockchain or distributed ledger. It is not able to detect shifts in an analyst's
sentiment.

13
CFA Program Level I for February 2024

B. Incorrect because data curation refers to the process of ensuring data quality and
accuracy through a data cleaning exercise. This process consists of reviewing all data to
detect and uncover data errors - bad or inaccurate data - and making adjustments for
missing data when appropriate. While the data used for natural language processing may
need to be curated, it is not, in of itself, able to detect shifts in an analyst's sentiment.
C. Correct because NLP [natural language processing] may be used to monitor analyst
commentary to aid investment decision making. Since analysts tend not to change their buy,
hold, and sell recommendations for a company frequently, they may instead offer nuanced
commentary without making a change in their investment recommendation. NLP can,
therefore, be used to detect, monitor, and tag shifts in sentiment, potentially ahead of an
analyst's recommendation change.
Quantitative Methods: describe applications of Big Data and Data Science to investment
management

30.
A. Incorrect because a tree - map is useful for displaying a frequency distribution, not
correlation. In addition to bar charts and grouped bar charts, another graphical tool for
displaying categorical data is a tree - map. It consists of a set of colored rectangles to
represent distinct groups, and the area of each rectangle is proportional to the value of the
corresponding group. The tree - map can represent data with additional dimensions by
displaying a set of nested rectangles.
B. Correct because scatter plots are a very useful tool for the sensible interpretation of a
correlation coefficient. A scatter plot is a type of graph for visualizing the joint variation in
two numerical variables. It is a useful tool for displaying and understanding potential
relationships between the variables.
C. Incorrect because a clustered bar chart is useful for displaying a frequency distribution,
not correlation. In the case of two categorical variables, we need an enhanced version of the
bar chart, called a grouped bar chart (also known as a clustered bar chart), to show joint
frequencies.
Quantitative Methods: interpret correlation between two variables to address an
investment problem

31.
A. Incorrect because Option 3 (annuity due with 20 payments of $13,000 each) has the
highest present value of $137,847. The PV of Option 1 is $136,000.
If a candidate incorrectly calculated the present value of Option 3 as an ordinary annuity,
the lump sum of $136,000 would have the highest present value. Incorrect calculator
solution for Option 3: End mode; N = 20; I/Y = 8; PMT= - 13,000, compute PV = 127,636

14
CFA Program Level I for February 2024

B. Incorrect because Option 3 (annuity due with 20 payments of $13,000 each) has the
highest present value of $137,847. The PV of Option 2 is $135,093.
If a candidate ignored the discount rate, the option with the 30 payments of $12,000 each
would have the highest value. That is, Option 2's 30 payments of $12,000 for a total of
$360,000 is larger than Option 3's 20 payments of $13,000 for a total of $260,000 and the
lump sum payment of $136,000.
C. Correct because Option 3 (annuity due with 20 payments of $13,000 each) has the
highest present value of the annuities and the $136,000 lump sum.
Calculator solution for Option 2: End mode; N = 30; I/Y= 8; PMT= - 12,000, compute PV =
135,093.
Calculator solution for Option 3: Begin mode; N = 20; I/Y= 8; PMT= - 13,000; compute PV =
137,847.
Quantitative Methods: calculate and interpret the present value (PV) of fixed - income and
equity instruments based on expected future cash flows

32.
A. Correct because mean - variance analysis generally considers risk symmetrically in the
sense that standard deviation captures variability both above and below the mean. An
alternative approach evaluates only downside risk. We discuss one such approach, safety -
first rules, as it provides an excellent illustration of the application of normal distribution
theory to practical investment problems. Safety - first rules focus on shortfall risk, the risk
that portfolio value will fall below some minimum acceptable level over some time horizon.
Roy's safety - first criterion states that the optimal portfolio minimizes the probability that
portfolio return, R, falls below the threshold level, R
B. Incorrect because the safety - first ratio uses standard deviation, not semideviation, as a
risk measure. The safety - first optimal portfolio maximizes the safety - first ratio (SFRatio):
SFRatio = [E(RP) – RL]/σp. The quantity E(RP) – RL is the distance from the mean return to the
shortfall level. Dividing this distance by op gives the distance in units of standard deviation.
Although not used in Roy's safety - first criterion, semivariance, semideviation, and related
dispersion measures [also] focus on downside risk. Semivariance is defined as the average
squared deviation below the mean. Semideviation (sometimes called semistandard
deviation) is the positive square root of semivariance.
C. Incorrect because Roy's safety - first criterion assumes that portfolio returns are normally
distributed. If returns are normally distributed, the safety - first optimal portfolio maximizes
the safety - first ratio (SFRatio): SFRatio = [E(RP) – R]/σp. The normal distribution, however, is
less suitable as a model for asset prices than as a model for returns. A normal random
variable has no lower limit. This characteristic has several implications for investment
applications. An asset price can drop only to 0, at which point the asset becomes worthless.

15
CFA Program Level I for February 2024

As a result, practitioners generally do not use the normal distribution to model the
distribution of asset prices.
Quantitative Methods: define shortfall risk, calculate the safety - first ratio, and identify an
optimal portfolio using Roy's safety - first criterion

33.
A. Incorrect because probability sampling gives every member of the population an equal
chance of being selected. Hence it can create a sample that is representative of the
population. In contrast, non - probability sampling depends on factors other than probability
considerations, such as a sampler's judgment or the convenience to access data.
Consequently there is a significant risk that non - probability sampling might generate a non
- representative sample. In general, all else being equal, probability sampling can yield more
accuracy and reliability compared with non - probability sampling.
B. Incorrect because probability sampling gives every member of the population an equal
change of being selected. Hence it can create a sample that is representative of the
population. In contrast, non - probability sampling depends on factors other than probability
considerations, such as a sampler's judgment or the convenience to access data.
Consequently there is a significant risk that non - probability sampling might generate a non
- representative sample. In general, all else being equal, probability sampling can yield more
accuracy and reliability compared with non - probability sampling.
C. Correct because probability sampling gives every member of the population an equal
change of being selected. Hence it can create a sample that is representative of the
population. In contrast, non - probability sampling depends on factors other than probability
considerations, such as a sampler's judgment or the convenience to access data.
Consequently there is a significant risk that non - probability sampling might generate a non
- representative sample. In general, all else being equal, probability sampling can yield more
accuracy and reliability compared with non - probability sampling.
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

34.
A. Incorrect because the t - statistic for a paired comparisons test has n - 1 degrees of
freedom, not n - 2 degrees of freedom, where n is the number of pairs of observations.
When n = 30, the number of degrees of freedom is 30 - 1=29, not 30 - 2=28.
B. Correct because the t - statistic for a paired comparisons test has n - 1 degrees of
freedom, where n is the number of pairs of observations. When n = 30, the number of
degrees of freedom is 30 - 1=29.

16
CFA Program Level I for February 2024

C. Incorrect because this is the number of degrees of freedom of the t - statistic for a
hypothesis test concerning the equality of the population means of two independent
samples, which is n1 + n₂ - 2. When both n1 and n₂ is 30, the number of degrees of freedom
of the t - statistic for a hypothesis test concerning the equality of the population means of
two independent samples is 30 + 30 - 2=58.
Quantitative Methods: construct hypothesis tests and determine their statistical
significance, the associated Type I and Type II errors. and power of the test given a
significance level

35.
A. Incorrect because it is the difference between the third quartile and the second quartile,
Q3 - Q2 = 93 - 62 = 31. The interquartile range (IQR) is the difference between the third
quartile and the first quartile.
B. Correct because the interquartile range (IQR) is the difference between the third quartile,
or IQR = and the first quartile, Q3 - Q1 " = 93 – 11 = 82. Quartiles divide the distribution into
quarters.
C. Incorrect because it is the range of the four numbers given, and not the interquartile
range. Q4 – Q1 = 359 - 11 = 348
Quantitative Methods: calculate, interpret, and evaluate measures of central tendency and
location to address an investment problem

36.
A. Incorrect because the p - value is the smallest level of significance at which the null
hypothesis can be rejected.
B. Correct because the power of a test is the probability of Correctly rejecting the null - that
is, the probability of rejecting the null when it is false.
C. Incorrect because the significance level of a test is the probability of rejecting a true null
hypothesis (l.e., the probability of incorrectly rejecting a null hypothesis).
Quantitative Methods: explain hypothesis testing and its components, including statistical
significance, Type I and Type II errors, and the power of a test.

37.
A. Incorrect because it is the money - weighted rate of return of the investment. The money
- weighted return and its calculation are similar to the internal rate of return. The internal
rate of return is the discount rate at which the sum of present values of these cash flows will
equal zero.

