If a distribution is heavily right or left skewed, which of the following statistics should not be used as a measure of central tendency?
Answer(s): B
The mean is affected severely by outliers and hence, should not be used as a measure of central tendency with skewed distributions.
What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$6,000>, Year 1:$4,000, Year 2: $3,000, Year 3: $2,000, Year 4: $1,000 (Note that the <> are used to indicate a negative number).
Answer(s): D
On the BAII Plus, press CF 2nd CLRWork 6000 +/- ENTER DownArrow 4000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 6000 CHS BlueShift CFo 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.
John buys a house that costs $275,000 and agrees to pay for it with a 15 year mortgage at 6% per year, compounded monthly. What is John's monthly payment on the loan?
On the BAII Plus, press 180 N, 6 divide 12 = I/Y, 275000 PV, 0 FV, CPT PMT. On the HP12C, press 180 n, 6 ENTER 12 divide i, 275000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to 1.
Assume you deposit $800 now into an account that had nothing in it previously, make an additional deposit of $800 in 2 years, and a final deposit of $800 in 4 years. How much is in your account in 5 years, if the account earns interest at 8% per year, compounded annually?
Answer(s): A
Solve this question by working several compound interest problems, moving each dollar amount over to year 5.On the BAII Plus, press 5 N, 8 I/Y, 800 PV, 0 PMT, CPT FV, which yields $1,175.46. Then press STO 1, 3 N, CPT FV, which yields $1,007.77. Then press + RCL 1 = STO 1. Then press 1 N, CPT FV, which yields $864.00.Then press + RCL 1 = to see the answer. On the HP12C, press 5 n, 8 i, 800 PV, 0 PMT, FV. Then press STO 1, 3 n, FV. Then press RCL 1 + STO 1. Then press 1 n, FV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the distance from year 5. Make sure that the BAII Plus has the P/Y value set to 1.
You can enter a derivative contract that will pay $100 at the end of a year if the price of corn exceeds $3 per bushel, or $50 if it is equal to $3 per bushel or lower. The probability that corn will exceed $x by the end of one year is 50%. The current price of the contract is $60, and interest is 5% per year. What is the optimal strategy?
Enter into the derivative contract for a cost of $60, for the expected payoff is 0.50 * $100 + 0.50 * $50 = $75.That is a 25% return on your investment in one year, greater than the 5% that could be made by investing the $60 at interest. This is an example of the investment consequences of inconsistent probabilities. The present value of the contract should be $75/1.05 = $71.43. Thus, an arbitrage opportunity is present. On an expected value basis, you can buy an asset worth $71.43 for only $60.
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