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Question#1of117 QuestionID:413030
Anempiricalprobabilityisonethatis:
A) derivedfromanalyzingpastdata.
B) supportedbyformalreasoning.
C) determinedbymathematicalprinciples.
Explanation
Anempiricalprobabilityisonethatisderivedfromanalyzingpastdata.Forexample,abasketballplayerhasscoredatleast
22pointsineachoftheseason's18games.Therefore,thereisahighprobabilitythathewillscore22pointsintonight's
game.
Question#2of117 QuestionID:413114
TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenario,asshowninthetable
below.Giventhisinformation,whatisthestandarddeviationofexpectedreturnsonPortfolioB?
D 40% 7% 9%
A) 9.51%.
B) 4.34%.
C) 12.55%.
Explanation
TheprobabilityofAis0.4.TheprobabilityofACis0.6.Theprobabilityof(B|A)is0.5,andtheprobabilityof(B|AC)is0.2.UsingBayes'
formula,whatistheprobabilityof(A|B)?
A) 0.375.
B) 0.625.
C) 0.125.
Explanation
Usingthetotalprobabilityrule,wecancomputetheP(B):
P(B)=[P(B|A)P(A)]+[P(B|AC)P(AC)]
P(B)=[0.50.4]+[0.20.6]=0.32
UsingBayes'formula,wecansolveforP(A|B):
P(A|B)=[P(B|A)P(B)]P(A)=[0.50.32]0.4=0.625
Question#4of117 QuestionID:413027
Whichofthefollowingisanempiricalprobability?
A) TheprobabilitytheFedwilllowerinterestratespriortotheendoftheyear.
B) Forastock,basedonpriorpatternsofupanddowndays,theprobabilityofthestock
havingadowndaytomorrow.
C) Onarandomdraw,theprobabilityofchoosingastockofaparticularindustryfromthe
S&P500basedonthenumberoffirms.
Explanation
Therearethreetypesofprobabilities:apriori,empirical,andsubjective.Anempiricalprobabilityiscalculatedbyanalyzing
pastdata.
Question#5of117 QuestionID:413048
Theprobabilityofeachofthreeindependenteventsisshowninthetablebelow.WhatistheprobabilityofAandCoccurring,
butnotB?
Event ProbabilityofOccurrence
A 25%
B 15%
C 42%
A) 10.5%.
B) 8.9%.
C) 3.8%.
Explanation
Usingthemultiplicationrule:(0.25)(0.42)(0.25)(0.15)(0.42)=0.08925or8.9%
Question#6of117 QuestionID:413073
Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofbothsufferingfromallergiesandnotsufferingfromallergies?
Smoker 35 25 60
A) 0.00.
B) 0.50.
C) 1.00.
Explanation
Thesearemutuallyexclusive,sothejointprobabilityiszero.
Question#7of117 QuestionID:413112
Usethefollowingdatatocalculatethestandarddeviationofthereturn:
50%chanceofa12%return
30%chanceofa10%return
20%chanceofa15%return
A) 3.0%.
B) 2.5%.
C) 1.7%.
Explanation
Thestandarddeviationisthepositivesquarerootofthevariance.Thevarianceistheexpectedvalueofthesquared
deviationsaroundtheexpectedvalue,weightedbytheprobabilityofeachobservation.Theexpectedvalueis:(0.5)(0.12)+
(0.3)(0.1)+(0.2)(0.15)=0.12.Thevarianceis:(0.5)(0.120.12)2+(0.3)(0.10.12)2+(0.2)(0.150.12)2=
0.0003.Thestandarddeviationisthesquarerootof0.0003=0.017or1.7%.
Question#8of117 QuestionID:413132
Ifafirmisgoingtocreatethreeteamsoffourfromtwelveemployees.Whichapproachisthemostappropriatefordetermining
howthetwelveemployeescanbeselectedforthethreeteams?
A) Combinationformula.
B) Permutationformula.
C) Labelingformula.
Explanation
Thisproblemisalabelingproblemwherethe12employeeswillbeassignedoneofthreelabels.Itrequiresthelabeling
formula.
Inthiscasethereare[(12!)/(4!4!4!)]=34,650waystogrouptheemployees.
Question#9of117 QuestionID:413074
Afirmholdstwo$50millionbondswithcalldatesthisweek.
TheprobabilitythatBondAwillbecalledis0.80.
TheprobabilitythatBondBwillbecalledis0.30.
Theprobabilitythatatleastoneofthebondswillbecalledisclosestto:
A) 0.50.
B) 0.24.
C) 0.86.
Explanation
Wecalculatetheprobabilitythatatleastoneofthebondswillbecalledusingtheadditionruleforprobabilities:
P(AorB)=P(A)+P(B)P(AandB),whereP(AandB)=P(A)P(B)
P(AorB)=0.80+0.30(0.80.3)=0.86
Question#10of117 QuestionID:413045
Themultiplicationruleofprobabilityisusedtocalculatethe:
A) unconditionalprobabilityofanevent,givenconditionalprobabilities.
B) jointprobabilityoftwoevents.
C) probabilityofatleastoneoftwoevents.
Explanation
Themultiplicationruleofprobabilityisstatedas:P(AB)=P(A|B)P(B),whereP(AB)isthejointprobabilityofeventsAandB.
Question#11of117 QuestionID:413041
Whichofthefollowingprobabilitiesisanexampleofanunconditionalprobability?Theprobabilitythattheeconomywillentera
recession:
A) anytimeinthenextthreeyears.
B) inthenextyeariftaxratesincrease.
C) inthenexttwoyearsifinterestratesincrease.
Explanation
Anunconditionalprobabilityisonethatisnotstatedasdependingontheoutcomeofanotherevent.Aconditionalprobabilityis
statedgiventheoutcomeofanotherevent.
Question#12of117 QuestionID:413127
Aportfoliomanagerwantstoeliminatefourstocksfromaportfoliothatconsistsofsixstocks.Howmanywayscanthefour
stocksbesoldwhentheorderofthesalesisimportant?
A) 24.
B) 360.
C) 180.
Explanation
Thisisachoosefourfromsixproblemwhereorderisimportant.Thus,itrequiresthepermutationformula:n!/(nr)!=6!/(6
4)!=360.
WithTIcalculator:6[2nd][nPr]4=360.
Question#13of117 QuestionID:413032
Lastyear,theaveragesalaryincreaseforpoultryresearchassistantswas2.5%.Ofthe10,000poultryresearchassistants,2,000
receivedraisesinexcessofthisamount.Theoddsthatarandomlyselectedpoultryresearchassistantreceivedasalaryincreasein
excessof2.5%are:
A) 1to5.
B) 1to4.
C) 20%.
Explanation
Forevent"E,"theprobabilitystatedasoddsis:P(E)/[1P(E)].Here,theprobabilitythatapoultryresearchassistantreceivedasalary
increaseinexcessof2.5%=2,000/10,000=0.20,or1/5andtheoddsare(1/5)/[1(1/5)]=1/4,or1to4.
Question#14of117 QuestionID:413064
ThomasBayneshasappliedtobothHarvardandYale.BayneshasdeterminedthattheprobabilityofgettingintoHarvardis
25%andtheprobabilityofgettingintoYale(hisfather'salmamater)is42%.Bayneshasalsodeterminedthattheprobability
ofbeingacceptedatbothschoolsis2.8%.WhatistheprobabilityofBaynesbeingacceptedateitherHarvardorYale?
A) 7.7%.
B) 64.2%.
C) 10.5%.
Explanation
Usingtheadditionrule,theprobabilityofbeingacceptedatHarvardorYaleisequalto:P(Harvard)+P(Yale)P(Harvardand
Yale)=0.25+0.420.028=0.642or64.2%.
Question#15of117 QuestionID:413118
Thereisa30%chancethattheeconomywillbegoodanda70%chancethatitwillbebad.Iftheeconomyisgood,your
returnswillbe20%andiftheeconomyisbad,yourreturnswillbe10%.Whatisyourexpectedreturn?
A) 17%.
B) 15%.
C) 13%.
Explanation
Expectedvalueistheprobabilityweightedaverageofthepossibleoutcomesoftherandomvariable.Theexpectedreturnis:
((0.3)(0.2))+((0.7)(0.1))=(0.06)+(0.07)=0.13.
Question#16of117 QuestionID:413087
Thereisa90%chancethattheeconomywillbegoodnextyearanda10%chancethatitwillbebad.Iftheeconomyisgood,
thereisa60%chancethatXYZIncorporatedwillhaveEPSof$4.00anda40%chancethattheirearningswillbe$3.00.Ifthe
economyisbad,thereisan80%chancethatXYZIncorporatedwillhaveEPSof$2.00anda20%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?
A) $5.40.
B) $3.42.
C) $2.50.
Explanation
TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:
(0.900.60$4.00)+(0.900.40$3.00)+(0.100.80$2.00)+(0.100.20$1.00)=$2.16+$1.08+$0.16+
$0.02=$3.42.
