INDIAN INSTITUTE OF QUANTITATIVE FINANCE

PRACTISE QUESTIONS:
QUANTITATIVE ANALYSIS
(SET 2)
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

1. Which of the following regarding independent random variables is/ are true?
1. E (XY) = E(X) + E(Y)
2. E (X+Y) = E(X) + E(Y)
3. Var(cX) = c Var(X) where c is constant
4. VAR (X+Y) = VAR(X) + VAR(Y)
A. Only 2
B. Only 1 and 3
C. Only 2 and 4
D. Only 3 and 4

2. In the FRM mock test of multiple choices with 4 choices for each of 20 questions,
what is the probability that the student gets less than 3 questions correct simply by
guessing?
A. 9%
B. 15%
C. 5%
D. 2.5 %

3. On any given day there is 60 % probability that stock price of NSD ltd will go up and
30% probability that it will go down. 10% probability it will remain unchanged. One
trader buys on open on 1st day and sells on the end of 3rd day. What is probability that it
has profit?
A. 0.0065
B. 0.05
C. 0.205
D. Cannot be determined from given information

4. Six bonds with no correlation on the default, their probabilities of default per annum
are 1%, 2%, 3%, 4%, 5%, and 10%. What is probability of no default in one year for
portfolio if portfolio is consisting of only six bonds?
A. 50%
B. 71%
C. 77%
D. 85%

5. Joint probability of independent random variable is,

A. Equal Zero
B. Not equal to the product of their independent probability
C. Greater than product of heir individual probability
D. Equal to product of their individual probability

6. What is the volatility for the stock of xyz ltd which details are as follows, current
market price is at 50$, estimated changes in price are as follows,
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Scenario Probability Price in $

A 30 60
B 30 70
C 40 30

A. 8%
B. 10%
C. 12%
D. 15%

7. X and Y are two random variables each follows standard normal distribution with
correlation coefficient(X, Y) = 0.5. What is the variance of (4X+3Y)?
A. 30
B. 37
C. 45
D. 50

8. Which are following statements about Correlation coefficient are true?

1. It is between 1 and -1.
2. A correlation coefficient zero means both variables are independent
3. It is measure of strength of relationship
4. It can be calculated by scaling the covariance between two variables with their
standard deviations

A. Only 1
B. Only 1,3 and 4
C. Only 1,2 and 3
D. None of the above

9. A trader has analyzed that stock N has perfectly negative correlation with S&P 500. In
order to profit from this analysis, he has taken short position in S&P 500 futures and long
position on stock N. Which of the following is true?
A. This is riskless trade coz the stock has negative correlation.
B. Apart from the currency risk and cash flow risks on margin calls, this is almost a
riskless strategy.
C. This trading strategy has the same risk as shorting the S&P 500. This is not a
hedged position.
D. There will be some small residual risk due to the currency conversion. Otherwise
it is a virtually riskless strategy.
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

10. Which of the following is description of distribution which has fatter tails than
normal distribution at given level of variance?
A. Positive Excess Kurtosis
B. Negative Excess Kurtosis
C. Positive skew-ness
D. Negative skew-ness

11. Following data has been collected regarding rate of returns. The mean return is 15%
with lower limit of 10 % and higher limit of 18%, the distribution is,
A. Positively Skewed
B. Normal
C. Negatively Skewed
D. Abnormal

12. There is chance of larger profit and larger loss, which of the following about
distribution is definitely true?
A. Positively Skewed
B. Negatively Skewed
C. Leptokurtic
D. Platykurtic

13. The probability that an observation lies within 4 standard deviations of the mean for
any probability distribution is at least:
A. 75%
B. 94%
C. 89%
D. 54%

14. Assume we use a continuous uniform distribution U (0, 10) to generate a series of
random numbers. Which of the following statement is correct?
A. The number 5 is likely to be observed much more often than any other
number.
B. Numbers between 4 & 6 are more likely to occur than numbers between 6 &
10, because the first interval is closer to the centre of the distribution.
C. Numbers between 1 & 3 are as likely as numbers between 4 & 6.
D. Numbers between 4 & 3 are as less likely than numbers between 4 & 6. Due to
the skewness of the distribution.

