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Free CFA-Level-I Exam Braindumps (page: 153)

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Suppose you are modeling GNP, and you believe that the probability that GNP will expand if interest rates fall is 70%; if interest rates stay constant, you believe that there is a 29% chance of expanding GNP; if interest rates increase, you believe that there is a 1% chance of GNP expanding. You think that the likelihood of interest rates falling is 60%; of staying the same is 30%; of increasing is 10%. What is the unconditional probability of GNP expanding?

  1. 49.8%.
  2. 50.0%.
  3. 50.8%.
  4. 50.9%.

Answer(s): C

Explanation:

We use the total probability rule: P(A), the unconditional probability, = P(A|S_1)*P(S_1) + P(A|S_2) *P(S_3) + P (A|S_3) *P(S_3), where the S_i represent mutually exclusive and exhaustive events. So the likelihood of interest rates increasing is 0.70 * 0.60 + 0.29 * 0.30 + 0.01 * 0.10 = 0.42 + 0.087 + 0.001 = 0.508.



The marketing department of a nationally known cereal maker plans to conduct a national survey to find out whether or not consumers of flake cereals can distinguish one of their favorite flake cereals. To test the questionnaire and procedure to be used, eight persons were asked to cooperate in an experiment. Five very small bowls of flake cereals were placed in front of a person. The bowls were labeled A, B, C, D, and E. The person was informed that only one bowl contained his or her favorite flake cereal. Suppose that the eight persons in the experiment were unable to identify their favorite cereal and just guessed which bowl it was in. What is the probability that none of the eight guessed correctly?

  1. 0.168
  2. 0.788
  3. 0.125
  4. None of these answers
  5. 0.009

Answer(s): A

Explanation:

This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!.
Here n = 8, r = 0,p = 0.2 and q = 0.80. Therefore we have 8!(0.2^0)(0.8^8)/0!8! = 0.168.



Which of the following is true?

  1. If the geometric return is zero, the arithmetic return must be negative.
  2. All of these answers are false.
  3. If the annual returns have zero volatility, the geometric return is equal to the arithmetic return.
  4. The geometric return is always less than the arithmetic return.

Answer(s): C

Explanation:

The mean and the geometric mean are equal when volatility in the rate of return is zero. For a non- zero volatility, the mean exceeds the geometric mean and the difference is larger the higher the volatility.



If you deposit $900 a year, beginning next year, for 20 years into an account paying 8% per year, compounded annually, how much is in your account after that last deposit?

  1. $40,598.15
  2. $50,003.98
  3. $530,118.37
  4. $48,304.12
  5. $41,185.77

Answer(s): E

Explanation:

On the BAII Plus, press 20 N, 8 I/Y, 0 PV, 900 PMT, CPT FV. On the HP12C, press 20 n, 8 i, 0 PV, 900 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.






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