17
CFA Program Level I for February 2024

Calculator solution.: [CF0] = investment in the first share= - 100, [CF1] = investment in the
second share + dividend from first share = - 110 + 10 = - 100. [CF2] = proceeds of selling two
shares = 230, [IRR] [CPT] = 0.09687 ~ 9.7%.
B. Correct because the time - weighted rate of return measures the compound rate of
growth of $1 initially invested in the portfolio over a stated measurement period.... We find
this time - weighted return by taking the geometric mean of the two holding period returns.
A holding period return is the return earned from holding an asset for a single specified
period of time.... This return can be generalized and shown as a mathematical expression in
which P is the price and / is the income: R= [(P1 - Po) + I1]/Po. The subscript indicates the
time of the price or income, (t = 0), is the beginning of the period and (t = 1) is the end of
the period. Thus, the holding period return between time 0 and 1 is
HPR1, = [(110 - 100) + 10]/100 = 0.2 = 20%,
and the holding period return between time 1 and 2 is
HPR₂ = [(230 - 220) + 0/220 = 0.04545~4.5%, where 220 = 110 x 2 is the price (value) of the
two shares held by the investor at time 1.
The time - weighted rate of return is then [(1 + HPR₁) × (1 + HPR₂)10.5 - 1 = [(1 + 0.2) × (1 +
0.04545)]0.5 - 1=0.12006 ~ 12.0%.
C. Incorrect because it simply calculates the arithmetic average of the two holding period
returns; (20% + 4.545%)/2= 12.273% ~12.3%.
Quantitative Methods: calculate and interpret major return measures and describe their
appropriate uses

38.
A. Incorrect because the second decile includes observations that are above the 10th
percentile and at or below the 20th percentile. The 19th observation is in the second group
of ten observations, but it is not in the second decile because there are only 75 observations
in the sample.
B. Correct because the 19th observation is located at the 25th percentile
𝑦
Ly = (1 + 𝑛) (100)
𝑦 19×100
19 = (1 + 75)(100); y = ( ) = 25.0
1 + 75

,which is in the second quintile. The second quintile includes observations that are above
the 20th percentile and at or below the 40th percentile.
C. Incorrect because the second quartile includes observations that are above the 25th
percentile and at or below the 50th percentile. Because the 19th observation is at the 25th
percentile, it is in the first quartile.

18
CFA Program Level I for February 2024

Quantitative Methods: calculate, interpret, and evaluate measures of central tendency and
location to address an investment problem

39.
A. Incorrect because for a given dataset with different observations, the harmonic mean has
the smallest value among harmonic, geometric, and arithmetic means. Unless all the
observations in a dataset have the same value, the harmonic mean is less than the
geometric mean, which, in turn, is less than the arithmetic mean.
B. Correct because the arithmetic mean of a given dataset with different observations is
higher than the harmonic and geometric means. Unless all the observations in a dataset
have the same value, the harmonic mean is less than the geometric mean, which, in turn, is
less than the arithmetic mean
C. Incorrect because for a given dataset with different observations, the geometric mean is
larger than the harmonic mean but smaller than the arithmetic mean. Unless all the
observations in a dataset have the same value, the harmonic mean is less than the
geometric mean, which, in turn, is less than the arithmetic mean.
Quantitative Methods: calculate and interpret different approaches to return measurement
over time and describe their appropriate uses

40.
A. Incorrect because sampling error is the difference between the observed value of a
statistic and the quantity it is intended to estimate.
B. Incorrect because sampling error is the difference between the observed value of a
statistic and the quantity it is intended to estimate.
C. Correct because sampling error is the difference between the observed value of a statistic
and the quantity it is intended to estimate.
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

41.
A. Incorrect because the central limit theorem allows us to make quite precise probability
statements about the population mean by using the sample mean, whatever the
distribution of the population (so long as it has finite variance), because the sample mean
follows an approximate normal distribution for large - size samples. Therefore, having a
normally distributed population is not a requirement for the central limit theorem to hold.

19
CFA Program Level I for February 2024

B. Correct because the central limit theorem states that the variance of the distribution of
the sample mean is σ²/n. The positive square root of variance is standard deviation. The
standard deviation of a sample statistic is known as the standard error of the statistic. The
sample mean, in addition to being an efficient estimator, is also a consistent estimator of
the population mean: As sample size n goes to infinity, its standard error, olin, goes to 0 and
its sampling distribution becomes concentrated right over the value of population mean, μ.
C. Incorrect because the central limit theorem states that the sum (and mean) [not the
product] of a large number of independent random variables is approximately normally
distributed.
Quantitative Methods: explain the central limit theorem and its importance for the
distribution and standard error of the sample mean

42.
A. Correct because the variance of a random variable is the expected value (the probability -
weighted average) of squared deviations from the random variable's expected value: o²(X) =
E[X - E(X)]. Since each scenario is equally likely (probability = 1/3), E(X) = (2.0 + 2.2 + 2.4)/3 =
2.2, so σ²(X) = [(2.0 - 2.2)² + (2.2 - 2.2)² + (2.4 - 2.2)2]/3 = [0.04 + 0.04]/3 = 0.08/3 = 0.0267 ~
0.03 [in $2]
B. Incorrect because it is the standard deviation, not the variance. The variance of a random
variable is the expected value (the probability - weighted average) of squared deviations
from the random variable's expected value: σ2(X) = E[X - E(X)]2. Since each scenario is
equally likely (probability = 1/3), E(X) = (2.0 + 2.2 + 2.4)/3 = 2.2, so σ 2(X)= [(2.0 - 2.2)2 + (2.2
- 2.2)2 + (2.4 - 2.2)2]/3 = [0.04 + 0.04]/3 = 0.08/3 = 0.0267 [in $2]. Standard deviation is the
positive square root of variance. Therefore, σ(X) = (0.0267)0.5= 0.1633 0.16 [in $]
C. Incorrect because it is the difference between each pair of EPS values, not the variance:
$2.40 - $2.20 =$2.20 - $2.00 = $0.20.
Quantitative Methods: calculate expected values, variances, and standard deviations and
demonstrate their application to investment

43
A. Correct because the 50th percentile is the median, which is the average of the two
middle items. (£0.50 + £2.50)/2 = £1.50. In an odd - numbered sample of n items, the
median occupies the (n + 1)/2 position. 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). Calculating the median may also be more complex, to do so, we need to
order the observations from smallest to largest, determine whether the sample size is even
or odd and, on that basis, apply one of two calculations. Alternatively, the 50th percentile
when Ly, is not a whole number or integer, Ly, lies between the two closest integer numbers

20
CFA Program Level I for February 2024

(one above and one below), and we use linear interpolation between those two places to
determine P. That is, L, = (n + 1)(y/100) = (4 + 1)(50/100) = 2.5. Hence, 2 is the closest
integer below the calculated location and 3 is the closest integer above the calculated
location. Using linear Interpolation, P0 = £0.50 + (£2.50 - £0.50) x (2.5 - 2) = £1.50,
B. Incorrect because it is the location of the median; n/2 = 4/2. Alternatively, it is also the
average EPS; ( - £0.50 + £0.50 + £2.50 + £5.50)/4= £2.00.
C. Incorrect because it is the position (or location) of the 50th percentile instead of the 50th
percentile: (4 + 1) x 50/100 = 2.5. The formula for the position (or location) of a percentile in
an array with n entries sorted in ascending order is L, = (n + 1)(y/100) where y is the
percentage point at which we are dividing the distribution and L, is the location (L) of the
percentile (P) in the array sorted in ascending order. The value of L, may or may not be a
whole number. When L, is not a whole number or integer, L, lies between the two closest
integer numbers (one above and one below), and we use linear interpolation between those
two places to determine Py
Quantitative Methods: calculate, interpret, and evaluate measures of central tendency and
location to address an investment problem

44.
A. Incorrect because unlike the coefficient of determination and the F - statistic, which are
relative measures of fit, the standard error of the estimate is an absolute measure of the
distance of the observed dependent variable from the regression line.
B. Incorrect because it is the coefficient of determination, and not the standard error of
estimate. The coefficient of determination, also referred to as the R - squared or R², is the
percentage of the variation of the dependent variable that is explained by the independent
variable.
C. Correct because the standard error of the estimate is a measure of the distance between
the observed values of the dependent variable and those predicted from the estimated
regression.
Quantitative Methods: describe the use of analysis of variance (ANOVA) in regression
analysis, interpret ANOVA results, and calculate and interpret the standard error of estimate
in a simple linear regression

45.
A. Incorrect because n (5) is used in the calculation instead of n - 1: (14/5)0.5, resulting in
1.67% ~1.7%.
B. Correct because the formula for target downside deviation is [E(X, - B)/(n - 1)]0.5, where X,
is the return for the period, B is the target return and n is the total number of sample

21
CFA Program Level I for February 2024

observations. Moreover, the summation is taken over only those observations (X) that are
less than or equal to the target B.

