FRM Part – I | Test ID 0009 | Questions - 60

1. A company has two machines that produce widgets. An older machine produces 16% defective
widgets, while the new machine produces only 8% defective widgets. In addition, the new
machine employs a superior production process such that it produces three times as many
widgets as the older machine does. Given that a widget was produced by the new machine, what
is the probability it is NOT defective?

A) 0.76.
B) 0.06.
C) 0.92.

2. A very large company has twice as many male employees relative to female employees. If a
random sample of four employees is selected, what is the probability that all four employees
selected are female?

A) 0.3333.
B) 0.0123.
C) 0.0625.

3. Given the following table about employees of a company based on whether they are smokers or
nonsmokers and whether or not they suffer from any allergies, what is the probability of both
suffering from allergies and not suffering from allergies?

Suffer from Don't Suffer from

Total
Allergies Allergies
Smoker 35 25 60
Nonsmoker 55 185 240
Total 90 210 300
A) 0.00.
B) 0.50.
C) 1.00.

4. A Treasury bill, with 45 days until maturity, has an effective annual yield of 12.50%. The bill's
holding period yield is closest to:

A) 1.57%.
B) 1.54%.
C) 1.46%.

5. An investor is considering investing in Tawari Company for one year. He expects to receive $2 in
dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a
return on the investment over the year of 14%, the price the investor would pay for the stock
today is closest to:

A) $29.
B) $28.
 C) $32.

6. Each lottery ticket discloses the odds of winning. These odds are based on:

A) past lottery history.

B) a priori probability.
C) the best estimate of the Department of Gaming.

7. According to Chebyshev’s Inequality, for any distribution, what is the minimum percentage of
observations that lie within three standard deviations of the mean?

A) 89%.
B) 94%.
C) 75%.

8. A recent ad for a Roth IRA includes the statement that if a person invests $500 at the beginning
of each month for 35 years, they could have $1,000,000 for retirement. Assuming monthly
compounding, what annual interest rate is implied in this statement?

A) 7.411%.
B) 7.625%.
C) 6.988%.

9. The following table summarizes the availability of trucks with air bags and bucket seats at a
dealership.

Bucket Seats No Bucket Seats Total

 Air Bags 75 50 125Â
 No Air Bags 35 60 95
 Total 110 110 220

What is the probability of selecting a truck at random that has either air bags or bucket seats?

A) 34%.
B) 107%.
C) 73%.

10. An investor has two stocks, Stock R and Stock S in her portfolio. Given the following information
on the two stocks, the portfolio's standard deviation is closest to:

 σR = 34%
 σS = 16%
 rR,S = 0.67
 W R = 80%
 W S = 20%

A) 29.4%.
B) 7.8%.
 C) 8.7%.

11. What is the compound annual growth rate for stock A which has annual returns of 5.60%,
22.67%, and -5.23%?

A) 6.00%.
B) 7.08%.
C) 8.72%.

12. The mean monthly return on U.S. Treasury bills (T-bills) is 0.42%. The mean monthly return for
an index of small stocks is 4.56%, with a standard deviation of 3.56%. What is the Sharpe
measure for the index of small stocks?

A) 16.56%.
B) 10.60%.
C) 1.16%.

13. Use the results from the following survey of 500 firms to answer the question.

Number of Employees Frequency

300 up to 400 40
400 up to 500 62
500 up to 600 78
600 up to 700 101
700 up to 800 131
800 up to 900 88

The frequency of the third class is:

A) 78.
B) 180.
C) 156.

14. Assume that the following returns are a sample of annual returns for firms in the clothing industry.
Given the following sample of returns, what are the sample variance and standard deviation
respectively?

Firm 1 Firm 2 Firm 3 Firm 4 Firm 5

15% 2% 5% (7%) 0%
64.5;
A)
8.0.
51.6;
B)
7.2.
32.4;
C)
5.7.
 15. A broker calls with a proposal to buy a Treasury bill (T-bill) with 186 days to maturity. He says the
effective annual yield on the T-bill is 4.217%. What is the holding period yield if you hold the bill
until maturity?

A) 8.44%.
B) 2.02%.
C) 2.13%.