Question#17of117 QuestionID:485759
Thefollowingtableshowstheindividualweightingsandexpectedreturnsforthethreestocksinaninvestor'sportfolio:
Whatistheexpectedreturnofthisportfolio?
A) 9.05%.
B) 8.85%.
C) 8.33%.
Explanation
Tosolvethisproblem,weneedtousetheformulafortheexpectedreturnofaportfolio:E(RP)=w1E(R1)+w2E(R2)+...+
wnE(Rn)
Multiplyingtheweightofeachassetbyitsexpectedreturn,thensumming,produces:E(RP)=0.40(12)+0.35(8)+0.25(5)=
8.85%.
Question#18of117 QuestionID:413050
Whichofthefollowingisajointprobability?Theprobabilitythata:
A) stockincreasesinvalueafteranincreaseininterestrateshasoccurred.
B) companymergeswithanotherfirmnextyear.
C) stockpaysadividendandsplitsnextyear.
Explanation
Ajointprobabilityappliestotwoeventsthatbothmustoccur.
Question#19of117 QuestionID:413033
Eachlotteryticketdisclosestheoddsofwinning.Theseoddsarebasedon:
A) aprioriprobability.
B) pastlotteryhistory.
C) thebestestimateoftheDepartmentofGaming.
Explanation
Anaprioriprobabilityisbasedonformalreasoningratherthanonhistoricalresultsorsubjectiveopinion.
Question#20of117 QuestionID:413121
GivenP(X=20,Y=0)=0.4,andP(X=30,Y=50)=0.6,thenCOV(XY)is:
A) 125.00.
B) 120.00.
C) 25.00.
Explanation
Theexpectedvaluesare:E(X)=(0.420)+(0.630)=26,andE(Y)=(0.40)+(0.650)=30.Thecovarianceis
COV(XY)=(0.4((2026)(030)))+((0.6(3026)(5030)))=120.
Question#21of117 QuestionID:413065
AveryScott,financialplanner,recentlyobtainedhisCFACharterandisconsideringmultiplejoboffers.Scottdevisedthe
followingfourcriteriatohelphimdecidewhichofferstopursuemostaggressively.
%ExpectedtoMeetthe
Criterion
Criteria
1.Within75milesofSanFrancisco 0.85
2.Employeesizelessthan50 0.50
3.Compensationpackageexceeding
0.30
$100,000
4.Threeweeksofvacation 0.15
IfScotthas20joboffersandtheprobabilitiesofmeetingeachcriterionareindependent,howmanyareexpectedtomeetall
ofhiscriteria?(Roundtonearestwholenumber).
A) 1.
B) 3.
C) 0.
Explanation
Wewillusethemultiplicationruletocalculatethisprobability.
P(1,2,3,4)=P(1)P(2)P(3)P(4)
=0.850.500.300.15=0.019125
Numberofoffersexpectedtomeetthecriteria=0.01912520=0.3825,or0.
Question#22of117 QuestionID:413124
BondsratedBhavea25%chanceofdefaultinfiveyears.BondsratedCCChavea40%chanceofdefaultinfiveyears.A
portfolioconsistsof30%Band70%CCCratedbonds.Ifarandomlyselectedbonddefaultsinafiveyearperiod,whatisthe
probabilitythatitwasaBratedbond?
A) 0.625.
B) 0.250.
C) 0.211.
Explanation
AccordingtoBayes'formula:P(B/default)=P(defaultandB)/P(default).
P(defaultandB)=P(default/B)P(B)=0.2500.300=0.075
P(defaultandCCC)=P(default/CCC)P(CCC)=0.4000.700=0.280
P(default)=P(defaultandB)+P(defaultandCCC)=0.355
P(B/default)=P(defaultandB)/P(default)=0.075/0.355=0.211
Question#23of117 QuestionID:413113
TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenario,asshowninthetable
below.Giventhisinformation,whatisthestandarddeviationofreturnsonportfolioA?
D 40% 7% 9%
A) 4.53%.
B) 1.140%.
C) 5.992%.
Explanation
E(RA)=11.65%
2=0.0020506=0.15(0.180.1165)2+0.2(0.170.1165)2+0.25(0.110.1165)2+0.4(0.070.1165)2
=0.0452836
Question#24of117 QuestionID:434199
Thereisa40%probabilitythattheeconomywillbegoodnextyearanda60%probabilitythatitwillbebad.Iftheeconomyis
good,thereisa50percentprobabilityofabullmarket,a30%probabilityofanormalmarket,anda20%probabilityofabear
market.Iftheeconomyisbad,thereisa20%probabilityofabullmarket,a30%probabilityofanormalmarket,anda50%
probabilityofabearmarket.Whatistheprobabilityofabullmarketnextyear?
A) 32%.
B) 20%.
C) 50%.
Explanation
Becauseagoodeconomyandabadeconomyaremutuallyexclusive,theprobabilityofabullmarketisthesumofthejoint
probabilitiesof(goodeconomyandbullmarket)and(badeconomyandbullmarket):(0.400.50)+(0.600.20)=0.32or
32%.
Question#25of117 QuestionID:413081
AninvestorisconsideringpurchasingACQ.Thereisa30%probabilitythatACQwillbeacquiredinthenexttwomonths.If
ACQisacquired,thereisa40%probabilityofearninga30%returnontheinvestmentanda60%probabilityofearning25%.If
ACQisnotacquired,theexpectedreturnis12%.Whatistheexpectedreturnonthisinvestment?
A) 16.5%.
B) 18.3%.
C) 12.3%.
Explanation
E(r)=(0.700.12)+(0.300.400.30)+(0.300.600.25)=0.165.
Question#26of117 QuestionID:413034
Whichofthefollowingisanaprioriprobability?
A) Forastock,basedonpriorpatternsofupanddowndays,theprobabilityof
thestockhavingadowndaytomorrow.
B) TheprobabilitytheFedwilllowerinterestratespriortotheendoftheyear.
C) Onarandomdraw,theprobabilityofchoosingastockofaparticularindustryfromthe
S&P500.
Explanation
Aprioriprobabilityisbasedonformalreasoningandinspection.Giventhenumberofstocksintheairlineindustryinthe
S&P500forexample,theaprioriprobabilityofselectinganairlinestockwouldbethatnumberdividedby500.
Question#27of117 QuestionID:413102
Aninvestorhastwostocks,StockRandStockSinherportfolio.Giventhefollowinginformationonthetwostocks,the
portfolio'sstandarddeviationisclosestto:
R=34%
S=16%
rR,S=0.67
WR=80%
WS=20%
A) 29.4%.
B) 8.7%.
C) 7.8%.
Explanation
Theformulaforthestandarddeviationofa2stockportfoliois:
s=[WA2sA2+WB2sB2+2WAWBsAsBrA,B]1/2
s=[(0.820.342)+(0.220.162)+(20.80.20.340.160.67)]1/2=[0.073984+0.001024+0.0116634]1/2=
0.08667141/2=0.2944,orapproximately29.4%.
Question#28of117 QuestionID:413026
Forastock,whichofthefollowingisleastlikelyarandomvariable?Its:
A) stocksymbol.
B) currentratio.
C) mostrecentclosingprice.
Explanation
Arandomvariablemustbeanumber.Sometimesthereisanobviousmethodforassigninganumber,suchaswhenthe
randomvariableisanumberitself,likeaP/Eratio.Astocksymbolofarandomlyselectedstockcouldhaveanumber
assignedtoitlikethenumberoflettersinthesymbol.Thesymbolitselfcannotbearandomvariable.
Question#29of117 QuestionID:413025
Iftwoeventsaremutuallyexclusive,theprobabilitythattheybothwilloccuratthesametimeis:
A) Cannotbedeterminedfromtheinformationgiven.
B) 0.50.
C) 0.00.
Explanation
Iftwoeventsaremutuallyexclusive,itisnotpossibletooccuratthesametime.Therefore,theP(AB)=0.
Question#30of117 QuestionID:413094
Giventhefollowingprobabilitydistribution,findthecovarianceoftheexpectedreturnsforstocksAandB.
Event P(Ri) RA RB
Recession 0.10 5% 4%
Below 0.30 2% 8%
Average
Normal 0.50 10% 10%
Boom 0.10 31% 12%
A) 0.00032.
B) 0.00174.
C) 0.00109.
Explanation
Findtheweightedaveragereturnforeachstock.
StockA:(0.10)(5)+(0.30)(2)+(0.50)(10)+(0.10)(0.31)=7%.
StockB:(0.10)(4)+(0.30)(8)+(0.50)(10)+(0.10)(0.12)=9%.
Next,multiplythedifferencesofthetwostocksbyeachother,multiplybytheprobabilityoftheeventoccurring,andsum.This
isthecovariancebetweenthereturnsofthetwostocks.
[(0.050.07)(0.040.09)](0.1)+[(0.020.07)(0.080.09)](0.3)+[(0.100.07)(0.100.09)](0.5)+[(0.31
0.07)(0.120.09)](0.1)=0.0006+0.00027+0.00015+0.00072=0.00174.
