Foundations for scientific investing : multiple -choice, short-answer, and long-answer test questions

323 Pages·2021·3.603 MB·English

by  Timothy Falcon Crack, Timothy Falcon Crack

Note: This is a Print Replica eBook of the 7th edition of Foundations for Sci-
entific Investing: Multiple-Choice, Short-Answer, and Long-Answer Test Questions
(January 2021). The page size on the original hardcopy book is 8.25x11 inches, so
it is suitable for a tablet (rotated), Mac, or PC. The font does not wrap, however,
so it is not suitable for a small phone or other small device.
In addition to the Kindle table of contents, I have embedded a clickable table of
contents at the beginning of the book. Click on any heading to go to that section
or chapter.
TFC/OU/2021
Foundations for Scientific Investing:
Multiple-Choice, Short-Answer, and
Long-Answer Test Questions
Foundations for Scientific Investing:
Multiple-Choice, Short-Answer, and
Long-Answer Test Questions
Timothy Falcon Crack
PhD (MIT), MCom, PGDipCom, BSc (HONS 1st Class), IMC
(cid:2)c2021 TIMOTHY FALCON CRACK
All rights reserved worldwide. No part of this book may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical, pho-
tocopying, recording, or otherwise, without the prior written permission of the author.
The author accepts no liability in any event including (without limitation) negligence for
any damages or loss of any kind, including (without limitation) direct, indirect, incidental,
special or consequential damages, expenses or losses arising out of, or in connection with,
your use or inability to use the information in this book.
Published by:
Timothy Falcon Crack, P.O. Box 6385, Dunedin North, Dunedin 9059, New Zealand
Editions: 1st Ed. Nov 2014, 2nd Ed. Sept 2015, 3rd Ed. Nov 2016, 4th Ed. Sept 2017
revised/corrected Feb 2018, 5th Ed. Feb 2019, 6th Ed. Nov 2019, 7th Ed. Jan 2021.
Coverimage: UnitedStatescoinimagefromtheUnitedStatesMint(usedwithpermission).
ISBN: 978-0-9951173-5-8
Typeset by the author.
www.FoundationsForScientificInvesting.com
[email protected]
Contents
Tables ix
Figures xi
Introduction 1
1 Multiple-Choice Test Questions 3
1.1 Foundations I: Quantitative . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Foundations II: Financial Economics . . . . . . . . . . . . . . . . . . 61
1.3 Financial Theories and Empirical Evidence . . . . . . . . . . . . . . 200
1.4 Active Investment Topics . . . . . . . . . . . . . . . . . . . . . . . . 208
2 Short-Answer Test Questions 229
2.1 Foundations I: Quantitative . . . . . . . . . . . . . . . . . . . . . . . 229
2.2 Foundations II: Financial Economics . . . . . . . . . . . . . . . . . . 232
2.3 Financial Theories and Empirical Evidence . . . . . . . . . . . . . . 243
2.4 Active Investment Topics . . . . . . . . . . . . . . . . . . . . . . . . 244
3 Long-Answer Test Questions 247
3.1 Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . 247
3.2 Portfolio Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
3.3 Other Investment Topics . . . . . . . . . . . . . . . . . . . . . . . . . 266
4 Suggested Solutions 269
4.1 Multiple-Choice Test Solutions . . . . . . . . . . . . . . . . . . . . . 269
4.2 Short-Answer Test Solutions . . . . . . . . . . . . . . . . . . . . . . . 270
A Equations for Reference 289
References 293
Alphabets and Numerical Equivalences 296
Index 297
v
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the first page of a section that starts on an odd-numbered
page. This page is included in the eBook for consistency, so
that both editions have exactly the same page numbering.
Preface
This book accompanies Foundations for Scientific Investing (see advertisements
at the end of this book). It provides 607 multiple-choice, and 125 short-answer
questionstoaccompanythelong-answerquestionsalreadyappearinginFoundations.
Most of the long-answer questions are repeated here.
