Practice Questions Flashcards
(35 cards)
Solve for bank discount yield, r(BD), using:
r(BD) = (D/F) x (360/t)
The probability (P) that A or B occurs, or both occur, is closest to:
P(A or B) = P(A) + P(B) − P(AB)
If there is variability in the data, compared with the arithmetic mean, the geometric mean will most likely be:
smaller
How do you calculate the Geometric Mean?
Add one to each of the given returns, then multiply them together and take the nth root of the resulting product
The net present value (NPV) of an investment is equal to the sum of the expected cash flows discounted at:
the discount rate or opportunity cost of capital
According to the NPV rule, shareholder wealth is maximized by selecting a project with the
highest NPV
Q. The internal rate of return (IRR) is best described as the:
A. opportunity cost of capital.
B. time-weighted rate of return.
C. discount rate that makes the net present value equal to zero.
C. the discount rate that makes the net present value equal to zero.
Q. The internal rate of return (IRR) rule indicates acceptance of a project when the IRR is:
A. greater than zero.
B. less than the opportunity cost of capital.
C. greater than the opportunity cost of capital.
C. greater than the opportunity cost of capital.
The IRR investment decision rule states
“Accept projects or investments for which the IRR is greater than the opportunity cost of capital.”
What does the money-weighted rate of return consider?
Both the timing and amounts of investments into the fund.
Three Commonly Used Yield Measures
- Holding Period Yield (HPY)
- Effective Annual Yield (EAY)
- Money Market Yield (CD Equivalent Yield)
What are the types of measurement scales and describe them?
- Nominal scales - categorizes data but does not rank them. It contains the least information.
- Ordinal scales - sorts data into categories that are ordered (ranked) with respect to some characteristic or performance
- Interval scales - scale that not only ranks data but also gives assurance that the differences between scale values are equal
- Ratio scales - has all the characteristics of the above scales as well as a true zero point as the origin. e.g. purchasing power. $2 has a weaker purchasing power than $4.
Definition of Population
all members of a specified group
Definition of Sample
A sample is a subset of a population.
Any descriptive measure of a population characteristic is called a
parameter e.g. median of a population
Definition of Sample Statistic
A sample statistic (or statistic) is a quantity computed from or used to describe a sample.
Harmonic Mean Formula
n / sum(1/x)
The harmonic mean is appropriate for
determining the average price per unit.
The formula for the position of a percentile in an array with n entries sorted in ascending order is
Ly = (n + 1)(y/100)
The formula for mean absolute deviation (MAD) is
sum of (x-mean) / n
Chebyshev’s inequality
the proportion of the observations within k standard deviations of the arithmetic mean is at least 1 – 1/k^2 for all k > 1.
The coefficient of variation (CV) is
the ratio of the standard deviation to the mean, where a higher CV implies greater risk per unit of return.
The Sharpe ratio (S) is
the mean excess portfolio return per unit of risk, where a higher Sharpe ratio indicates better performance.
S = (Rp - Rf) / s
When analyzing investment returns, the geometric mean measures:
an investment’s compound rate of growth over multiple periods.