Question#31of117 QuestionID:413060
TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenarioasshowninthetable
below.Giventhisinformation,whatistheexpectedreturnonportfolioA?
D 40% 8% 9%
A) 9.25%.
B) 11.55%.
C) 10.75%.
Explanation
Theexpectedreturnisequaltothesumoftheproductsoftheprobabilitiesofthescenariosandtheirrespectivereturns:=
(0.15)(0.17)+(0.20)(0.14)+(0.25)(0.12)+(0.40)(0.08)=0.1155or11.55%.
Question#32of117 QuestionID:413077
IftheoutcomeofeventAisnotaffectedbyeventB,theneventsAandBaresaidtobe:
A) conditionallydependent.
B) mutuallyexclusive.
C) statisticallyindependent.
Explanation
Iftheoutcomeofoneeventdoesnotinfluencetheoutcomeofanother,thentheeventsareindependent.
Question#33of117 QuestionID:413067
TheprobabilityofanewWalMartbeingbuiltintownis64%.IfWalMartcomestotown,theprobabilityofanewWendy's
restaurantbeingbuiltis90%.WhatistheprobabilityofanewWalMartandanewWendy'srestaurantbeingbuilt?
A) 0.675.
B) 0.306.
C) 0.576.
Explanation
P(AB)=P(A|B)P(B)
TheprobabilityofanewWalMartandanewWendy'sisequaltotheprobabilityofanewWendy's"ifWalMart"(0.90)times
theprobabilityofanewWalMart(0.64).(0.90)(0.64)=0.576.
Question#34of117 QuestionID:413115
ForassetsAandBweknowthefollowing:E(RA)=0.10,E(RB)=0.10,Var(RA)=0.18,Var(RB)=0.36andthecorrelationof
thereturnsis0.6.Whatisthevarianceofthereturnofaportfoliothatisequallyinvestedinthetwoassets?
A) 0.1500.
B) 0.1102.
C) 0.2114.
Explanation
Youarenotgiventhecovarianceinthisproblembutinsteadyouaregiventhecorrelationcoefficientandthevariancesof
assetsAandBfromwhichyoucandeterminethecovariancebyCovariance=(correlationofA,B)StandardDeviationofA)
(StandardDeviationofB).
Sinceitisanequallyweightedportfolio,thesolutionis:
[(0.52)0.18]+[(0.52)0.36]+[20.50.50.6(0.180.5)(0.360.5)]
=0.045+0.09+0.0764=0.2114
Question#35of117 QuestionID:413047
AbondportfolioconsistsoffourBBratedbonds.Eachhasaprobabilityofdefaultof24%andtheseprobabilitiesare
independent.Whataretheprobabilitiesofallthebondsdefaultingandtheprobabilityofallthebondsnotdefaulting,
respectively?
A) 0.960000.04000.
B) 0.040000.96000.
C) 0.003320.33360.
Explanation
Forthefourindependenteventswheretheprobabilityisthesameforeach,theprobabilityofalldefaultingis(0.24)4.The
probabilityofallnotdefaultingis(10.24)4.
Question#36of117 QuestionID:413125
Johnpurchased60%ofthestocksinaportfolio,whileAndrewpurchasedtheother40%.HalfofJohn'sstockpicksare
consideredgood,whileafourthofAndrew'sareconsideredtobegood.Ifarandomlychosenstockisagoodone,whatisthe
probabilityJohnselectedit?
A) 0.40.
B) 0.30.
C) 0.75.
Explanation
Usingtheinformationofthestockbeinggood,theprobabilityisupdatedtoaconditionalprobability:
P(John|good)=P(goodandJohn)/P(good).
P(goodandJohn)=P(good|John)P(John)=0.50.6=0.3.
P(goodandAndrew)=0.250.40=0.10.
P(good)=P(goodandJohn)+P(goodandAndrew)=0.40.
P(John|good)=P(goodandJohn)/P(good)=0.3/0.4=0.75.
Question#37of117 QuestionID:413111
Afterrepeatedexperiments,theaverageoftheoutcomesshouldconvergeto:
A) one.
B) thevariance.
C) theexpectedvalue.
Explanation
Thisisthedefinitionoftheexpectedvalue.Itisthelongrunaverageofalloutcomes.
Question#38of117 QuestionID:434201
Aneconomistestimatesa60%probabilitythattheeconomywillexpandnextyear.Thetechnologysectorhasa70%
probabilityofoutperformingthemarketiftheeconomyexpandsanda10%probabilityofoutperformingthemarketifthe
economydoesnotexpand.Giventhenewinformationthatthetechnologysectorwillnotoutperformthemarket,theprobability
thattheeconomywillnotexpandisclosestto:
A) 54%.
B) 33%.
C) 67%.
Explanation
UsingthenewinformationwecanuseBayes"formulatoupdatetheprobability.
P(economydoesnotexpand|techdoesnotoutperform)=P(economydoesnotexpandandtechdoesnotoutperform)/
P(techdoesnotoutperform).
P(economydoesnotexpandandtechdoesnotoutperform)=P(techdoesnotoutperform|economydoesnotexpand)
P(economydoesnotexpand)=0.900.40=0.36.
P(economydoesexpandandtechdoesnotoutperform)=P(techdoesnotoutperform|economydoesexpand)P(economy
doesexpand)=0.300.60=0.18.
P(economydoesnotexpand)=1.00P(economydoesexpand)=1.000.60=0.40.
P(techdoesnotoutperform|economydoesnotexpand)=1.00P(techdoesoutperform|economydoesnotexpand)=1.00
0.10=0.90.
P(techdoesnotoutperform)=P(techdoesnotoutperformandeconomydoesnotexpand)+P(techdoesnotoutperformand
economydoesexpand)=0.36+0.18=0.54.
P(economydoesnotexpand|techdoesnotoutperform)=P(economydoesnotexpandandtechdoesnotoutperform)/
P(techdoesnotoutperform)=0.36/0.54=0.67.
Question#39of117 QuestionID:413066
PatBinder,CFA,isexaminingtheeffectofaninvertedyieldcurveonthestockmarket.Shedeterminesthatinthepast
century,75%ofthetimestheyieldcurvehasinverted,abearmarketinstocksbeganwithinthenext12months.Binder
believestheprobabilityofaninvertedyieldcurveinthenextyearis20%.Binder'sestimateoftheprobabilitythattherewillbe
aninvertedyieldcurveinthenextyearfollowedbyabearmarketisclosestto:
A) 38%.
B) 15%.
C) 50%.
Explanation
Thisisajointprobability.Fromtheinformation:P(BearMarketgiveninvertedyieldcurve)=0.75andP(invertedyieldcurve)=
0.20.Thejointprobabilityistheproductofthesetwoprobabilities:(0.75)(0.20)=0.15.
Question#40of117 QuestionID:413036
Iftheprobabilityofaneventis0.20,whataretheoddsagainsttheeventoccurring?
A) Fourtoone.
B) Onetofour.
C) Fivetoone.
Explanation
Theanswercanbedeterminedbydividingtheprobabilityoftheeventbytheprobabilitythatitwillnotoccur:(1/5)/(4/5)=1to
4.Theoddsagainsttheeventoccurringisfourtoone,i.e.infiveoccurrencesoftheevent,itisexpectedthatitwilloccuronce
andnotoccurfourtimes.
Question#41of117 QuestionID:413039
Iftheprobabilityofaneventis0.10,whataretheoddsfortheeventoccurring?
A) Onetoten.
B) Ninetoone.
C) Onetonine.
Explanation
Theanswercanbedeterminedbydividingtheprobabilityoftheeventbytheprobabilitythatitwillnotoccur:(1/10)/(9/10)=1
to9.Theprobabilityoftheeventoccurringisonetonine,i.e.intenoccurrencesoftheevent,itisexpectedthatitwilloccur
onceandnotoccurninetimes.
Question#42of117 QuestionID:413099
Withrespecttotheunitseachismeasuredin,whichofthefollowingisthemosteasilydirectlyapplicablemeasureof
dispersion?The:
A) covariance.
B) standarddeviation.
C) variance.
Explanation
Thestandarddeviationisintheunitsoftherandomvariableitselfandnotsquaredunitslikethevariance.Thecovariance
wouldbemeasuredintheproductoftwounitsofmeasure.
Question#43of117 QuestionID:413037
Acompanyhastwomachinesthatproducewidgets.Anoldermachineproduces16%defectivewidgets,whilethenew
machineproducesonly8%defectivewidgets.Inaddition,thenewmachineemploysasuperiorproductionprocesssuchthatit
producesthreetimesasmanywidgetsastheoldermachinedoes.Giventhatawidgetwasproducedbythenewmachine,
whatistheprobabilityitisNOTdefective?
A) 0.92.
B) 0.06.
C) 0.76.
Explanation
Theproblemisjustaskingfortheconditionalprobabilityofadefectivewidgetgiventhatitwasproducedbythenewmachine.