The suggested solutions to the multiple-choice and short-answer questions ap-
pear here and are also available, free of charge, at the Web site for the book:
www.FoundationsForScientificInvesting.com. You may need to use the pass-
word “gosset” without the quotes to access the solutions. Note that the suggested
solutions to the long-answer questions already appear at the Web site, and are not
repeated here.
If you have purchased an eBook version of this book which is not able to be
printed, it might be easiest to print out the Web-based solutions to consult while
viewing the eBook questions.
Note that if any errors in the solutions in this book are discovered, then they
will be amended and corrected in the Web-based solutions.
I thank the thousands of undergraduate, masters, and PhD students who were
guinea pigs for the classroom testing of the material in this book. I thank ASB
Securities for kindly allowing me to include online brokerage screen shots.
TFC/OU/2021
vii
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the first page of a section that starts on an odd-numbered
page. This page is included in the eBook for consistency, so
that both editions have exactly the same page numbering.
Tables
1.1 Function f(x) = 5×erf(1/x) . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Function f(x) = sin(x·π)−Γ(x,π) . . . . . . . . . . . . . . . . . . 7
1.3 Stock Price and Option Price (both in dollars per share) . . . . . . . 16
1.4 PossibleCorrelationsBetweenPricesandCorrelationsBetweenReturns 24
1.5 Stock Price and Option Price . . . . . . . . . . . . . . . . . . . . . . 29
1.6 Possible Correlations . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.7 Examples of Parametric and Non-Parametric Techniques . . . . . . . 42
1.8 Stock ABC Price and Dividends (Dollars Per Share) . . . . . . . . . 63
1.9 Centralized Limit Order Book for TEL NZ . . . . . . . . . . . . . . 69
1.10 Stock DEF Price and Dividends (Cents Per Share) . . . . . . . . . . 72
1.11 Stock ABC Price and Dividends (Cents Per Share) . . . . . . . . . . 73
1.12 Brokerage Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
1.13 Centralized Limit Order Book for CEN NZ . . . . . . . . . . . . . . 83
1.14 FX A/R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
1.15 Your FX Desk’s Quotes . . . . . . . . . . . . . . . . . . . . . . . . . 96
1.16 Centralized Limit Order Book for BLT NZ. . . . . . . . . . . . . . . 101
1.17 Centralized Limit Order Book for ABA NZ . . . . . . . . . . . . . . 105
1.18 Centralized Limit Order Book for MHI NZ . . . . . . . . . . . . . . 109
1.19 Centralized Limit Order Book for NZF NZ . . . . . . . . . . . . . . 111
1.20 Ten Stocks and Benchmark Price Performance over Last Six Months 112
1.21 Relative Spreads on Financial Instruments . . . . . . . . . . . . . . . 118
1.22 Stock Prices on Two Days, Six Months Apart (10 Stocks) . . . . . . 138
1.23 Centralized Limit Order Book for GPG NZ . . . . . . . . . . . . . . 142
1.24 Centralized Limit Order Book for WBC NZ . . . . . . . . . . . . . . 143
1.25 Centralized Limit Order Book for SPK NZ . . . . . . . . . . . . . . 151
2.1 Skewness and Kurtosis Z-Statistics for 10 stocks . . . . . . . . . . . 231
2.2 Stock CUB: October 20XY . . . . . . . . . . . . . . . . . . . . . . . 232
2.3 APN Market Quotes on April 04, and April 11, 2006 . . . . . . . . . 239
2.4 Stock Price and Put Price (both Dollars Per Share) . . . . . . . . . 240
2.5 Stock ABC Price and Dividends (Cents Per Share) . . . . . . . . . . 241
2.6 Ten Stocks and Benchmark Price Performance over Last Six Months 242
ix
This page has been intentionally left blank
In the physical hardcopy edition, this is a blank page facing
the first page of a section that starts on an odd-numbered
page. This page is included in the eBook for consistency, so
that both editions have exactly the same page numbering.