Year Return (%) Deviations from the target Squared deviations

1 6 0 0
2 7 0 0
3 3 -2 4
4 2 -3 9
5 4 -1 1

Since the sum of squared deviations is 14, the target downside deviation = [14/(5 - 1)]0.5,
resulting in 1.87% ~ 1.9%.
C. Incorrect because all the returns are used in the calculation, not just the returns below
the target. In other words, the standard deviation from the target return is calculated. Since
the sum of all squared deviations is 14 + 5= 19, the target downside deviation is calculated
as: [19/(5 - 1)]0.5 resulting in 2.18% ~ 2.2%.
This answer is also closest if n is assumed to be the number of observations used in the
correct calculation (3): (14/3)0.5, resulting in 2.16% ~ 2.2%.
Quantitative Methods: calculate, interpret, and evaluate measures of dispersion to address
an investment problem

46.
A. Incorrect because the Sharpe ratio is the average return in excess of the risk - free rate
divided by the standard deviation of returns. This ratio measures the excess return earned
per unit of standard deviation of return. Therefore, the Sharpe ratio does not quantify the
amount of risk per unit of mean return.
B. Incorrect because the standard deviation measures risk, but it does not quantify the
amount of risk per unit of mean return. Variance is defined as the average of the squared
deviations around the mean. Standard deviation is the positive square root of the variance.
C. Correct because the coefficient of variation, CV, is the ratio of the standard deviation of a
set of observations to their mean value. When the observations are returns, for example,
the coefficient of variation measures the amount of risk (standard deviation) per unit of
mean return.
Quantitative Methods: calculate, interpret, and evaluate measures of dispersion to address
an investment problem

22
CFA Program Level I for February 2024

47.
A. Incorrect because it confuses the location of the second quartile, which is calculated as L,
= (7 + 1) x 50/100 = 4, with the value of the second quartile, which is the return of the 4th
fund after placing the funds' returns in ascending order. 4% also corresponds to the retum
of the 4 fund (the middle fund) when the array has not been sorted in ascending order,
which a candidate might interpret as the 50th percentile (the median).
B. Correct because the formula for the position of a percentile in an array with n entries
sorted in ascending order is L = (n + 1) x Y/100, where y is the percentage point at which we
are dividing the distributien and L, is the location (L) of the percentile (P) in the array sorted
in ascending order with seven entries, the location of the second quartile, or 50th
percentile, is: L= (7 + 1) x 50/100 = 4 When placing the funds' returns in ascending order
(3%, 3%, 4%, 5% 7%, 8%; 12%), the return of the 4th fund is 5%
Alteratively, candidates might realize that the secced quartile or 50th percentue is the
median, 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 odd - numbered sample of n items, the median
occupies the (n + 1)/2 position Hence, the median return is 5%.
C. Incorrect because the mean is mistaken as the 50th percentile or second quartile, mean
return = (12% + 8% + 7% + 5% + 4% + 3% + 3% )/7=6%.
Quantitative Methods: calculate, interpret, and evaluate measures of central tendency and
location to address an investment problem

48.
A. Incorrect because correlation ranges from - 1 and + 1 for two random variables, X and Y
B. Incorrect because correlation may also be an unreliable measure when outliers are
present in one or both of the variables. As we have seen, outliers are small numbers of
observations at either extreme (small or large) of a sample. The correlation may be quite
sensitive to outliers
C. Correct because the correlation coefficient expresses the strength of the linear
relationship between the two random variables.
Quantitative Methods: interpret correlation between two variables to address an
investment problem

49.
A. Correct because the correlation between two random variables, R, and R,, is defined as
p(Ri,Rj)= Cov(Ri,Rj), [o(Ri),σ(Rj)], where Cov denotes the covariance and σ the standard

23
CFA Program Level I for February 2024

deviation. Since the standard deviation of each asset occurs in the denominator of the
correlation formula, it is clear that, all else being equal. an increase in the variance (hence
standard deviation) of either variable will decrease the correlation.
B. Incorrect because the correlation between two random variables, R, and R, is defined as
p(Ri,Rj) = Cov(Ri,Rj)[ σ(Ri), σ(Rj)], where Cov denotes the covariance and σ the standard
deviation. Hence an increase in variance will decrease the correlation, not keep it the same.
Candidates may select this answer choice since the covariance of correlated variables has
remained the same, or if they assume that correlation is independent of variance.
C. Incorrect because the correlation between two random variables, R, and R, is defined as
p(Ri,Rj) = Cov(Ri,Rj /[ σ (Ri),σ(Rj)], where Cov denotes the covariance and σ the standard
deviation. Hence an increase in variance will decrease the correlation, not increase it.
Candidates may select this answer choice if they think that more variance means more
covariance and hence more correlation, or if they swap numerator and denominator of the
correlation formula; [σ(Ri),σ(Rj)]/Cov(Ri,Rj).
Quantitative Methods: calculate and interpret the expected value, variance, standard
deviation, covariances, and correlations of portfolio returns

50.
A. Correct because the correlation coefficient is a measure of the linear association between
two variables; it would not be appropriate to use the correlation coefficient to measure the
non - linear relationship between variables
B. Incorrect because the correlation coefficient is a measure of the linear association
between two variables. It does not measure non - linear relationships between variables.
C. Incorrect because the correlation coefficient is a measure of the linear association
between two variables. It does not measure non - linear relationships between variables.
Quantitative Methods: interpret correlation between two variables to address an
investment problem

51.
A. Correct because the equation to estimate the standard error of the sample mean
effectively computes the sample standard deviation of the different means generated
across all resamples. Hence the mean of each resample is required. However, neither the
mean, nor the standard deviation, of the original sample are required
B. Incorrect because the equation to estimate the standard error of the sample mean
effectively computes the sample standard deviation of the different means generated
across all resamples. Hence the mean of each resample is required. However, neither the
mean, nor the standard deviation, of the original sample are required.

24
CFA Program Level I for February 2024

C. Incorrect because the equation to estimate the standard error of the sample mean
effectively computes the sample standard deviation of the different means generated
across all resamples. Hence the mean of each resample is required. However, neither the
mean, nor the standard deviation, of the original sample are required.
Quantitative Methods: describe the use of resampling (bootstrap, jackknife) to estimate the
sampling distribution of a statistic

52.
A. Correct because the expected value E(X) = Σi=1 nP(Xi)Xj = (0.20 x 35) + (0.30 x 50) + (0.50 x
80) = 62. The variance σ2(X) = E{[X - E(X)]2}= Σi=1 nP(Xi)[X - E(X)]2 = 0.20 x (35 - 62)2 + 0.30 x (50
- 62)2 + 0.50 × (80 - 62)2 = 351. Standard deviation is the positive square root of variance: σ =
3511/2 ~ 18.73.
B. Incorrect because it uses the simple average of the outcomes instead of the expected
value in the calculation. The simple average Xbar = (35 + 50 + 80)/3 = 55. Hence the
variance becomes σ2(X) = Σi=1 nP(Xi)[X — Xbar]2 =0.20 x (35 - 55)2 + 0.30 x (50 - 55)2 + 0.50 x
(80 - 55)2 = 400. Then, the standard deviation is equal to σ = 4001/2 = 20.00.
C. Incorrect because it ignores that this is a random variable and just calculates the sample
standard deviation instead for a sample with 3 observations. The sample mean Xoar (35 + 50
+ 80)/3 = 55. Hence the sample variance is equal to σ2 = (Σi=1 n [X - Xbar]2)/(n − 1) = [(35 −55)2
+ (50 - 55)2 + (80 - 55)/(3 - 1) = 525. Then, the sample standard deviation is equal to σ =
5251/2 ~ 22.91.
Quantitative Methods: calculate expected values, variances, and standard deviations and
demonstrate their application to investment problems

53.
A. Incorrect because it wrongly multiplies the expected dividend per share given the
favorable scenario ($1.90) by the probability of the scenario (0.60):
Probability of favorable scenario x E(Dividend | Favorable scenario)
= 0.60 × [(0.80 x $2.00) + (0.20 x $1.50)]
= 0.60 x $1.90
= $1.14.
B. Incorrect because it is the unconditional expected dividend per share based on the total
probability rule for expected value:
E(Dividend | Favorable scenario) = (0.80 x $2.00) + (0.20 x $1.50) = $1.90.
E(Dividend | Unfavorable scenario) = (0.30 x $0.75) + (0.70 x $0.50) = $0.575.