Sincethewidgetwasproducedbythenewmachineandnotselectedfromtheoutputrandomly(ifrandomlyselected,you
wouldnotknowwhichmachineproducedthewidget),weknowthereisan8%chanceitisdefective.Hence,theprobabilityitis
notdefectiveisthecomplement,18%=92%.
Question#44of117 QuestionID:413044
Whichprobabilityruledeterminestheprobabilitythattwoeventswillbothoccur?
A) Thetotalprobabilityrule.
B) Themultiplicationrule.
C) Theadditionrule.
Explanation
Themultiplicationruleisusedtodeterminethejointprobabilityoftwoevents.Theadditionruleisusedtodeterminethe
probabilitythatatleastoneoftwoeventswilloccur.Thetotalprobabilityruleisutilizedwhentryingtodeterminethe
unconditionalprobabilityofanevent.
Question#45of117 QuestionID:413054
ThefollowingtablesummarizestheresultsofapolltakenofCEO'sandanalystsconcerningtheeconomicimpactofapendingpieceof
legislation:
Thinkitwillhavea Thinkitwillhavea
Group Total
positiveimpact negativeimpact
CEO's 40 30 70
Analysts 70 60 130
110 90 200
Whatistheprobabilitythatarandomlyselectedindividualfromthisgroupwillbeananalystthatthinksthatthelegislationwillhavea
positiveimpactontheeconomy?
A) 0.30.
B) 0.45.
C) 0.35.
Explanation
70analysts/200individuals=0.35.
Question#46of117 QuestionID:413062
Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofsufferingfromallergiesorbeingasmoker?
Smoker 35 25 60
A) 0.38.
B) 0.88.
C) 0.12.
Explanation
Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring.Theprobabilityofeacheventisaddedandthejointprobability(iftheeventsarenotmutuallyexclusive)is
subtractedtoarriveatthesolution.P(smokerorallergies)=P(smoker)+P(allergies)P(smokerandallergies)=(60/300)+
(90/300)(35/300)=0.20+0.300.117=0.38.
Alternatively:1Prob.(Neither)=1(185/300)=38.3%.
Question#47of117 QuestionID:413055
Thereisa50%chancethattheFedwillcutinterestratestomorrow.Onanygivenday,thereisa67%chancetheDJIAwill
increase.OndaystheFedcutsinterestrates,theprobabilitytheDJIAwillgoupis90%.Whatistheprobabilitythattomorrow
theFedwillcutinterestratesortheDJIAwillgoup?
A) 0.72.
B) 0.33.
C) 0.95.
Explanation
Thisrequirestheadditionformula.Fromtheinformation:P(cutinterestrates)=0.50andP(DJIAincrease)=0.67,P(DJIA
increase|cutinterestrates)=0.90.Thejointprobabilityis0.500.90=0.45.ThusP(cutinterestratesorDJIAincrease)=
0.50+0.670.45=0.72.
Question#48of117 QuestionID:413110
Giventhefollowingprobabilitydistribution,findthestandarddeviationofexpectedreturns.
Event P(RA) RA
Recession 0.10 5%
BelowAverage 0.30 2%
A) 10.04%.
B) 7.00%.
C) 12.45%.
Explanation
Findtheweightedaveragereturn(0.10)(5)+(0.30)(2)+(0.50)(10)+(0.10)(31)=7%.
Next,takedifferences,squarethem,multiplybytheprobabilityoftheeventandaddthemup.Thatisthevariance.Takethe
squarerootofthevarianceforStd.Dev.(0.1)(57)2+(0.3)(27)2+(0.5)(107)2+(0.1)(317)2=100.8=variance.
100.80.5=10.04%.
Question#49of117 QuestionID:413100
Thecovariance:
A) canbepositiveornegative.
B) mustbebetween1and+1.
C) mustbepositive.
Explanation
Cov(a,b)=aba,b.Sincea,bcanbepositiveornegative,Cov(a,b)canbepositiveornegative.
Question#50of117 QuestionID:413117
Usethefollowingprobabilitydistributiontocalculatethestandarddeviationfortheportfolio.
Bust 0.70 3%
A) 6.0%.
B) 6.5%.
C) 5.5%.
Explanation
[0.30(0.150.066)2+0.70(0.030.066)2]1/2=5.5%.
Question#51of117 QuestionID:413085
Ananalystannouncesthatanincreaseinthediscountratenextquarterwilldoubleherearningsforecastforafirm.Thisisan
exampleofa:
A) conditionalexpectation.
B) useofBayes'formula.
C) jointprobability.
Explanation
Thisisaconditionalexpectation.Theanalystindicateshowanexpectedvaluewillchangegivenanotherevent.
Question#52of117 QuestionID:413075
Abagofmarblescontains3whiteand4blackmarbles.Amarblewillbedrawnfromthebagrandomlythreetimesandput
backintothebag.Relativetotheoutcomesofthefirsttwodraws,theprobabilitythatthethirdmarbledrawniswhiteis:
A) dependent.
B) independent.
C) conditional.
Explanation
Eachdrawhasthesameprobability,whichisnotaffectedbypreviousoutcomes.Thereforeeachdrawisanindependent
event.
Question#53of117 QuestionID:413103
Whatisthestandarddeviationofaportfolioifyouinvest30%instockone(standarddeviationof4.6%)and70%instocktwo
(standarddeviationof7.8%)ifthecorrelationcoefficientforthetwostocksis0.45?
A) 6.83%.
B) 6.20%.
C) 0.38%.
Explanation
Thestandarddeviationoftheportfolioisfoundby:
Question#54of117 QuestionID:413101
JoeMayer,CFA,projectsthatXYZCompany'sreturnonequityvarieswiththestateoftheeconomyinthefollowingway:
ThestandarddeviationofXYZ'sexpectedreturnonequityisclosestto:
A) 3.5%.
B) 1.5%.
C) 12.3%.
Explanation
Inordertocalculatethestandarddeviationofthecompanyreturns,firstcalculatetheexpectedreturn,thenthevariance,andthestandard
deviationisthesquarerootofthevariance.
Theexpectedvalueofthecompanyreturnistheprobabilityweightedaverageofthepossibleoutcomes:(0.20)(0.20)+(0.50)(0.15)+
(0.30)(0.10)=0.145.
Thevarianceisthesumoftheprobabilityofeachoutcomemultipliedbythesquareddeviationofeachoutcomefromtheexpectedreturn:
(0.2)(0.200.145)2+(0.5)(0.150.145)2+(0.3)(0.10.145)2=0.000605+0.0000125+0.0006075=0.001225.
Thestandarddeviationisthesquarerootof0.001225=0.035or3.5%.
Question#55of117 QuestionID:413031
Whichofthefollowingstatementsaboutthedefiningpropertiesofprobabilityismostaccurate?
A) ThesumoftheprobabilitiesofeventsE1thoughExequalsoneiftheevents
aremutuallyexclusiveorexhaustive.
B) Ifthedevicethatgeneratesaneventisnotfair,theeventscanbemutuallyexclusive
andexhaustive.
C) Theprobabilityofanyeventisbetween0and1,exclusive.
Explanation
Evenifthedevicethatgeneratesaneventisnotfair,theeventscanbemutuallyexclusiveandexhaustive.Considera
standarddiewiththepossibleoutcomesof1,2,3,4,5and6.TheP(2or4or6)=0.50andP(1or3or5)=0.50,andthusthe
probabilitiessumto1andaremutuallyexclusiveandexhaustive.Anunfairdiewouldnotchangethis.
Bothremainingstatementsarefalse.Theprobabilityofanyeventisbetween0and1,inclusive.Itispossiblethatthe
probabilityofaneventcouldequal0or1,oranypointinbetween.ThesumoftheprobabilitiesofeventsE1thoughExequals
1iftheeventsaremutuallyexclusiveandexhaustive.
Question#56of117 QuestionID:413079
IfXandYareindependentevents,whichofthefollowingismostaccurate?
A) P(X|Y)=P(X).
B) P(XorY)=(P(X))(P(Y)).
C) P(XorY)=P(X)+P(Y).
Explanation
Notethateventsbeingindependentmeansthattheyhavenoinfluenceoneachother.Itdoesnotnecessarilymeanthatthey
aremutuallyexclusive.Accordingly,P(XorY)=P(X)+P(Y)P(XandY).Bythedefinitionofindependentevents,P(X|Y)=
P(X).
Question#57of117 QuestionID:413042
Foragivencorporation,whichofthefollowingisanexampleofaconditionalprobability?Theprobabilitythecorporation's:
A) earningsincreaseanddividendincreases.
B) inventoryimproves.
C) dividendincreasesgivenitsearningsincrease.
Explanation
Aconditionalprobabilityinvolvestwoevents.Oneoftheeventsisagiven,andtheprobabilityoftheothereventdependsuponthatgiven.
Question#58of117 QuestionID:413072
Inagivenportfolio,halfofthestockshaveabetagreaterthanone.Ofthosewithabetagreaterthanone,athirdareina
computerrelatedbusiness.Whatistheprobabilityofarandomlydrawnstockfromtheportfoliohavingbothabetagreater
thanoneandbeinginacomputerrelatedbusiness?