16. Which of the following is NOT a problem with the internal rate of return (IRR)?

A) Non-normal cash flow patterns may result in multiple IRRs.

B) A higher IRR does not necessarily indicate a more-profitable project.
C) Sometimes the IRR exceeds the cost of capital.

17. Which of the following statements about the arithmetic mean is least accurate?

A) If the distribution is skewed to the left then the mean will be greater than the median.
The arithmetic mean of a frequency distribution is equal to the sum of the class frequency
B)
times the midpoint of the frequency class all divided by the number of observations.
The arithmetic mean is the only measure of central tendency where the sum of the deviations
C)
of each observation from the mean is always zero.

18. The weights and returns for individual positions in a portfolio are shown below:

Position Mkt. Value at 1/1/05($MM) Return for 2005(%)

A 1.3 –2.0
B 1.4 –4.2
C 2.2 +6.4
D 3.9 +2.1
E 1.7 –0.8

What is the return on the portfolio?

A) +1.50%.
B) +1.18%.
C) -1.20%.

19. Natalie Brunswick, neurosurgeon at a large U.S. university, was recently granted permission to
take an 18-month sabbatical that will begin one year from today. During the sabbatical, Brunswick
will need $2,500 at the beginning of each month for living expenses that month. Her financial
planner estimates that she will earn an annual rate of 9% over the next year on any money she
saves. The annual rate of return during her sabbatical term will likely increase to 10%. At the end
of each month during the year before the sabbatical, Brunswick should save approximately:

A) $3,356.
B) $3,505.
C) $3,330.
 20. Peter Wallace wants to deposit $10,000 in a bank certificate of deposit (CD). Wallace is
considering the following banks:Â

 Bank A offers 5.85% annual interest compounded annually.

 Bank B offers 5.75% annual interest rate compounded monthly.
 Bank C offers 5.70% annual interest compounded daily.

Which bank offers the highest effective interest rate and how much?

A) Bank A, 5.85%.
B) Bank C, 5.87%.
C) Bank B, 5.90%.

21. An investor has the choice of two investments. Investment A offers interest at 7.25%
compounded quarterly. Investment B offers interest at the annual rate of 7.40%. Which
investment offers the higher dollar return on an investment of $50,000 for two years, and by how
much?

A) Investment B offers a $36.92 greater return.

B) Investment A offers a $122.18 greater return.
C) Investment A offers a $53.18 greater return.

22. Justin Banks just won the lottery and is trying to decide between the annual cash flow payment
option or the lump sum option. He can earn 8% at the bank and the annual cash flow option is
$100,000/year, beginning today for 15 years. What is the annual cash flow option worth to Banks
today?

A) $924,423.70.
B) $855,947.87.
C) $1,080,000.00.

23. A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is
the bank discount yield?

A) 5.41%.
B) 5.14%.
C) 4.18%.

24. Which of the following statements about probability is most accurate?

A) An event is a set of one or more possible values of a random variable.

B) An outcome is the calculated probability of an event.
C) A conditional probability is the probability that two or more events will happen concurrently.

25. Claude Bellow, CFA, is an analyst with a real-estate focused investment firm. Today, one of the
partners e-mails Bellow the following table and requests that he “run some numbers.― The
table below gives five years of annual returns for Marley REIT (real estate investment trust) and a
large urban apartment building. Marley REIT invests in commercial properties. (Note: For this
question, calculate the mean returns using the arithmetic mean.)
 Table 1: Annual returns (in %)
Asset Year 1 Year 2 Year 3 Year 4 Year 5
Marley REIT 15.0 8.0 13.0 9.0 13.0
Apartment Bldg 10.0 -1.0 8.0 8.0 9.0

One of the office assistants begins to “run some numbers,― but is then called away to an important
meeting. So far, the assistant calculated the variance of the apartment building returns at 15.76%. (He
assumed that the returns given represent the entire population of returns.) Now, Bellow must finish the
work.

Bellow should conclude that the standard deviation of the:

A) apartment building, if the given returns represent a sample of returns, is 19.70%.

B) REIT, assuming the given returns represent the entire population, is 2.97%.
C) apartment building, if the given returns represent a sample of returns, is 4.44%.