25
CFA Program Level I for February 2024

E(Dividend) = (0.60 x $1.90) + (0.40 x $0.575) = $1.37.

C. Correct because the expected value of a random variable X given an event or scenario S is
denoted E(XS). Suppose the random variable X can take on any one of n distinct outcomes
X1, X2, ….Xn, (these outcomes form a set of mutually exclusive and exhaustive events). The
expected value of X conditional on S is the first outcome, X,, times the probability of the first
outcome given S, P(X1 | S), plus the second outcome, X₂, times the probability of the second
outcome given S, P(X2 | S), and so forth.
In our case,
S = Favorable scenario,
X1 = Dividend of $2.50, P(X1 | S) = 0.80
X₂ = Dividend of $1.50, P(X₂ | S) = 0.20.
Thus, the expected dividend given the favorable scenario = (0.80 x $2.00) + (0.20 x $1.50) =
$1.90.
Probability Trees and Conditional Expectations: formulate an investment problem as a
probability tree and explain the use of conditional expectations in investment application

54.
A. Incorrect because it takes the natural logarithm of Term Deposit 1's stated annual rate
instead of its effective annual rate (EAR). Calculation: In(1.04) = 0.039221 = 3.92%.
B. Correct because the investor will be indifferent if the EAR for both term deposits is the
same. Therefore, we need to find the stated annual rate with continuous compounding that
corresponds to the EAR of the quarterly compounded term deposit. Calculations: EAR of
Term Deposit 1 = (1 + 0.04/4)4 - 1= 0.040604. Hence, EAR of Term Deposit 2 = 0.040604=er -
1, leading to a stated annual rate for Term Deposit 2 of r = In(1.040604) = 0.039801 = 3.98%.
C. Incorrect because it is the EAR of Term Deposit 1, not the stated annual rate of Term
Deposit 2. EAR of Term Deposit 1 = (1 + 0.04/4)4 - 1= 0.040604 = 4.06%. This answer is also
closest to the calculations e0.04 - 1 = 0.040811 = 4.08% or e0.040604 - 1 = 0.041440 = 4.14%.
=
Quantitative Methods: calculate and interpret annualized return measures and
continuously compounded returns, and describe their appropriate uses

26
CFA Program Level I for February 2024

55.
A. Correct because the harmonic mean is used to determine the average price paid per
share when using cost averaging.
3
= 14.05
1 1 1
14 + 12 + 17

The weighted mean formula could also be used, where the weights would be the proportion
of the total number of shares purchased. However, in order to use this method a fixed
investment amount would need to be created.
B. Incorrect because it is the average price per share, not the cost per share; (14 + 12 +
17)/3 = 14.33. Using the arithmetic mean assumes equal weighting, which is not appropriate
when the investment amount is fixed and the share price is variable.
C. Incorrect because the price per share is incorrectly used as the weight in the weighted
mean formula:
14 12 17
14(14 + 12 + 17) + 12(14 + 12 + 17) + 17(14 + 12 + 17) = 14.63

Quantitative Methods: calculate and interpret different approaches to return measurement

over time and describe their appropriate uses

56.
A. Incorrect because in the log - lin model, the dependent variable is in logarithmic form and
the independent variable is not.
B. Correct because the lin - log model is similar to the log - lin model, but only the
independent variable is in logarithmic form.
C. Incorrect because the log - log model is one in which both the dependent variable and the
independent variable are linear in their logarithmic forms. In the lin - log model only the
independent variable is in logarithmic form.
Quantitative Methods: describe different functional forms of simple linear regressions

27
CFA Program Level I for February 2024

57.
A. Incorrect because the covariance formula is misapplied as Cov(RA,RB) = ΣP(RA,i,RB,j)(RA,i −
E[RA]) + ΣP(RA,i‚RBi) (RB,i - E[RB]), resulting in 0.2(2014) + 0.4(1514) + 0.4(10 - 14) + 0.2(159) +
0.4(109) + 0.4(5 - 9) = 1.2 + 0.4 + ( - 1.6) + 1.2 + 0.4 + ( - 1.6) = 0.
B. Incorrect because the covariance formula is misapplied as Cov(RA,RB) = ΣP(RA,i,RB,i)(RA,i -
RB,i;) resulting in
0.2(20 - 15) + 0.4(15 - 10) + 0.4(10 - 5)
= 0.2(5) + 0.4(5) + 0.4(5)
= 1 + 2 + 2=5.
This answer also represents the difference between the expected returns of X and Y:
14 - 9 = 5.
C. Correct because the formula for calculating the covariance between random variables RA,
and RB is Cov(RA,RB) = ΣΣP(RA,I,RB,i)(RA,i) - E[RA])(RB,j - E[RB]).
The expected return (given) for each company is:

E[RX]= 0.2(20) + 0.4(15) + 0.4(10) = 4 + 6 + 4= 14,

E[RY] = 0.2(15) + 0.4(10) + 0.4(5)=3 + 4 + 2 = 9.

Hence, Cov(Rx,Ry) = 0.2(2014) (15 - 9) + 0.4(15 - 14)(10 - 9) + 0.4(10 - 14)(5 - 9)=0.2(6)(6) +

0.4(1)(1) + 0.4( - 4) ( - 4)=7.2 + 0.4 + 6.4 = 14.
Quantitative Methods: calculate and interpret the covariance and correlation of portfolio
returns using a joint probability function for returns

58.
A. Correct because the mean absolute deviation of 1.5% is less than the sample standard
deviation of 1.83%. The mean absolute deviation, MAD, is calculated as:
∑𝑛𝑖=1 |𝑋𝑖 − 𝑋|
𝑛
where the sample mean,
∑ 𝑛
𝑋𝑖
𝑋̅= 𝑖=1
𝑛

As the sample mean is:

(−2−1 + 1 + 2)
𝑋̅= =0
4

28
CFA Program Level I for February 2024

the calculation of MAD is:

|−2−0| + |−1−0| + |1−0| + |2−0| 2+2+1+1
=
4 4

= 1.5000%, while the sample standard deviation of n observations, Xi, is

∑𝑛
𝑖=1(𝑋𝑖 −𝑋)^2
S=√ 𝑛−1

here:

(−2−0)2 + (−1−0)2 + (1−0)2 + (2−0)2 4+1+4+1

√ =√ = √3.3333
4−1 3

= 1.8257%.

B. Incorrect because the mean absolute deviation, MAD, is less than standard deviation of
returns in the sample. The mean absolute deviation, MAD, is calculated as:
∑𝑛𝑖=1 |𝑋𝑖 − 𝑋|
𝑛

where the sample mean,

∑𝑛
𝑋𝑖
𝑋̅= 𝑖=1
𝑛

which results in MAD = 1.50% while sample standard deviation

∑𝑛
𝑖=1(𝑋𝑖 −𝑋)^2
S=√ 𝑛−1

= 1.83% therefore MAD is less than standard deviation of sample returns.

C. Incorrect because the mean absolute deviation, MAD, is less than standard deviation of
returns in the sample.
The mean absolute deviation, MAD, is calculated as:
∑𝑛𝑖=1 |𝑋𝑖 − 𝑋̅|
𝑛
where the sample mean,
∑ 𝑛
𝑋𝑖
𝑋̅= 𝑖=1
𝑛

which results in MAD = 1.50% while sample standard deviation

29
CFA Program Level I for February 2024

∑𝑛 ̅ 2
𝑖=1(𝑋𝑖 −𝑋)
S=√ 𝑛−1

= 1.83% therefore MAD is less than standard deviation of sample returns.