A) 0.167.
B) 0.667.
C) 0.333.
Explanation
Thisisajointprobability.Fromtheinformation:P(beta>1)=0.500andP(comp.stock|beta>1)=0.333.Thus,thejoint
probabilityistheproductofthesetwoprobabilities:(0.500)(0.333)=0.167.
Question#59of117 QuestionID:434197
Aparkinglothas100redandbluecarsinit.
40%ofthecarsarered.
70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.
Whatistheprobabilityofselectingacaratrandomthatiseitherredorhasaradio?
A) 28%.
B) 88%.
C) 76%.
Explanation
Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring,inthiscaseacarbeingredorhavingaradio.Tousetheadditionrule,theprobabilitiesofeachindividualeventare
addedtogether,and,iftheeventsarenotmutuallyexclusive,thejointprobabilityofbotheventsoccurringatthesametimeis
subtractedout:P(redorradio)=P(red)+P(radio)P(redandradio)=0.40+0.760.28=0.88or88%.
Question#60of117 QuestionID:434198
Thereisa40%probabilitythattheeconomywillbegoodnextyearanda60%probabilitythatitwillbebad.Iftheeconomyis
good,thereisa50percentprobabilityofabullmarket,a30%probabilityofanormalmarket,anda20%probabilityofabear
market.Iftheeconomyisbad,thereisa20%probabilityofabullmarket,a30%probabilityofanormalmarket,anda50%
probabilityofabearmarket.Whatisthejointprobabilityofagoodeconomyandabullmarket?
A) 20%.
B) 12%.
C) 50%.
Explanation
Jointprobabilityistheprobabilitythatbothevents,inthiscasetheeconomybeinggoodandtheoccurrenceofabullmarket,
happenatthesametime.Jointprobabilityiscomputedbymultiplyingtheindividualeventprobabilitiestogether:0.400.50=
0.20or20%.
Question#61of117 QuestionID:413092
ThecovarianceofthereturnsoninvestmentsXandYis18.17.ThestandarddeviationofreturnsonXis7%,andthe
standarddeviationofreturnsonYis4%.WhatisthevalueofthecorrelationcoefficientforreturnsoninvestmentsXandY?
A) +0.85.
B) +0.65.
C) +0.32.
Explanation
Thecorrelationcoefficient=Cov(X,Y)/[(StdDev.X)(Std.Dev.Y)]=18.17/28=0.65
Question#62of117 QuestionID:413061
ThefollowingtablesummarizestheresultsofapolltakenofCEO'sandanalystsconcerningtheeconomicimpactofapending
pieceoflegislation:
Thinkitwillhavea Thinkitwillhavea
Group positiveimpact negativeimpact Total
CEO's 40 30 70
Analysts 70 60 130
110 90 200
Whatistheprobabilitythatarandomlyselectedindividualfromthisgroupwillbeeitherananalystorsomeonewhothinksthis
legislationwillhaveapositiveimpactontheeconomy?
A) 0.75.
B) 0.80.
C) 0.85.
Explanation
Thereare130totalanalystsand40CEOswhothinkitwillhaveapositiveimpact.(130+40)/200=0.85.
Question#63of117 QuestionID:413058
Iftwoeventsareindependent,theprobabilitythattheybothwilloccuris:
A) Cannotbedeterminedfromtheinformationgiven.
B) 0.00.
C) 0.50.
Explanation
Iftwoeventsareindependent,theirprobabilityoftheirjointoccurrenceiscomputedasfollows:P(AB)=P(A)P(B).Sincewearenot
givenanyinformationontherespectiveprobabilitiesofAorB,thereisnotenoughinformation.
Question#64of117 QuestionID:413107
ForassetsAandBweknowthefollowing:E(RA)=0.10,E(RB)=0.20,Var(RA)=0.25,Var(RB)=0.36andthecorrelationof
thereturnsis0.6.Whatistheexpectedreturnofaportfoliothatisequallyinvestedinthetwoassets?
A) 0.1500.
B) 0.3050.
C) 0.2275.
Explanation
Theexpectedreturnofaportfoliocomposedofnassetsistheweightedaverageoftheexpectedreturnsoftheassetsinthe
portfolio:((w1)(E(R1))+((w2)(E(R2))=(0.50.1)+(0.50.2)=0.15.
Question#65of117 QuestionID:413029
WhichofthefollowingsetsofnumbersdoesNOTmeettherequirementsforasetofprobabilities?
A) (0.50,0.50).
B) (0.10,0.20,0.30,0.40,0.50).
C) (0.10,0.20,0.30,0.40).
Explanation
Asetofprobabilitiesmustsumtoone.
Question#66of117 QuestionID:413126
Ananalystexpectsthat20%ofallpubliclytradedcompanieswillexperienceadeclineinearningsnextyear.Theanalysthas
developedaratiotohelpforecastthisdecline.Ifthecompanyisheadedforadecline,thereisa90%chancethatthisratiowill
benegative.Ifthecompanyisnotheadedforadecline,thereisonlya10%chancethattheratiowillbenegative.Theanalyst
randomlyselectsacompanywithanegativeratio.BasedonBayes'theorem,theupdatedprobabilitythatthecompanywill
experienceadeclineis:
A) 69%.
B) 18%.
C) 26%.
Explanation
Givenasetofpriorprobabilitiesforaneventofinterest,Bayes'formulaisusedtoupdatetheprobabilityoftheevent,inthis
casethatthecompanywehavealreadyselectedwillexperienceadeclineinearningsnextyear.Bayes'formulasaystodivide
theProbabilityofNewInformationgivenEventbytheUnconditionalProbabilityofNewInformationandmultiplythatresultby
thePriorProbabilityoftheEvent.Inthiscase,P(companyhavingadeclineinearningsnextyear)=0.20isdividedby0.26
(whichistheUnconditionalProbabilitythatacompanyhavinganearningsdeclinewillhaveanegativeratio(90%have
negativeratiosofthe20%whichhaveearningsdeclines)plus(10%havenegativeratiosofthe80%whichdonothave
earningsdeclines)or((0.90)(0.20))+((0.10)(0.80))=0.26.)ThisresultisthenmultipliedbythePriorProbabilityofthe
ratiobeingnegative,0.90.Theresultis(0.20/0.26)(0.90)=0.69or69%.
Question#67of117 QuestionID:413130
Whichofthefollowingstatementsaboutcountingmethodsisleastaccurate?
A) Thecombinationformuladeterminesthenumberofdifferentwaysagroupofobjects
canbedrawninaspecificorderfromalargersizedgroupofobjects.
B) Thelabelingformuladeterminesthenumberofdifferentwaystoassignagivennumberof
differentlabelstoasetofobjects.
C) Themultiplicationruleofcountingisusedtodeterminethenumberofdifferentwaysto
chooseoneobjectfromeachoftwoormoregroups.
Explanation
Thepermutationformulaisusedtofindthenumberofpossiblewaystodrawrobjectsfromasetofnobjectswhentheorderinwhichthe
objectsaredrawnmatters.Thecombinationformula("nchooser")isusedtofindthenumberofpossiblewaystodrawrobjectsfroma
setofnobjectswhenorderisnotimportant.Theotherstatementsareaccurate.
Question#68of117 QuestionID:413096
Whichofthefollowingstatementsisleastaccurateregardingcovariance?
A) Thecovarianceofavariablewithitselfisone.
B) Covariancecanonlyapplytotwovariablesatatime.
C) Covariancecanexceedone.
Explanation
Thecovarianceofavariablewithitselfisitsvariance.Bothremainingstatementsaretrue.Covariancerepresentsthelinear
relationshipbetweentwovariablesandisnotlimitedinvalue(i.e.,itcanrangefromnegativeinfinitytopositiveinfinity).
Question#69of117 QuestionID:413108
ComputethestandarddeviationofatwostockportfolioifstockA(40%weight)hasavarianceof0.0015,stockB(60%weight)
hasavarianceof0.0021,andthecorrelationcoefficientforthetwostocksis0.35?
A) 2.64%.
B) 0.07%.
C) 1.39%.
Explanation
Thestandarddeviationoftheportfolioisfoundby:
[W1212 +W2222+2W1W2121,2]0.5
=[(0.40)2(0.0015)+(0.60)2(0.0021)+(2)(0.40)(0.60)(0.0387)(0.0458)(0.35)]0.5
=0.0264,or2.64%.
Question#70of117 QuestionID:413068
IftheprobabilityofbothanewWalMartandanewWendy'sbeingbuiltnextmonthis68%andtheprobabilityofanewWal
Martbeingbuiltis85%,whatistheprobabilityofanewWendy'sbeingbuiltifanewWalMartisbuilt?
A) 0.70.
B) 0.80.
C) 0.60.
Explanation
P(AB)=P(A|B)P(B)
0.68/0.85=0.80
Question#71of117 QuestionID:413023
IfeventAandeventBcannotoccursimultaneously,theneventsAandBaresaidtobe:
A) mutuallyexclusive.