26. As the number of compounding periods increases, what is the effect on the EAR? EAR:

A) increases at an increasing rate.

B) increases at a decreasing rate.
C) does not increase.

27. Robert Mackenzie, CFA, buys 100 shares of GWN Breweries each year for four years at prices of
C$10, C$12, C$15 and C$13 respectively. GWN pays a dividend of C$1.00 at the end of each
year. One year after his last purchase he sells all his GWN shares at C$14. Mackenzie calculates
his average cost per share as [(C$10 + C$12 + C$15 + C$13) / 4] = C$12.50. Mackenzie then
uses the internal rate of return technique to calculate that his money-weighted annual rate of
return is 12.9%. Has Mackenzie correctly determined his average cost per share and money-
weighted rate of return?

Money-weighted
< >> Average cost
return
A) Incorrect Correct
B) Correct Correct
C) Correct Incorrect

28. The probability of A is 0.4. The probability of AC is 0.6. The probability of (B | A) is 0.5, and the
probability of (B | AC) is 0.2. Using Bayes’ formula, what is the probability of (A | B)?

A) 0.125.
B) 0.625.
C) 0.375.

29. What is the yield on a discount basis for a Treasury bill priced at $97,965 with a face value of
$100,000 that has 172 days to maturity?

A) 2.04%.
 B) 4.26%.
C) 3.95%.

30. There is a 30% chance that the economy will be good and a 70% chance that it will be bad. If the
economy is good, your returns will be 20% and if the economy is bad, your returns will be 10%.
What is your expected return?

A) 13%.
B) 17%.
C) 15%.

31. A nursery sells trees of different types and heights. Suppose that 75 trees chosen at random are
sold for planting at City Hall. These 75 trees average 60 inches in height with a standard
deviation of 16 inches.

Using this information, construct a 95% confidence interval for the mean height of all trees in the nursery.

A) 60 + 1.96(1.85).
B) 60 + 1.96(16).
C) 0.8 + 1.96(16).

32. If the threshold return is higher than the risk-free rate, what will be the relationship between
Roy’s safety-first ratio (SF) and Sharpe’s ratio?

A) The SF ratio may be higher or lower depending on the standard deviation.

B) The SF ratio will be higher.
C) The SF ratio will be lower.

33. Claude Bellow, CFA, is an analyst with a real-estate focused investment firm. Today, one of the
partners e-mails Bellow the following table and requests that he look into the reward-to-variability
ratios of two asset classes. The table below gives five years of annual returns for Marley REIT
(real estate investment trust) and a large urban apartment building. Marley REIT invests in
commercial properties. The risk-free rate is 5.0% and the firm’s threshold rate for this type is
investment is 5.7%. (Note: For this question, calculate the mean returns using the arithmetic
mean.)

Table 1: Annual returns (in %)

Asset Year 1 Year 2 Year 3 Year 4 Year 5
Marley REIT 15.0 8.0 13.0 9.0 13.0
Apartment Bldg 10.0 -1.0 8.0 8.0 9.0

One of the office assistants begins to “run some numbers,― but is then called away to an important
meeting. So far, the assistant has calculated the standard deviation of the apartment building returns at
3.97% and the standard deviation of the REIT returns at 2.65%. (He assumed that the returns given
represent the entire population of returns.) Now, Bellow must finish the work.

Bellow should conclude that the:

 A) safety-first ratio for the REIT is 2.49.
REIT has a higher excess return per unit of risk than the apartment building has per unit of
B)
risk.
partner is asking Bellow to select the investment with the minimal probability that the return
C)
falls below 5.70%.

34. What kind of test is being used for the following hypothesis and what would a z-statistic of 1.68
tell us about a hypothesis with the appropriate test and a level of significance of 5%, respectively?

H0: B ≤ 0
HA: B > 0

A) One-tailed test; fail to reject the null.

B) One-tailed test; reject the null.
C) Two-tailed test; fail to reject the null.

35. If a stock decreases from $90 to $80, the continuously compounded rate of return for the period
is:

A) -0.1250.
B) -0.1000.
C) -0.1178.