15. An analyst has found out historically that the stock prices of XYZ company rises on
three days out of five & falls on two days out of five, what is the probability that XYZ will
fall on exactly seven out of the next eight days?
A. 0.8%
B. 4.5%
C. 9.0%
D. 12.0 %
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

16. Which of the following statements are TRUE?

I. The sum of two random normal variables is also a random normal variable.
II. The product of two random normal variables is also a random normal variable.
III. The sum of two random lognormal variables is also a random lognormal variable.
IV. The product of two random lognormal variables is also a random lognormal variable.
A. I & II only.
B. II & III only.
C. III & IV only.
D. I & IV only.

17. Which of the following exhibit positively skewed distributions?

I. Normal Distribution.
II. Lognormal Distribution.
III. The Return of Being Short a Put Option.
IV. The Returns of Being Long a Call Option.

A. II only
B. III only
C. II and IV only
D. I, III and IV only

18. Consider a stock with an initial price of $100. Its price one year from now is given by
S = 100 *exp(r), where the rate of return r is normally distributed with a mean of 0.1 and
a standard deviation of 0.2. With 95% confidence, after rounding, S will be between:
A. $67.57 and $147,99
B. $70.80 and $149.20
C. $74.68 and $163.56
D. $102.18 and $119.53

19. A call center receives an average of two phone calls per hour. The probability that
they will receive 20 calls in an 8 – hour day is closest to:
A. 5.59%
B. 16.56%
C. 3.66%
D. 6.40%

20. The mean age of the 100 employees in a company is 40 and the standard deviation
is 15. Assuming that the ages are normally distributed and using 99 percent confidence,
we can say that the employees' age will firm fall between:
A. 20.0 and 50.0 years
B. 31.7 and 38.3 years
C. 36.1 and 43.9 years
D. 34.6 and 35.4 years

21. Which of the following statements are NOT true?

I. Type I error occurs when the null hypothesis is not rejected when it is actually
false.
II. Type II error occurs when the null hypothesis is rejected when it is actually true.
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

III. Type I error occurs when the alternate hypothesis is wrongly accepted.
IV. Minimizing the probability of Type II error maximizes the power of the tet.

A. I and II
B. I and III
C. II and IV
D. I, II and IV

22. The standard deviation of Hospitality Company stocks and market is same.
Research has to be made to test whether the mean spending by tourist coming to a
holiday resort is equal to or less than $2000 with a 5 percent level of significance. He
finds that the average spending by 16 tourists is $2200 and the standard deviation of the
population is $400. The critical value of the Z statistic for this study is:
A. 1.65
B. 1.96
C. 2.33
D. 2.58

23. Which of the following test statistics is most appropriate for conducting the
hypothesis test given below?
H0: variance A = variance B; where the test is based on two random independent
samples from two normally distributed populations.
A. T-statistic
B. Z-statistic
C. F-statistic
A. Chi-square

24. The test statistic for Chi Square – test of sample variance is the:
A. (n-1) times Ratio of the sample std deviation and population std deviation
B. Ratio of the sample and population standard deviations
C. (n-1) times Ratio of the sample variance and population variance
D. Ratio of the sample variance and population variance

25. What is the appropriate alternative hypothesis to test the statistical significance of
the intercept term in the following regression?
Y = a1 + a2 (X) + ε
A. H1: a1 ≠ 0
B. H1: a1 > 0
C. H1: a2 ≠ 0
D. H1: a2 > 0

26. Using a sample size of 80 observations, an analyst determines that the standard
deviation of the returns from a stock is 25 percent. Using a 0.95 confidence level, the
analyst:
A. Can conclude that the standard deviation of returns is higher than 15%
B. Cannot conclude that the standard deviation of returns is higher than 15%
C. Can conclude that the standard deviation of returns is not higher than 15%
D. None of the above.
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

27. In what circumstances could the explanatory power of regression analysis be

overstated?
A. The explanatory variables are not correlated with one another.
B. The variance of error term decreases as the value of the dependent variable
increases
C. The error term is normally distributed
D. An important explanatory variable is omitted that influences the explanatory
variables included, and the dependent variable.