B) collectivelyexhaustive.
C) statisticallyindependent.
Explanation
Iftwoeventscannotoccurtogether,theeventsaremutuallyexclusive.Agoodexampleisacoinflip:headsANDtailscannotoccuron
thesameflip.
Question#72of117 QuestionID:413090
Thecorrelationcoefficientforaseriesofreturnsontwoinvestmentsisequalto0.80.Theircovarianceofreturnsis0.06974.
Whichofthefollowingarepossiblevariancesforthereturnsonthetwoinvestments?
A) 0.02and0.44.
B) 0.04and0.19.
C) 0.08and0.37.
Explanation
Thecorrelationcoefficientis:0.06974/[(StdDevA)(StdDevB)]=0.8.(StdDevA)(StdDevB)=0.08718.Sincethestandard
deviationisequaltothesquarerootofthevariance,eachpairofvariancescanbeconvertedtostandarddeviationsand
multipliedtoseeiftheyequal0.08718.0.04=0.20and0.19=0.43589.Theproductoftheseequals0.08718.
Question#73of117 QuestionID:413052
Ananalysthasalistof20bondsofwhich14arecallable,andfivehavewarrantsattachedtothem.Twoofthecallablebonds
havewarrantsattachedtothem.Ifasinglebondischosenatrandom,whatistheprobabilityofchoosingacallablebondora
bondwithawarrant?
A) 0.70.
B) 0.85.
C) 0.55.
Explanation
Thisrequirestheadditionformula,P(callable)+P(warrants)P(callableandwarrants)=P(callableorwarrants)=14/20+5/20
2/20=17/20=0.85.
Question#74of117 QuestionID:413057
Averylargecompanyhastwiceasmanymaleemployeesrelativetofemaleemployees.Ifarandomsampleoffour
employeesisselected,whatistheprobabilitythatallfouremployeesselectedarefemale?
A) 0.3333.
B) 0.0625.
C) 0.0123.
Explanation
Sincetherearetwiceasmanymaleemployeestofemaleemployees,P(male)=2/3andP(female)=1/3.Therefore,the
probabilityof4"successes"=(0.333)4=0.0123.
Question#75of117 QuestionID:413082
FirmAcanfallshort,meet,orexceeditsearningsforecast.Eachoftheseeventsisequallylikely.WhetherfirmAincreasesits
dividendwilldependupontheseoutcomes.Respectively,theprobabilitiesofadividendincreaseconditionalonthefirmfalling
short,meetingorexceedingtheforecastare20%,30%,and50%.Theunconditionalprobabilityofadividendincreaseis:
A) 1.000.
B) 0.333.
C) 0.500.
Explanation
Theunconditionalprobabilityistheweightedaverageoftheconditionalprobabilitieswheretheweightsaretheprobabilitiesof
theconditions.Inthisproblemthethreeconditionsfallshort,meet,orexceeditsearningsforecastareallequallylikely.
Therefore,theunconditionalprobabilityisthesimpleaverageofthethreeconditionalprobabilities:(0.2+0.3+0.5)3.
Question#76of117 QuestionID:413028
Theprobabilitiesofearningaspecifiedreturnfromaportfolioareshownbelow:
Probability Return
0.20 10%
0.20 20%
0.20 22%
0.20 15%
0.20 25%
Whataretheoddsofearningatleast20%?
A) Threetotwo.
B) Twotothree.
C) Threetofive.
Explanation
Oddsarethenumberofsuccessfulpossibilitiestothenumberofunsuccessfulpossibilities:
P(E)/[1P(E)]or0.6/0.4or3/2.
Question#77of117 QuestionID:413095
ThereturnsonassetsCandDarestronglycorrelatedwithacorrelationcoefficientof0.80.ThevarianceofreturnsonCis0.0009,and
thevarianceofreturnsonDis0.0036.WhatisthecovarianceofreturnsonCandD?
A) 0.03020.
B) 0.00144.
C) 0.40110.
Explanation
r=Cov(C,D)/(CxD)
C=(0.0009)0.5=0.03
D=(0.0036)0.5=0.06
0.8(0.03)(0.06)=0.00144
Question#78of117 QuestionID:413084
Aconditionalexpectationinvolves:
A) determiningtheexpectedjointprobability.
B) calculatingtheconditionalvariance.
C) refiningaforecastbecauseoftheoccurrenceofsomeotherevent.
Explanation
Conditionalexpectedvaluesarecontingentupontheoccurrenceofsomeotherevent.Theexpectationchangesasnew
informationisrevealed.
Question#79of117 QuestionID:413097
GivenCov(X,Y)=1,000,000.WhatdoesthisindicateabouttherelationshipbetweenXandY?
A) Onlythatitispositive.
B) Itisweakandpositive.
C) Itisstrongandpositive.
Explanation
Apositivecovarianceindicatesapositivelinearrelationshipbutnothingelse.Themagnitudeofthecovariancebyitselfisnot
informativewithrespecttothestrengthoftherelationship.
Question#80of117 QuestionID:413106
Atwosidedbutverythickcoinisexpectedtolandonitsedgetwiceoutofevery100flips.Andtheprobabilityoffaceup
(heads)andtheprobabilityoffacedown(tails)areequal.Whenthecoinisflipped,theprizeis$1forheads,$2fortails,and
$50whenthecoinlandsonitsedge.Whatistheexpectedvalueoftheprizeonasinglecointoss?
A) $1.50.
B) $17.67.
C) $2.47.
Explanation
Sincetheprobabilityofthecoinlandingonitsedgeis0.02,theprobabilityofeachoftheothertwoeventsis0.49.The
expectedpayoffis:(0.02$50)+(0.49$1)+(0.49$2)=$2.47.
Question#81of117 QuestionID:413119
Thejointprobabilityfunctionforreturnsonanequityindex(RI)andreturnsonastock(RS)isgiveninthefollowingtable:
ReturnsonIndex(RI)
Returnonstock
RI=0.16 RI=0.02 RI=0.10
(RS)
Covariancebetweenstockreturnsandindexreturnsisclosestto:
A) 0.029.
B) 0.019.
C) 0.014.
Explanation
E(I)=(0.250.16)+(0.450.02)+(0.300.10)=0.0190.
E(S)=(0.250.24)+(0.450.03)+(0.300.15)=0.0285.
Covariance=[0.25(0.160.0190)(0.240.0285)]+[0.45(0.020.0190)(0.030.0285)]+[0.30(0.100.0190)
(0.150.0285)]=0.0138.
Question#82of117 QuestionID:413105
ThefollowinginformationisavailableconcerningexpectedreturnandstandarddeviationofPlutoandNeptuneCorporations:
ExpectedReturn StandardDeviation
NeptuneCorporation 9% 0.13
IfthecorrelationbetweenPlutoandNeptuneis0.25,determinetheexpectedreturnandstandarddeviationofaportfoliothat
consistsof65%PlutoCorporationstockand35%NeptuneCorporationstock.
A) 10.3%expectedreturnand2.58%standarddeviation.
B) 10.0%expectedreturnand16.05%standarddeviation.
C) 10.3%expectedreturnand16.05%standarddeviation.
Explanation
ERPort =(WPluto)(ERPluto)+(WNeptune)(ERNeptune)
=(0.65)(0.11)+(0.35)(0.09)=10.3%
p =[(w1)2(1)2+(w2)2(2)2+2w1w212r1,2]1/2
=[(0.65)2(22)2+(0.35)2(13)2+2(0.65)(0.35)(22)(13)(0.25)]1/2
=[(0.4225)(484)+(0.1225)(169)+2(0.65)(0.35)(22)(13)(0.25)]1/2
=(257.725)1/2=16.0538%
Question#83of117 QuestionID:413104
Assumetwostocksareperfectlynegativelycorrelated.StockAhasastandarddeviationof10.2%andstockBhasastandard
deviationof13.9%.Whatisthestandarddeviationoftheportfolioif75%isinvestedinAand25%inB?
A) 0.17%.
B) 4.18%.
C) 0.00%.
Explanation
Thestandarddeviationoftheportfolioisfoundby:
Question#84of117 QuestionID:413089
Thereisa60%chancethattheeconomywillbegoodnextyearanda40%chancethatitwillbebad.Iftheeconomyisgood,
thereisa70%chancethatXYZIncorporatedwillhaveEPSof$5.00anda30%chancethattheirearningswillbe$3.50.Ifthe
economyisbad,thereisan80%chancethatXYZIncorporatedwillhaveEPSof$1.50anda20%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?
A) $5.95.
B) $2.75.
C) $3.29.
Explanation
TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:
(0.600.70$5.00)+(0.600.30$3.50)+(0.400.80$1.50)+(0.400.20$1.00)=$2.10+$0.63+$0.48+
$0.08=$3.29.