Quantitative Methods: calculate, interpret, and evaluate measures of dispersion to address
an investment problem

59.
A. Correct because the money - weighted return and its calculation are similar to the
internal rate of return and the yield to maturity. Just like the internal rate of return,
amounts invested are cash outflows from the investor's perspective and amounts returned
or withdrawn by the investor, or the money that remains at the end of an investment cycle,
is a cash inflow for the investor. For the stock investment this is: $20 $3/(1 + r) + ($20 +
$1)/(1 + r)², yielding r = 10.24% ~10%.
Calculator solution: CF0 = - 20; CF1 = 3; CF2 = 21; IRR CPT = 10.24.
B. Incorrect because it is time - weighted, not money - weighted, rate of return. For the
stock investment, the holding period returns (HPR) for the two periods are HPR, = ($12 - $20
+ $3)/$20= - 0.25= - 25% and HPR₂ = ($20 - $12 + $1)/$12 = 0.75 = 75%. Hence, TWR =
√(0.75 x 1.75) - 1=0.1456 = 14.56% ~ 15%.
C. Incorrect because it confuses the money - weighted rate of return with the 'money
returned', Le. the net cash flow: $20 + $3 + $1 - $20= $4, which, on an initial investment of
$20, corresponds to a 20% return; $4/$20 = 0.2 = 20%.
Quantitative Methods: calculate and interpret major return measures and describe their
appropriate uses

60.
A. Incorrect because the money - weighted return and its calculation are similar to the
internal rate of return and the yield to maturity. Just like the internal rate of return,
amounts invested are cash outflows from the investor's perspective and amounts returned
or withdrawn by the investor, or the money that remains at the end of an investment cycle,
is a cash inflow for the investor That is, cash withdrawals and investments are included in
the money - weighted return calculation, however, cash withdrawals and investments are
ignored in the calculation of the arithmetic and geometric mean returns
B. Correct because the money - weighted return is an accurate measure of what the
investor actually eamed on the money invested
C. Incorrect because although the money - weighted return is an accurate measure of what
the investor actually earned on the money invested, it is limited in its applicability to other
situations. For example, it does not allow for return comparison between different

30
CFA Program Level I for February 2024

individuals or different investment opportunities. Two investors in the same mutual fund
may have different money - weighted returns because they invested different amounts in
different years.
Quantitative Methods: calculate and interpret major return measures and describe their
appropriate uses

61.
A. Incorrect because an investment measure that is not sensitive to the additions and
withdrawals of funds is the time - weighted rate of return. The time - weighted rate of
return measures the compound rate of growth of $1 initially invested in the portfolio over a
stated measurement period. For the evaluation of portfolios of publicly traded securities,
the time - weighted rate of return is the preferred performance measure as it neutralizes
the effect of cash withdrawals or additions to the portfolio, which are generally outside of
the control of the portfolio manager.
B. Incorrect because the simplest way to compute the return is to take a simple arithmetic
average of all holding period returns. Moreover, the arithmetic mean return assumes that
the amount invested at the beginning of each period is the same. Thus, the arithmetic mean
return does not account for cash additions to the portfolio and it is not affected by them.
C. Correct because the money - weighted rate of return ... puts a greater weight on the
second year's relatively poor performance... than the first year's relatively good
performance..., as more money was invested in the second year than in the first. That is the
sense in which returns in this method of calculating performance are 'money weighted If a
client gives an investment manager more funds to invest at an unfavorable time, the
manager's money - weighted rate of return will tend to be depressed.
Quantitative Methods: compare the money - weighted and time - weighted rates of return
and evaluate the performance of portfolios based on these measures

62.
A. Incorrect because "uncorrelated" is misinterpreted as having a correlation value of - 1
(i.e., perfect negative correlation is used instead of zero) when calculating the portfolio
standard deviation;

σp =

√(0.5)²(3)² + (0.5)²(3)² + 2(0.5)(0.5)(3)(3)(−1) = √0 = 0% -

B. Correct because the portfolio standard deviation is 2.1%;
√(0.5)2(3)2 + (0.5)2(3)2 + 2(0.5)(0.5)(3)(3)(0) = √4.5
or 2.12%, using the formula

31
CFA Program Level I for February 2024

√σ2p = √w[Ww1 σ21 + W22 σ22 + 2W1W2Cov(R1,R2)

where the Cov(R1,R2) = P(R1,R2)σ(R1)σ(R2)
, which is equal to zero because the funds are uncorrelated;
P(R1, R2)=0.
C. Incorrect because it is the weighted average of the two securities' standard deviation and
calculates the portfolio standard deviation as: σ = (0.5) (3%) + (0.5) (3%) = 3.0%.
Quantitative Methods: calculate and interpret the expected value, variance, standard
deviation, covariances, and correlations of portfolio retums

63.
A. Correct because the present value of the future lump sum payment is PV = FV N (1 + r) - N =
$500,000(1 + 0.04) - 15= $277,632.25. The 10 annual payments form an annuity due (since
the payments start today) whose present value equals the present value of an ordinary
annuity with 9 annual payments plus the first payment, i.e. PV = A + A[1 - 1/(1 + r)N ]/r=A(1 +
[1 - 1/(1 + 0.04)9]/0.04)= 8.4353 (A). Setting the PV of the cash outflows (the annuity) equal
to the PV of the cash inflows (the return in 15 years), we can solve for the annual payment
amount; A = $277,632.25/8.4353 $32,913.
Calculator solution: BGN; N = 10; I/Y = 4; PV = 277,632.25; solve for PMT 32,913.
B. Incorrect because it mistakes the required payments as an ordinary annuity, rather than
an annuity due, calculating their present value as: PV = A[1 - 1/(1 + r)N]/r = A([1 - 1/(1 +
0.04)10 ]/0.04)= 8.1109(A). The present value of the return at t = 15 is PV = FV (1 + r) - N=
$500,000(1 + 0.04) - 15= $277,632.25. Setting these two values equal and solving for the
annual payment thus yields: A = $277,632.25/8.1109 $34,230.
Calculator solution: END; N = 10; I/Y= 4; PV = 277,632.25; solve for PMT = 34,230.
C. Incorrect because it assumes the $500,000 return is paid at t = 10 instead of t = 15. The
present value of this payment is therefore PV = FV (1 + r) - N = $500,000(1 + 0.04) - 10 =
$337,782.08. The 10 annual payments form an annuity due (since the payments start today)
whose present value equals the present value of an ordinary annuity with 9 annual
payments plus the first payment, i.e. PV = A + A[1 - 1/(1 + r)N ]/r=A(1 + [1 - 1/(1 + 0.04)9
/0.04)= 8.4353(A). Setting the PV of the cash outflows (the annuity) equal to the PV of the
cash inflows (the return in 15 years), we can solve for the annual payment amount; A =
$337,782/8.4353 ~ $40,044.
Calculator solution: BGN; N = 10; I/Y = 4; FV = 500,000; solve for PMT = 40,044.
Quantitative Methods: calculate and interpret the implied return of fixed - income
instruments and required return and implied growth of equity instruments given the
present value (PV) and cash flows

32
CFA Program Level I for February 2024

64.
A. Incorrect because the power of the test is equal to one minus the probability of Type II
error. The p - value is a measure of Type I error and is synonymous with distracter B.
B. Incorrect because the power of the test is equal to one minus the probability of Type II
error. The p - value is a measure of Type I error and is synonymous with distracter B.
C. Correct because the power of a test is the probability of Correct ly rejecting the null - that
is, the probability of rejecting the null when it is false. Failing to reject the null hypothesis
when it is false is a Type II error. So the power of the test is equal to one minus the
probability of Type II error.
Quantitative Methods: explain hypothesis testing and its components, including statistical
significance, Type I and Type II errors, and the power of a test.

65.
A. Incorrect because the prediction interval is equal to the predicted value of the dependent
variable plus/minus the critical t - value times the standard error of the forecast. The larger
the sample size (n) in the regression estimation, the smaller the standard error of the
forecast. Meanwhile, when the sample size is larger, the critical t - value will be smaller.
Both will lead to a narrower prediction interval if holding other things constant.
B. Incorrect because the prediction interval is equal to the predicted value of the dependent
variable plus/minus the critical - value times the standard error of the forecast. When the
level of significance increases, the critical - value will decrease, which will lead to a narrower
prediction interval if holding other things constant.
C. Correct because the prediction interval is equal to the predicted value of the dependent
variable plus/minus the critical ! - value times the standard error of the forecast. The better
the fit of the regression model, the smaller the standard error of the estimate (s) and,
therefore, the smaller standard error of the forecast. When the standard error of the
estimate increases, the standard error of the forecast will increase, which will lead to a
wider prediction interval if holding other things constant.
Quantitative Methods: calculate and interpret the predicted value for the dependent
variable, and a prediction interval for it, given an estimated linear regression model and a
value for the independent variable

66.
A. Incorrect because the annuity is taken as an ordinary annuity rather than an annuity due,
leading to a PV 10 years from today of PV10 $50,000 x [1 - 1/(1.03)4]/0.03= $50,000 ×