36. Consider a random variable X that follows a continuous uniform distribution: 7 ≤ X ≤ 20. Which of
the following statements is least accurate?

A) F(12 ≤ X ≤ 16) = 0.307.

B) F(21) = 0.00.
C) F(10) = 0.23.

37. A local high school basketball team had 18 home games this season and averaged 58 points per
game. If we assume that the number of points made in home games is normally distributed,
which of the following is most likely the range of points for a confidence interval of 90%?

A) 24 to 78.
B) 34 to 82.
C) 26 to 80.

38. Which of the following statements about hypothesis testing is most accurate?

A Type I error is rejecting the null hypothesis when it is true, and a Type II error is accepting
A)
the alternative hypothesis when it is false.
When the critical Z-statistic is greater than the sample Z-statistic in a two-tailed test, reject the
B)
null hypothesis and accept the alternative hypothesis.
A hypothesized mean of 3, a sample mean of 6, and a standard error of the sampling means
C)
of 2 give a sample Z-statistic of 1.5.
39. In addition to the usual parameters that describe a normal distribution, to completely describe 10
random variables, a multivariate normal distribution requires knowing the:

A) overall correlation.
B) 45 correlations.
C) 10 correlations.

40. In order to test if the mean IQ of employees in an organization is greater than 100, a sample of 30
employees is taken. The sample value of the computed z-statistic = 3.4. The appropriate decision
at a 5% significance level is to:

A) reject the null hypotheses and conclude that the population mean is greater than 100.
B) reject the null hypothesis and conclude that the population mean is not equal to 100.
C) reject the null hypothesis and conclude that the population mean is equal to 100.

41. A survey is taken to determine whether the average starting salaries of CFA charterholders is
equal to or greater than $62,500 per year. What is the test statistic given a sample of 125 newly
acquired CFA charterholders with a mean starting salary of $65,000 and a standard deviation of
$2,600?

A) -10.75.
B) 10.75.
C) 0.96.

42. A portfolio manager is looking at an investment that has an expected annual return of 10% with a
standard deviation of annual returns of 5%. Assuming the returns are approximately normally
distributed, the probability that the return will exceed 20% in any given year is closest to:

A) 0.0%.
B) 4.56%.
C) 2.28%.

43. Over a period of one year, an investor’s portfolio has declined in value from 127,350 to
108,427. What is the continuously compounded rate of return?

A) -13.84%.
B) -16.09%.
C) -14.86%.

44. Frank Grinder is trying to introduce sampling into the quality control program of an old-line
manufacturer. Currently, each item is individually inspected to make sure it meets size tolerances.
For all items manufactured during August, the standard deviation of size was 0.02 centimeters. If
Grinder takes a sample of 30 items and finds a standard deviation of size of 0.019 centimeters,
what is the standard error of the sample mean?

A) 0.00365.
B) 0.00200.
C) 0.00600.
45. For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one
bond defaults is independent of whether another bond defaults. For a portfolio of five of these
junk bonds, what is the probability that zero or one bond of the five defaults in the year ahead?

A) 0.0819.
B) 0.7373.
C) 0.4096.

46. According to the Central Limit Theorem, the distribution of the sample means is approximately
normal if:

A) the underlying population is normal.

B) the sample size n > 30.
C) the standard deviation of the population is known.

47. A traffic engineer is trying to measure the effects of carpool-only lanes on the expressway. Based
on a sample of 100 cars at rush hour, he finds that the mean number of occupants per car is 2.5,
and the sample standard deviation is 0.4. What is the standard error of the sample mean?

A) 0.04.
B) 1.00.
C) 5.68.

48. Which of the following statements about sampling and estimation is most accurate?

A confidence interval estimate consists of a range of values that bracket the parameter with a
A)
specified level of probability, 1 − β.
B) Time-series data are observations over individual units at a point in time.
A point estimate is a single estimate of an unknown population parameter calculated as a
C)
sample mean.

49. Frank Grinder is trying to introduce sampling into the quality control program of an old-line
manufacturer. Grinder samples 38 items and finds that the standard deviation in size is 0.019
centimeters. What is the standard error of the sample mean?