Question#85of117 QuestionID:413053
JessicaFassler,optionstrader,recentlywrotetwoputoptionsontwodifferentunderlyingstocks(AlphaDogSoftwareand
OmegaWolfPublishing),bothwithastrikepriceof$11.50.TheprobabilitiesthatthepricesofAlphaDogandOmegaWolfstock
willdeclinebelowthestrikepriceare65%and47%,respectively.Theprobabilitythatatleastoneoftheputoptionswillfall
belowthestrikepriceisapproximately:
A) 1.00.
B) 0.31.
C) 0.81.
Explanation
Wecalculatetheprobabilitythatatleastoneoftheoptionswillfallbelowthestrikepriceusingtheadditionruleforprobabilities
(ArepresentsAlphaDog,OrepresentsOmegaWolf):
P(AorO)=P(A)+P(O)P(AandO),whereP(AandO)=P(A)P(O)
P(AorO)=0.65+0.47(0.650.47)=approximately0.81
Question#86of117 QuestionID:413049
Iftwofaircoinsareflippedandtwofairsixsideddicearerolled,allatthesametime,whatistheprobabilityofendingupwith
twoheads(onthecoins)andtwosixes(onthedice)?
A) 0.4167.
B) 0.8333.
C) 0.0069.
Explanation
Forthefourindependenteventsdefinedhere,theprobabilityofthespecifiedoutcomeis0.50000.50000.16670.1667=
0.0069.
Question#87of117 QuestionID:413091
Thecovarianceofreturnsontwoinvestmentsovera10yearperiodis0.009.IfthevarianceofreturnsforinvestmentAis
0.020andthevarianceofreturnsforinvestmentBis0.033,whatisthecorrelationcoefficientforthereturns?
A) 0.687.
B) 0.444.
C) 0.350.
Explanation
Thecorrelationcoefficientis:Cov(A,B)/[(StdDevA)(StdDevB)]=0.009/[(0.02)(0.033)]=0.350.
Question#88of117 QuestionID:413069
Thefollowingtablesummarizestheavailabilityoftruckswithairbagsandbucketseatsatadealership.
Bucket NoBucket
Total
seats Seats
AirBags 75 50 125
NoAirBags 35 60 95
Total 110 110 220
Whatistheprobabilityofrandomlyselectingatruckwithairbagsandbucketseats?
A) 0.34.
B) 0.16.
C) 0.28.
Explanation
75220=0.34.
Question#89of117 QuestionID:413051
Averylargecompanyhasequalamountsofmaleandfemaleemployees.Ifarandomsampleoffouremployeesisselected,whatisthe
probabilitythatallfouremployeesselectedarefemale?
A) 0.0625.
B) 0.0256
C) 0.1600
Explanation
Eachemployeehasequalchanceofbeingmaleorfemale.Hence,probabilityof4"successes"=(0.5)4=0.0625
Question#90of117 QuestionID:413109
GivenP(X=2)=0.3,P(X=3)=0.4,P(X=4)=0.3.WhatisthevarianceofX?
A) 3.0.
B) 0.3.
C) 0.6.
Explanation
Thevarianceisthesumofthesquareddeviationsfromtheexpectedvalueweightedbytheprobabilityofeachoutcome.
TheexpectedvalueisE(X)=0.32+0.43+0.34=3.
Thevarianceis0.3(23)2+0.4(33)2+0.3(43)2=0.6.
Question#91of117 QuestionID:413043
LetAandBbetwomutuallyexclusiveeventswithP(A)=0.40andP(B)=0.20.Therefore:
A) P(AandB)=0.
B) P(AandB)=0.08.
C) P(B|A)=0.20.
Explanation
Ifthetwoevensaremutuallyexclusive,theprobabilityofbothocurringiszero.
Question#92of117 QuestionID:413083
TheeventsYandZaremutuallyexclusiveandexhaustive:P(Y)=0.4andP(Z)=0.6.IftheprobabilityofXgivenYis0.9,and
theprobabilityofXgivenZis0.1,whatistheunconditionalprobabilityofX?
A) 0.42.
B) 0.33.
C) 0.40.
Explanation
Becausetheeventsaremutuallyexclusiveandexhaustive,theunconditionalprobabilityisobtainedbytakingthesumofthe
twojointprobabilities:P(X)=P(X|Y)P(Y)+P(X|Z)P(Z)=0.40.9+0.60.1=0.42.
Question#93of117 QuestionID:413071
Datashowsthat75outof100touristswhovisitNewYorkCityvisittheEmpireStateBuilding.ItrainsorsnowsinNewYork
Cityonedayinfive.WhatisthejointprobabilitythatarandomlychoosentouristvisitstheEmpireStateBuildingonadaywhen
itneitherrainsnorsnows?
A) 60%.
B) 15%.
C) 95%.
Explanation
Ajointprobabilityistheprobabilitythattwoeventsoccurwhenneitheriscertainoragiven.Jointprobabilityiscalculatedby
multiplyingtheprobabilityofeacheventtogether.(0.75)(0.80)=0.60or60%.
Question#94of117 QuestionID:434200
TinaO'Fahey,CFA,believesastock'spriceinthenextquarterdependsontwofactors:thedirectionoftheoverallmarketand
whetherthecompany'snextearningsreportisgoodorpoor.Thepossibleoutcomesandsomeprobabilitiesareillustratedin
thetreediagramshownbelow:
Basedonthistreediagram,theexpectedvalueofthestockifthemarketdecreasesisclosestto:
A) $57.00.
B) $62.50.
C) $26.00.
Explanation
Theexpectedvalueiftheoverallmarketdecreasesis0.4($60)+(10.4)($55)=$57.
Question#95of117 QuestionID:413131
Forthetaskofarrangingagivennumberofitemswithoutanysubgroups,thiswouldrequire:
A) thelabelingformula.
B) onlythefactorialfunction.
C) thepermutationformula.
Explanation
Thefactorialfunction,denotedn!,tellshowmanydifferentwaysnitemscanbearrangedwherealltheitemsareincluded.
Question#96of117 QuestionID:413088
Thereisan80%chancethattheeconomywillbegoodnextyearanda20%chancethatitwillbebad.Iftheeconomyisgood,
thereisa60%chancethatXYZIncorporatedwillhaveEPSof$3.00anda40%chancethattheirearningswillbe$2.50.Ifthe
economyisbad,thereisa70%chancethatXYZIncorporatedwillhaveEPSof$1.50anda30%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?
A) $2.51.
B) $2.00.
C) $4.16.
Explanation
TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:
(0.800.60$3.00)+(0.800.40$2.50)+(0.200.70$1.50)+(0.200.30$1.00)=$1.44+$0.80+$0.21+
$0.06=$2.51.
Question#97of117 QuestionID:413059
Thereisa30%probabilityofrainthisafternoon.Thereisa10%probabilityofhavinganumbrellaifitrains.Whatisthechance
ofitrainingandhavinganumbrella?
A) 40%.
B) 33%.
C) 3%.
Explanation
P(A)=0.30.P(B|A)=0.10.P(AB)=(0.30)(0.10)=0.03or3%.
Question#98of117 QuestionID:413040
The"likelihood"ofaneventoccurringreferstoa:
A) jointprobability.
B) unconditionalprobability.
C) conditionalprobability.
Explanation
Conditionalprobability,orlikelihood,iswheretheoccurrenceofoneeventaffectstheprobabilityoftheoccurrenceofanother
event.Anunconditionalprobabilityreferstotheprobabilityofaneventoccurringregardlessofpastoffutureevents.Ajoint
probabilityistheprobabilitythattwoeventswillbothoccur.
Question#99of117 QuestionID:413063
Thefollowingtablesummarizestheavailabilityoftruckswithairbagsandbucketseatsatadealership.
BucketSeats NoBucketSeats Total
AirBags 75 50 125
NoAirBags 35 60 95
Total 110 110 220
Whatistheprobabilityofselectingatruckatrandomthathaseitherairbagsorbucketseats?
A) 73%.
B) 107%.
C) 34%.
Explanation
Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring.Theprobabilityofeacheventisaddedandthejointprobability(iftheeventsarenotmutuallyexclusive)is
subtractedtoarriveatthesolution.P(airbagsorbucketseats)=P(airbags)+P(bucketseats)P(airbagsandbucketseats)
=(125/220)+(110/220)(75/220)=0.57+0.500.34=0.73or73%.
Alternative:1P(noairbagandnobucketseats)=1(60/220)=72.7%
Question#100of117 QuestionID:413076
Theprobabilityofrollinga3onthefourthrollofafair6sideddie:
A) isequaltotheprobabilityofrollinga3onthefirstroll.
B) is1/6tothefourthpower.
C) dependsontheresultsofthethreepreviousrolls.
Explanation
Becauseeacheventisindependent,theprobabilitydoesnotchangeforeachroll.Forasixsideddietheprobabilityofrollinga
3(oranyothernumberfrom1to6)onasinglerollis1/6.
Question#101of117 QuestionID:413046
Theunconditionalprobabilityofanevent,givenconditionalprobabilities,isdeterminedbyusingthe:
A) totalprobabilityrule.
B) multiplicationruleofprobability.
C) additionruleofprobability.