33
CFA Program Level I for February 2024

3.717098 = $185,855. The PV of the annuity today would equal PV, = $185.855/(1.03)^10 =
$138,294.
Calculator solution: END mode, N = 4; I/Y = 3%; PMT 50,000; solve for PV = 185,855.
Discounted back 10 years: N = 10; I/Y= 3%, FV= 185,855, solve for PV = 138,294.
This is also the result if the PV of the annuity due is discounted back 11 years instead of 10
years: $191.431/(1.03)^11 = $138,294.
Calculator solution: BEGIN mode; N = 4; I/Y=3% ; PMT = 50,000, solve for PV 191,431.
Discounted back 11 years: N = 11, I/Y=3%; FV = 191,431, solve for PV = 138,294.
B. Correct because the present value (PV) of the annuity due 10 years from today equals PV
10 = $50,000 + $50,000 [1 - 1/(1.03) ^3/0.03 =$50,000 + $50,000 x 2.828611 = $191,431.
The PV of the annuity today equals PV $191.431/(1.03)^10 =$142,442.
Calculator solution: BEGIN mode; N = 4; I/Y=3%; PMT = 50,000; solve for PV 191,431.
Discounted back 10 years: N = 10; I/Y= 3%, FV = 191,431, solve for PV = 142,442.
Alternatively, the annuity can be treated as an ordinary annuity, with a PV 9 years from
today of PV,= $50,000 × [1 - 1/(1.03)^4/0.03 = $50,000 × 3.717098 = $185,855. The PV of the
annuity today equals PV₁ = $185,855/(1.03)^9 = $142,442.
Calculator solution: END mode; N= 4; I/Y= 3%; PMT 50,000; solve for PV = 185,855.
Discounted back 9 years: N = 9; I/Y= 3%, FV = 185,855; solve for PV = 142,442
C. Incorrect because the PV of the annuity due is discounted back 9 years instead of 10
years: $191,431/(1.03)^9 = $146,716.
Calculator solution: BEGIN mode: N = 4; I/Y=3% ; PMT = 50,000; solve for PV 191,431,
Discounted back 9 years: N = 9; I/Y = 3%; FV = 191,431; solve for PV = 146,716.
This answer is also closest to the PV of the entire required amount: $200,000/(1.03) 10 =
$148,819.
Quantitative Methods: calculate and interpret the implied return of fixed - income
instruments and required return and implied growth of equity instruments given the
present value (PV) and cash flows

67.
A. Incorrect because it assumes the ordinary annuity starts in Year 5 instead of Year 4. The
present value of an ordinary annuity with 7 payments of $10,000 at a 6% discount rate is
calculated as follows:
PV=A[1 - 1/(1 + r)N]/r
PV4=$10,000 × [1 - 1/(1 + 0.06)7]/0.06
PV4 $55,823.81

34
CFA Program Level I for February 2024

Then the PV of the investment is incorrectly discounted from Year 5 instead of Year 4 such
that:
PV1 = FV5(1 + r) - N
PV= $55,823.81 × (1 + 0.06) - 5
PV= $41,714.80 ~ $41,715.
Calculator solution:
(1) END mode; N = 7; 1= 6; PMT = - 10,000; FV = 0; solve for PV = 55,823.81.
(2) END mode; N = 5; 1= 6; PMT = 0; FV = - 55,823.81; solve for PV = 41,714.80.

B. Correct because the present value in Year 4 of an ordinary annuity with 7 payments of
$10,000 at a 6% discount rate is calculated as follows:
PV=A[1 - 1/(1 + r)N]/r
PV4 $10,000 × [1 - 1/(1 + 0.06)7]/0.06
PV4 $55,823.81
Then, using a time line, the PV of the annuity in today's dollars is
PV0 = FV4(1 + r) - N
PV0 $55,823.81 × (1 + 0.06) - 4
PV0 $44,217.69 ~ $44,218.
Calculator solution:
(1) END mode; N = 7; 1= 6; PMT= - 10,000; FV = 0; solve for PV = 55,823.81.
(2) END mode; N = 4; 1= 6; PMT = 0; FV = - >55,823.81; solve for PV = 44,217.69.

C. Incorrect because it is an intermediate step in the calculation and it represents the value
of the annuity in 4 years. The present value in Year 4 of an ordinary annuity with 7 payments
of $10,000 at a 6% discount rate is calculated as follows:
PV=A[1 - 1/(1 + r)^N/r
PV, $10,000 x [1 - 1/(1 + 0.06)^7]/0.06
PV $55,823.81 ~ $55,824.
Calculator solution: (1) END mode, N = 7; 1= 6; PMT - 10,000; FV = 0; solve for PV =
55,823.81.

35
CFA Program Level I for February 2024

Quantitative Methods: calculate and interpret the present value (PV) of fixed - income and
equity instruments based on expected future cash flows

68.
A. Incorrect because we look at the sum of squared deviations of the observations from the
mean to capture [the variation of the dependent variable]. Our goal is to understand what
explains the variation of Y. The variation of Y is often referred to as the sum of squares total
(SST), or the total sum of squares. Therefore, the difference between an observation and
the mean of the dependent variable is not the observation's residual.
B. Correct because the residual for the observation, e,, is how much the observed value of Y,
differs from the estimated [value] using the regression line. Further, the residual refers to
the fitted linear relation based on the sample.
C. Incorrect because the error term refers to the true underlying population relationship,
whereas the residual refers to the fitted linear relation based on the sample. Further, the
error term, or simply the error, represents the difference between the observed value of Y
and that expected from the true underlying population relation between Y and X
Quantitative Methods: describe a simple linear regression model, how the least squares
criterion is used to estimate regression coefficients, and the interpretation of these
coefficients

69.
A. Incorrect because 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. US T - bills, for example, do not bear a liquidity premium because large amounts can
be bought and sold without affecting their market price.
B. Incorrect because the maturity premium compensates investors for the increased
sensitivity of the market value of debt to a change in market interest rates as maturity is
extended. For example, the difference between the interest rate on longer - maturity, liquid
Treasury debt and that on short - term Treasury debt reflects a positive maturity premium
for the longer - term debt.
C. Correct because the real risk - free rate reflects the time preferences of individuals for
current versus future real consumption.
Quantitative Methods: interpret interest rates as required rates of return, discount rates, or
opportunity costs and explain an interest rate as the sum of a real risk - free rate and
premiums that compensate investors for bearing distinct types of risk

70.

36
CFA Program Level I for February 2024

A. Correct because the target downside deviation = [(X - B)(n - 1)]0.5, where X, are the
periodic returns below the target return, B is the target return, and n is the total number of
periods. Since the sample has a standard deviation of 2.7%, it will have values below and
above its mean of 1.0%. Since the target downside deviation ignores the deviations above
the mean, it will be less than the standard deviation.
B. Incorrect because the target downside deviation = [(X, - B)/(n - 1)], where X, are the
periodic returns below the target return, B is the target return, and n is the total number of
periods. Since the sample has a standard deviation of 2.7%, it will have values below and
above its mean of 1.0%. Since the target downside deviation ignores the deviations above
the mean, it will be less than the standard deviation.

C. Incorrect because the target downside deviation = [(X - B)/(n - 1)]0.5, where X, are the
periodic returns below the target return, B is the target return, and n is the total number of
periods. Since the sample has a standard deviation of 2.7%, it will have values below and
above its mean of 1.0%. Since the target downside deviation ignores the deviations above
the mean, it will be less than the standard deviation.
Quantitative Methods: calculate, interpret, and evaluate measures of dispersion to address
an investment problem

71.
A. Correct because the trimmed mean is computed by excluding a stated small percentage
of the lowest and highest values and then computing an arithmetic mean of the remaining
values. For example, a 5% trimmed mean discards the lowest 2.5% and the highest 2.5% of
values and computes the mean of the remaining 95% of values.
B. Incorrect because the harmonic mean is the value obtained by summing the reciprocals
of the observations - terms of the form 1/X - then averaging that sum by dividing it by the
number of observations n, and, finally, taking the reciprocal of the average. The harmonic
mean may be viewed as a special type of weighted mean in which an observation's weight is
inversely proportional to its magnitude. The harmonic mean does not exclude or replace
any outliers.
C. Incorrect because the winsorized mean is calculated by assigning a stated percentage of
the lowest values equal to one specified low value and a stated percentage of the highest
values equal to one specified high value, and then it computes a mean from the restated
data. For example, a 95% winsorized mean sets the bottom 2.5% of values equal to the
value at or below which 2.5% of all the values lie (as will be seen shortly, this is called the
'2.5th percentile' value) and the top 2.5% of values equal to the value at or below which
97.5% of all the values lie (the '97.5th percentile' value).