A) 0.00204.
B) 0.00615.
C) 0.00308.

50. Brandee Shoffield is the public relations manager for Night Train Express, a local sports team.
Shoffield is trying to sell advertising spots and wants to know if she can say with 90% confidence
that average home game attendance is greater than 3,000. Attendance is approximately normally
distributed. A sample of the attendance at 15 home games results in a mean of 3,150 and a
standard deviation of 450. Which of the following statements is most accurate?

A) The calculated test statistic is 1.291.

With an unknown population variance and a small sample size, no statistic is available to test
B)
Shoffield's hypothesis.
 C) Shoffield should use a two-tailed Z-test.

51. Standardizing a normally distributed random variable requires the:

A) mean, variance and skewness.

B) natural logarithm of X.
C) mean and the standard deviation.

52. A Type II error:

A) fails to reject a true null hypothesis.

B) rejects a true null hypothesis.
C) fails to reject a false null hypothesis.

53. Abby Ness is an analyst for a firm that specializes in evaluating firms involved in mineral
extraction. Ness believes that the earnings of copper extracting firms are more volatile than those
of bauxite extraction firms. In order to test this, Ness examines the volatility of returns for 31
copper firms and 25 bauxite firms. The standard deviation of earnings for copper firms was $2.69,
while the standard deviation of earnings for bauxite firms was $2.92. Ness’s Null Hypothesis
is σ12 ≤ σ22. Based on the samples, can we reject the null hypothesis at a 95% confidence level
using an F-statistic and why? Null is:

A) not rejected. The critical value exceeds the F-value by 0.71.

B) rejected. The F-value exceeds the critical value by 0.849.
C) rejected. The F-value exceeds the critical value by 0.71.

54. Which of the following is the correct sequence of events for testing a hypothesis?

State the hypothesis, select the level of significance, compute the test statistic, formulate the
A)
decision rule, and make a decision.
State the hypothesis, select the level of significance, formulate the decision rule, compute the
B)
test statistic, and make a decision.
State the hypothesis, formulate the decision rule, select the level of significance, compute the
C)
test statistic, and make a decision.

55. An investment has a mean return of 15% and a standard deviation of returns equal to 10%. If
returns are normally distributed, which of the following statements is least accurate? The
probability of obtaining a return:

A) greater than 25% is 0.32.

B) between 5% and 25% is 0.68.
C) greater than 35% is 0.025.

56. Which of the following portfolios provides the optimal “safety first― return if the minimum
acceptable return is 9%?

Portfolio Expected Return (%) Standard Deviation (%)

1 13 5
 2 11 3
3 9 2
A) 2.
B) 1.
C) 3.

57. A random variable follows a continuous uniform distribution over 27 to 89. What is the probability
of an outcome between 34 and 38?

A) 0.0546.
B) 0.0719.
C) 0.0645.

58. Monthly sales of hot water heaters are approximately normally distributed with a mean of 21 and
a standard deviation of 5. What is the probabilility of selling 12 hot water heaters or less next
month?

A) 3.59%.
B) 1.80%.
C) 96.41%.

59. A traffic engineer is trying to measure the effects of carpool-only lanes on the expressway. Based
on a sample of 20 cars at rush hour, he finds that the mean number of occupants per car is 2.5,
with a standard deviation of 0.4. If the population is normally distributed, what is the confidence
interval at the 5% significance level for the number of occupants per car?

A) 2.387 to 2.613.
B) 2.313 to 2.687.
C) 2.410 to 2.589.

60. The table below is for five samples drawn from five separate populations. The far left columns
give information on the population distribution, population variance, and sample size. The right-
hand columns give three choices for the appropriate tests: z = z-statistic, and t = t-statistic.
“None― means that a test statistic is not available.

Sampling From Test Statistic Choices

Distribution Variance n One Two Three
Non-normal 0.75 100 z z z
Normal 5.60 75 z z z
Non-normal n/a 15 t t none
Normal n/a 18 t t t
Non-normal 14.3 15 z t none

Which set of test statistic choices (One, Two, or Three) matches the correct test statistic to the sample for
all five samples?

A) Three.
B) One.
C) Two.