28. Analyst have generated the linear regression of returns of telecom company with
returns of S&P 500. The analyst computed following information,
σ s&p500 = 16%
σ telecom company = 20%
Correlation coefficient , ρ= 0.8
Mean annual return of S&P 500 = 9%
Risk free rate ,Rf = 5%

What is the slope of regression equation?

A. 1.1
B. 0.90
C. 0.98
D. 1.5

29. Regression equation is given as, Y = 0.75 - 0.6X + e

R² is coefficient of determination. = 0.81
Std deviation of independent variable is 0.5 and variance of dependent variable is 0.09.
What is cov(X, Y)?

A. 0.135
B. 0.096
C. 0.085
D. 0.078

30. A linear regression of a XYZ ltd stock’s returns on an telecom industry index
provides the following results:
Coefficient Standard Error
Intercept 4.2 2.6
Industry Index 2.4 0.65
Sum of Square
Regression 1005.25
Error 250.5
Total 1255.75

Assuming the sample has 10 years of half yearly observations. Which of the following
statements is (are) correct?
I. The coefficient of determination is 80.1 percent.
II. The industry index coefficient is significant at the 99 percent confidence level.
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

III. The correlation coefficient between the stock’s returns and the return on the
industry index is 0.42.
IV. The correlation coefficient between the stock’s returns and the return on the
industry index is statistically different from zero at the 99 percent confidence
level.

A. II and IV only.
B. I and II only.
C. I, II, and IV only.
D. I only

31. Which of the following GARCH models will take the highest time to revert to its
mean?
A. ht = 0.05 + 0.03 r²t-1 + 0.96 h t-1
B. ht = 0.03 + 0.02 r²t-1 + 0.95 h t-1
C. ht = 0.02 + 0.01 r²t-1 + 0.97 h t-1
D. ht = 0.01 + 0.01 r²t-1 + 0.97 h t-1
32. The generalized extreme value (GEV) distribution is most useful for:
A. VaR calculations
B. Stress testing
C. Determining the actual distribution
D. Identifying structural charges

33. EVT seeks to overcome a weakness in VaR caused by the assumption of

A. Limited data points
B. Fat tails
C. Normal distributions
D. High loss threshold

34. Which of the following statement is FALSE regarding the implementation of MC

simulation for VAR?
I. MC simulation involves the creation of a distribution of pricing paths created via a
random generation procedure.
II. After samples are made, a pricing model is used to determine financial values
III. MC simulation used actual market movements of past price data.

A. I only
B. III only
C. I and III
D. I, II and III

35. Extreme value theory (EVT) can assist with value at risk (VaR) calculations by
providing better probability estimates of observing extreme losses than that indicated by
a standard normal distribution because empirical distributions exhibit fat tails. If one uses
the generalized Pareto distribution (GPD) method to generate parameter estimates for
the shape parameter, fat tails will indicate a:
A. Positive parameter estimate and VaR calculations that are too large.
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

B. Negative parameter estimate and VaR calculations that are too small.
C. Positive parameter estimate and VaR calculations that are too small.
D. Negative parameter estimate and VaR calculations that are too large.

36. Which of the following are examples of extreme value distribution (EVD),
I. Weibull Distribution
II. Frechet Distribution
III. Generalised Pareto Distribution
IV. Student t distribution

A. I and II
B. I, II and III
C. IV only
D. II and III