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CFA Program Level I for February 2024

Quantitative Methods: calculate, interpret, and evaluate measures of central tendency and
location to address an investment problem

72.
A. Incorrect because the stock price will be distributed in a lognormal manner, not in a
normal or uniform manner.
B. Incorrect because the stock price will be distributed in a lognormal manner, not in a
normal or uniform manner.
C. Correct because the relationship between normal and lognormal distributions is if a
stock's continuously compounded return is normally distributed, then future stock price is
necessarily lognormally distributed.
Quantitative Methods: explain the relationship between normal and lognormal
distributions and why the lognormal distribution is used to model asset prices when using
continuously compounded asset returns

73.
A. Incorrect because the procedure does not involve the systematic selection of a sample
from the population. With systematic sampling, we select every kth member until we have a
sample of the desired size. The sample that results from this procedure should be
approximately random.
B. Correct because the sampling procedure does not give every member of the population
an equal chance of being selected. It is based on the analyst's convenience. Non - probability
sampling depends on factors other than probability considerations, such as a sampler's
judgment or the convenience to access data.
C. Incorrect because cluster sampling requires the division or classification of the population
into subpopulation groups, called clusters. In this method, the population is divided into
clusters, each of which is essentially a mini - representation of the entire populations. Then
certain clusters are chosen as a whole using simple random sampling. If all the members in
each sampled cluster are sampled, this sample plan is referred to as one - stage cluster
sampling. If a subsample is randomly selected from each selected cluster, then the plan is
referred as two - stage cluster sampling. Choosing only company names starting with the
letter P is not two - stage cluster sampling.
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

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CFA Program Level I for February 2024

74.
A. Incorrect because it fails to account for any compounding: (3% + 5%) = 8%, 90,000 (1.08)
= 97,200.
B. Incorrect because it fails to account for quarterly compounding, 90,000(1.03) (1.05) =
97,335.
C. Correct because the returns are compounded quarterly,
0.03 4 0.05 4
90,000(1 + ) (1 + ) = 97,455
4 4

Quantitative Methods: calculate and interpret annualized return measures and

continuously compounded retums, and describe their appropriate uses

75.
A. Incorrect because the two most noteworthy observations about the lognormal
distribution are that it is bounded below by 0 and it is skewed to the right
B. Correct because the two most noteworthy observations about the lognormal distribution
are that it is bounded below by 0 and it is skewed to the right (it has a long right tail), i.e. it is
asymmetrical.
C. Incorrect because like the normal distribution, the lognormal distribution is completely
described by two parameters. Unlike the other distributions, a lognormal distribution is
defined in terms of the parameters of a different distribution. The two parameters of a
lognormal distribution are the mean and standard deviation (or variance) of its associated
normal distribution. Remember, we must keep track of two sets of means and standard
deviations (or variances) the mean and standard deviation (or variance) of the associated
normal distribution (these are the parameters) and the mean and standard deviation (or
variance) of the lognormal variable itself. The mean of the lognormal distribution is not
equal to the mean of the associated normal distribution.
Quantitative Methods: explain the relationship between normal and lognormal
distributions and why the lognormal distribution is used to model asset prices when using
continuously compounded asset returns

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CFA Program Level I for February 2024

76.
A. Incorrect because a scatter plot (or scattergram) represents two variables in two
dimensions. The variation of Y [the dependent variable] is often referred to as the sum of
squares total (SST), or the total sum of squares.
B. Correct because the variation of Y [the dependent variable] is often referred to as the
sum of squares total (SST), or the total sum of squares.
C. Y [the dependent variable] is often referred to as the sum of squares total (SST), or the
total sum of squares.
Quantitative Methods: describe a simple linear regression model, how the least squares
criterion is used to estimate regression coefficients, and the interpretation of these
coefficients

77.
A. Correct because tokenization is the process of representing ownership rights to physical
assets on a blockchain or distributed ledger.
B. Incorrect because an initial coin offering (ICO) is an unregulated process whereby
companies sell their crypto tokens to investors in exchange for fiat money or for another
agreed upon cryptocurrency.
C. Incorrect because a consensus mechanism is used to validate new transactions in the
blockchain; it is not the process of representing ownership rights to physical assets. New
transactions are inserted into the chain only after validation via a consensus mechanism in
which authorized members agree on the transaction and the preceding order, or history, in
which previous transactions have occurred. The consensus mechanism used to verify a
transaction includes a cryptographic problem that must be solved by some computers on
the network (known as miners) each time a transaction takes place.
Alternative Investments: describe financial applications of distributed ledger technology

78.
A. Correct because using the equation PV=FVN (1 + rs/m) - Nm
where
m = number of compounding periods per year
r = quoted annual interest rate
N = number of years
we compute PV = $10,000,000 × (1 + 0.05/2) - 15x2 = $4,767,426.85 ~ $4,767,427.

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CFA Program Level I for February 2024

In applying the equation, we use the periodic rate (in this case, the semi - annual rate) and
the appropriate number of periods with semi - annual compounding.
Alternative solution using a financial calculator in END mode:
N = 30; I/Y= 0.025; PMT = 0; FV = 10,000,000; CPT PV = $4,767,426.852 ~ $4,767,427
B. Incorrect because when computing present value, it uses 5% instead of EAR to get
$10,000,000 x (1.05) - 15= $4,810,170.98 ~ $4,810,171.
C. Incorrect because in the present value equation, it incorrectly accounts for compounding
(multiplies by 2 instead of dividing) and does not use the appropriate number of periods for
semi - annual compounding (divides by 2 instead of multiplying by 2); to incorrectly
compute PV = 10,000,000 × (1 + 0.05x2) - 15/2= $4,892,770.68 ~ $4,892,771.
Quantitative Methods: calculate and interpret annualized return measures and
continuously compounded returns, and describe their appropriate uses

79.
A. Incorrect because bitcoin is a well - known use of an open permissionless network. .
B. Incorrect because miners verify transactions in the blockchain, they do not execute smart
contracts. The consensus mechanism used to verify a transaction includes a cryptographic
problem that must be solved by some computers on the network (known as miners) each
time a transaction takes place. On the other hand, smart contracts are computer programs
that self - execute on the basis of pre - specified terms and conditions agreed to by the
parties to a contract.
C. Correct because through tokenization, the process of representing ownership rights to
physical assets on a blockchain or distributed ledger, DLT [distributed ledger technology] has
the potential to streamline this process by creating a single, digital record of ownership with
which to verify ownership title and authenticity, including all historical activity.
Alternative Investments: describe financial applications of distributed ledger technology

80.
A. Correct because we need to make the following four key assumptions to be able to draw
valid conclusions from a simple linear regression model. One of those assumptions is that
regression residuals are normally distributed.
B. Incorrect because one of the four underlying assumptions for simple linear regression is
Independence: The observations, pairs of Ys and Xs, are independent of one another. This
implies the regression residuals are uncorrelated [and do not have high correlation] across
observations.

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CFA Program Level I for February 2024

C. Incorrect because one of the four underlying assumptions for simple linear regression is
Homoskedasticity: The variance of the regression residuals is the same [and not different]
for all observations.
Quantitative Methods: explain the assumptions underlying the simple linear regression
model, and describe how residuals and residual plots indicate if these assumptions may
have been violated

81.
A. Correct because when the observations are returns, the coefficient of variation measures
the amount of risk (standard deviation) per unit of mean return.
B. Incorrect because it describes the Sharpe ratio, not the coefficient of variation. The
Sharpe ratio measures the reward, in terms of mean excess return, per unit of risk, where
mean excess return is defined as the average rate of return in excess of the risk - free rate.
C. Incorrect because it describes the mean absolute deviation (MAD), not the coefficient of
variation. The MAD is defined as the mean of the absolute values of deviations from the
sample mean.
Quantitative Methods: calculate, interpret, and evaluate measures of dispersion to address
an investment problem

82.
A. Correct because when the unknown population variances are equal, a t - test based on
independent random samples is given by t = (X1 - X2 - μ₁ + µ₂)/(Sp²/n1 + Sp²/n2)0.5, where Sp2
is a pooled estimator of the common variance. Hence, a change in hypothesized difference
µ1 - µ2 will change the value of the test statistic.
B. Incorrect because the number of degrees of freedom is n, + n₂ - 2 and it is independent
of the hypothesized difference µ1 - µ2.
C. Incorrect because sp2 = ((n1 - 1)s1² + (n2 - 1)s2²)/(n1 + n₂ - 2) is a pooled estimator of the
common variance. It is independent of the hypothesized difference µ1 - µ2.
Quantitative Methods: construct hypothesis tests and determine their statistical
significance, the associated Type I and Type II errors, and power of the test given a
significance level

