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Free CFA-Level-I Exam Braindumps (page: 214)

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Suppose you have two assets, A and B. A has returns of 10%, 2%, and 15%, with probabilities 40%, 50%, and 10% respectively. B has returns of 5%, 10%, and -20%, with probabilities 40%, 50%, and 10% respectively.
What is the return covariance between assets A and B?

  1. -50.23%%
  2. -60.65%%
  3. -10.78%%.
  4. -32.45%%

Answer(s): D

Explanation:

First we must find the expected returns for A and B. These are 6.50% and 5.00%, respectively. Second, we find the difference between each observation and the average: (10% - 6.5%), (2% - 6.5%), and (15% - 6.5%) for A, and (5% - 5%), (10% - 5%), and (-20% - 5%) for B. Next, we take the probability weighted cross product of these differences and sum them. So we get 3.5% * 0% * 40% + (-4.5%) * 5% * 50% + 8.5% * (-25%) * 10% = - 32.45%%.



The probability that GNP will expand in the next 12 months is called:

  1. an unconditional probability.
  2. a conditional probability.
  3. a joint probability.
  4. a guess.

Answer(s): A

Explanation:

An unconditional probability takes the form of P(A), the probability that an event (A) will happen. It is unconditional because it is not conditioned on any other event.



"Sampling error" refers to:

  1. an incorrect selection of a sampling method.
  2. the standard error of the normal deviates of a sample drawn from a population.
  3. the difference between a sample statistic and the corresponding population parameter.
  4. an incorrect usage of a sampling method.

Answer(s): C

Explanation:

Sampling error is the difference between the population's actual parameter and the parameter estimate that results from analysis of the sample.



A perpetuity pays $1,000 a year. You have a discount rate of 10% per year. If you are indifferent between buying this perpetuity and a 7-year annuity, how much does the annuity pay per year?

  1. $2,054
  2. $3,199
  3. $1,867
  4. $1,429

Answer(s): A

Explanation:

The value of the perpetuity is 1,000/0.1 = $10,000. If the annuity pays $C per year, then its value is C/0.1*[1 - 1/ (1.1)^7] = 4.868C. For you to be indifferent between these two, the two values must be equal, giving C = 10,000/4.868 = $2,054.






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