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CFA Program Level I for February 2024

83.
A. Correct because with n as the sample size, the Spearman rank correlation is given by:
rs = 1 - (6 Σdi2)/(n(n2 – 1)) = 1 − 6(12)/(4(42 - 1)) = 1 - 6/5= - 1/5 = - 0.2, where the sum of
squared differences
in ranks Σdi2 = (2 - 1)2 + (3 - 2)2 + (4 - 3)2 + (1 - 4)2 = 1 + 1 + 1 + 9 = 12.
B. Incorrect because this answer is calculated by erroneously omitting the multiple (of the
sum of squared deviations) of 6, giving a rank correlation of 1 - 1/5 = 4/5 = 0.8.
C. Incorrect because instead of using the sum of squared differences in ranks, this answer
erroneously uses the sum of unsquared differences in ranks (which, by definition, sums to
zero), giving a rank correlation of 1.
Quantitative Methods: explain parametric and nonparametric tests of the hypothesis that
the population correlation coefficient equals zero, and determine whether the hypothesis is
rejected at a given level of significance

84.
A. Incorrect because variation in the supply of wheat is a dependent variable not limited to
values of 0 or 1. Suppose we want to examine whether a company's quarterly earnings
announcements influence its monthly stock returns. In this case, we could use an indicator
variable, or dummy variable, that takes on only the values 0 or 1 as the independent
variable.
B. Correct because variation in the demand for corn is being used to explain the variation in
the supply of wheat. Therefore the variation in the supply of wheat is the dependent
variable, or explained variable. We refer to the variable whose variation is being explained
as the dependent variable, or the explained variable, it is typically denoted by Y.
C. Incorrect because the variation in the demand for corn is being used to explain the
variation in the supply of wheat. Therefore the variation in the demand for corn is the
independent variable. We refer to the variable whose variation is being used to explain the
variation of the dependent variable as the independent variable, or the explanatory
variable, it is typically denoted by X.
Quantitative Methods: describe a simple linear regression model, how the least squares
criterion is used to estimate regression coefficients, and the interpretation of these
coefficients

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CFA Program Level I for February 2024

85.
A. Correct because a return distribution with negative skew has frequent small gains and a
few extreme losses.
B. Incorrect because a return distribution with positive skew has frequent small losses and a
few extreme gains. A return distribution with negative skew has frequent small gains and a
few extreme losses.
C. Incorrect because a return distribution with positive skew has frequent small losses and a
few extreme gains. A
eturn distribution with negative skew has frequent small gains and a few extreme losses.
Quantitative Methods: interpret and evaluate measures of skewness and kurtosis to
address an investment problem

86.
A. Incorrect because when we look at the residuals of a model, what we would like to see is
that the residuals are random. The residuals should not exhibit a pattern when plotted
against the independent variable.
B. Correct because when we look at the residuals of a model, what we would like to see is
that the residuals are random. The residuals should not exhibit a pattern when plotted
against the independent variable.
C. Incorrect because when we look at the residuals of a model, what we would like to see is
that the residuals are random. The residuals should not exhibit a pattern when plotted
against the independent variable.
Quantitative Methods: explain the assumptions underlying the simple linear regression
model, and describe how residuals and residual plots indicate if these assumptions may
have been violated

87.
A. Correct because, in cluster sampling, the population is divided into clusters, each of
which is essentially a mini - representation of the entire populations. Then certain clusters
are chosen as a whole using simple random sampling Cluster sampling is commonly used for
market surveys, and the most popular version identifies clusters based on geographic
parameters.
B. Incorrect because judgmental, not cluster, sampling involves selectively handpicking
elements from the population based on a researcher's knowledge and professional
judgment. For example, when auditing financial statements, seasoned auditors can apply

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CFA Program Level I for February 2024

their sound judgment to select accounts or transactions that can provide sufficient audit
coverage.
C. Incorrect because creating a bond portfolio to mirror the performance of a specified
index is an application of stratified sampling. Bond indexing is one area in which stratified
sampling, rather than cluster sampling, is frequently applied. Indexing is an investment
strategy in which an investor constructs a portfolio to mirror the performance of a specified
index.
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

88.
A. Incorrect because it is the underlying binomial distribution that exhibits skewness when p
≠ 0.5, not the sampling distribution of the sample mean. Since the sample size is large, the
distribution of the sample mean will be approximately normal according to the central limit
theorem, and therefore symmetric.
B. Correct because, according to the central limit theorem, the sampling distribution of the
sample mean will be approximately normal when the sample size n is large. The normal
distribution has a skewness of 0 (it is symmetric). Since the binomial distribution has a mean
of np and finite variance of np(1 - p), where n is the number of trials and p is the probability
of success, the central limit theorem holds.
C. Incorrect because it is the underlying binomial distribution that exhibits skewness when p
≠ 0.5, not the sampling distribution of the sample mean. Since the sample size is large, the
distribution of the sample mean will be approximately normal according to the central limit
theorem, and therefore symmetric.
Quantitative Methods: explain the central limit theorem and its importance for the
distribution and standard error of the sample mean

89.
A. Correct. A negatively skewed distribution appears as if the left tail has been pulled away
from the mean. The average magnitude of negative deviations from the mean is larger than
the average magnitude of positive deviations.
B. Incorrect. Kurtosis refers to relative peakedness of a distribution; leptokurtosis means
more peaked than normal.
C. Incorrect. A negatively skewed distribution appears as if the left tail has been pulled away
from the mean.

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CFA Program Level I for February 2024

Quantitative Methods: interpret and evaluate measures of skewness and kurtosis to

address an investment problem

90.
A. Incorrect. Tests related to differences between means concern a parameter.
Nonparametric tests are used when the data do not concern a parameter or the data do not
meet distributional assumptions.
B. Correct. A nonparametric test is used under three circumstances:
1) when the data do not meet distributional assumptions,
2) when the data are given in ranks
and
3) when the hypothesis does not concern a parameter.
C. Incorrect, When the data meet distributional assumptions, a parametric test is used
instead of a nonparametric test.
Quantitative Methods: compare and contrast appropriate type of test parametric and
nonparametric tests, and describe situations where each is the more

91.
A. Correct because the time - weighted rate of return is the preferred performance measure
as it neutralizes the effect of cash withdrawals or additions to the portfolio, which are
generally outside of the control of the portfolio manager.
B. Incorrect because the arithmetic return is biased upward. For the evaluation of portfolios
of publicly traded securities, the time - weighted rate of return is the preferred performance
measure.
C. Incorrect because investment managers find time - weighted returns more meaningful. If
a client gives an investment manager more funds to invest at an unfavorable time, the
manager's money - weighted rate of return will tend to be depressed. If a client adds funds
at a favorable time, the money - weighted return will tend to be elevated. The time -
weighted rate of return removes these effects.
Quantitative Methods: compare the money - weighted and time - weighted rates of return
and evaluate the performance of portfolios based on these measures

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CFA Program Level I for February 2024

92.
A. Incorrect because, in cluster sampling, the population is divided into clusters, each of
which is essentially a mini - representation of the entire populations. Then certain clusters
are chosen as a whole using simple random sampling. The sampling method used by the
analyst is not cluster sampling because, first, each sector is not a mini - representation of all
public firms, second, certain sectors are not chosen as a whole.
B. Incorrect because, in simple random sampling, a public firm would be randomly selected
without the firms being grouped into sectors first. A simple random sample is a subset of a
larger population created in such a way that each element of the population has an equal
probability of being selected to the subset.
C. Correct because, in stratified random sampling, the population is divided into
subpopulations (strata) based on one or more classification criteria. Simple random samples
are then drawn from each stratum in sizes proportional to the relative size of each stratum
in the population
Quantitative Methods: compare and contrast simple random, stratified random, cluster,
convenience, and judgmental sampling and their implications for sampling error in an
investment problem

93.
A. Incorrect because if we mistakenly reject the null hypothesis, we can only be making a
Type I error.
B. Incorrect because rejecting a false null hypothesis is a correct decision and therefore not
a Type II error.
C. Correct because, when we make a decision in a hypothesis test, we run the risk of making
either a Type I or a Type II error. These are mutually exclusive errors: If we mistakenly reject
the null hypothesis, we can only be making a Type I error, if we mistakenly fail to reject the
null, we can only be making a Type II error.
Quantitative Methods: explain hypothesis testing and its components, including statistical
significance, Type I and Type II errors, and the power of a test.

47