Explanation
Thetotalprobabilityruleususedtocalculatetheunconditionalprobabilityofaneventfromtheconditionalprobabilitiesofthe
eventgivenamutuallyexclusiveandexhaustivesetofoutcomes.Theruleisexpressedas:
P(A)=P(A|B1)P(B1)+P(A|B2)P(B2)+...+P(A|Bn)P(Bn)
Question#102of117 QuestionID:413078
Acompanysaysthatwhetheritincreasesitsdividendsdependsonwhetheritsearningsincrease.Fromthisweknow:
A) P(bothdividendincreaseandearningsincrease)=P(dividendincrease).
B) P(dividendincrease|earningsincrease)isnotequaltoP(earningsincrease).
C) P(earningsincrease|dividendincrease)isnotequaltoP(earningsincrease).
Explanation
IftwoeventsAandBaredependent,thentheconditionalprobabilitiesofP(A|B)andP(B|A)willnotequaltheirrespective
unconditionalprobabilities(ofP(A)andP(B),respectively).Bothremainingchoicesmayormaynotoccur,e.g.,P(A|B)=P(B)
ispossiblebutnotnecessary.
Question#103of117 QuestionID:434196
Aparkinglothas100redandbluecarsinit.
40%ofthecarsarered.
70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.
Whatistheprobabilityofselectingacaratrandomandhavingitberedandhavearadio?
A) 48%.
B) 28%.
C) 25%.
Explanation
Jointprobabilityistheprobabilitythatbothevents,inthiscaseacarbeingredandhavingaradio,happenatthesametime.
Jointprobabilityiscomputedbymultiplyingtheindividualeventprobabilitiestogether:P(redandradio)=(P(red))(P(radio))=
(0.4)(0.7)=0.28or28%.
Radio NoRadio
Red 28 12 40
Blue 48 12 60
76 24 100
Question#104of117 QuestionID:413056
Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofbeingeitheranonsmokerornotsufferingfromallergies?
Smoker 35 25 60
Nonsmoker 55 185 240
Total 90 210 300
A) 0.50.
B) 0.88.
C) 0.38.
Explanation
Theprobabilityofbeinganonsmokeris240/300=0.80.Theprobabilityofnotsufferingfromallergiesis210/300=0.70.
Theprobabilityofbeinganonsmokerandnotsufferingfromallergiesis185/300=0.62.Sincethequestionasksforthe
probabilityofbeingeitheranonsmokerornotsufferingfromallergieswehavetotaketheprobabilityofbeinganonsmoker
plustheprobabilityofnotsufferingfromallergiesandsubtracttheprobabilityofbeingboth:0.80+0.700.62=0.88.
Alternatively:1P(Smoker&Allergies)=1(35/300)=88.3%.
Question#105of117 QuestionID:413080
JayHamilton,CFA,isanalyzingMadison,Inc.,adistressedfirm.Hamiltonbelievesthefirm'ssurvivaloverthenextyear
dependsonthestateoftheeconomy.Hamiltonassignsprobabilitiestofoureconomicgrowthscenariosandestimatesthe
probabilityofbankruptcyforMadisonundereach:
Probabilityof Probabilityof
Economicgrowthscenario
scenario bankruptcy
BasedonHamilton'sestimates,theprobabilitythatMadison,Inc.doesnotgobankruptinthenextyearisclosestto:
A) 18%.
B) 67%.
C) 33%.
Explanation
Usingthetotalprobabilityrule,theunconditionalprobabilityofbankruptcyis(0.2)(0.6)+(0.3)(0.4)+(0.4)(0.2)+(0.1)(0.1)=
0.33.TheprobabilitythatMadison,Inc.doesnotgobankruptis10.33=0.67=67%.
Question#106of117 QuestionID:413022
Inanygivenyear,thechanceofagoodyearis40%,anaverageyearis35%,andthechanceofabadyearis25%.Whatis
theprobabilityofhavingtwogoodyearsinarow?
A) 8.75%.
B) 10.00%.
C) 16.00%.
Explanation
Thejointprobabilityofindependenteventsisobtainedbymultiplyingtheprobabilitiesoftheindividualeventstogether:(0.40)
(0.40)=0.16or16%.
Question#107of117 QuestionID:413038
Atacharityfundraisertherehavebeenatotalof342raffleticketsalreadysold.Ifapersonthenpurchasestwoticketsrather
thanone,howmuchmorelikelyaretheytowin?
A) 1.99.
B) 0.50.
C) 2.10.
Explanation
Ifyoupurchaseoneticket,theprobabilityofyourticketbeingdrawnis1/343or0.00292.Ifyoupurchasetwotickets,your
probabilitybecomes2/344or0.00581,soyouare0.00581/0.00292=1.99timesmorelikelytowin.
Question#108of117 QuestionID:413035
Iftheoddsagainstaneventoccurringaretwelvetoone,whatistheprobabilitythatitwilloccur?
A) 0.0833.
B) 0.9231.
C) 0.0769.
Explanation
Iftheprobabilityagainsttheeventoccurringistwelvetoone,thismeansthatinthirteenoccurrencesoftheevent,itis
expectedthatitwilloccuronceandnotoccurtwelvetimes.Theprobabilitythattheeventwilloccuristhen:1/13=0.0769.
Question#109of117 QuestionID:434195
HelenPedersenhasallhermoneyinvestedineitheroftwomutualfunds(AandB).Sheknowsthatthereisa40%probability
thatfundAwillriseinpriceanda60%chancethatfundBwillriseinpriceiffundArisesinprice.Whatistheprobabilitythat
bothfundAandfundBwillriseinprice?
A) 0.40.
B) 0.24.
C) 1.00.
Explanation
P(A)=0.40,P(B|A)=0.60.Therefore,P(AB)=P(A)P(B|A)=0.40(0.60)=0.24.
Question#110of117 QuestionID:413128
Afirmwantstoselectateamoffivefromagroupoftenemployees.Howmanywayscanthefirmcomposetheteamoffive?
A) 252.
B) 25.
C) 120.
Explanation
Thisisalabelingproblemwherethereareonlytwolabels:chosenandnotchosen.Thus,thecombinationformulaapplies:10!
/(5!5!)=3,628,800/(120120)=252.
WithaTIcalculator:10[2nd][nCr]5=252.
Question#111of117 QuestionID:413116
Usethefollowingprobabilitydistributiontocalculatetheexpectedreturnfortheportfolio.
Bust 0.70 3%
A) 6.6%.
B) 9.0%.
C) 8.1%.
Explanation
0.300.15+0.700.03=6.6%
Question#112of117 QuestionID:413024
Whichofthefollowingstatementsaboutprobabilityismostaccurate?
A) Anoutcomeisthecalculatedprobabilityofanevent.
B) Aneventisasetofoneormorepossiblevaluesofarandomvariable.
C) Aconditionalprobabilityistheprobabilitythattwoormoreeventswillhappen
concurrently.
Explanation
Conditionalprobabilityistheprobabilityofoneeventhappeninggiventhatanothereventhashappened.Anoutcomeisthe
numericalresultassociatedwitharandomvariable.
Question#113of117 QuestionID:413093
Ifgiventhestandarddeviationsofthereturnsoftwoassetsandthecorrelationbetweenthetwoassets,whichofthefollowing
wouldananalystleastlikelybeabletoderivefromthese?
A) Strengthofthelinearrelationshipbetweenthetwo.
B) Covariancebetweenthereturns.
C) Expectedreturns.
Explanation
Thecorrelationsandstandarddeviationscannotgiveameasureofcentraltendency,suchastheexpectedvalue.
Question#114of117 QuestionID:413098
PersonalAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwo
portfoliosfortheirclientundereachscenario.Personal'seconomisthasestimatedtheprobabilityofeachscenarioasshownin
thetablebelow.Giventhisinformation,whatisthecovarianceofthereturnsonPortfolioAandPortfolioB?
A) 0.001898.
B) 0.002019.
C) 0.890223.
Explanation
Question#115of117 QuestionID:434202
Aparkinglothas100redandbluecarsinit.
40%ofthecarsarered.
70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.
Whatistheprobabilitythatthecarisredgiventhatithasaradio?
A) 28%.
B) 47%.
C) 37%.
Explanation
Givenasetofpriorprobabilitiesforaneventofinterest,Bayes'formulaisusedtoupdatetheprobabilityoftheevent,inthis
casethatthecarwealreadyknowhasaradioisred.Bayes'formulasaystodividetheProbabilityofNewInformationgiven
EventbytheUnconditionalProbabilityofNewInformationandmultiplythatresultbythePriorProbabilityoftheEvent.Inthis
case,P(redcarhasaradio)=0.70isdividedby0.76(whichistheUnconditionalProbabilityofacarhavingaradio(40%are
redofwhich70%haveradios)plus(60%areblueofwhich80%haveradios)or((0.40)(0.70))+((0.60)(0.80))=0.76.)
ThisresultisthenmultipliedbythePriorProbabilityofacarbeingred,0.40.Theresultis(0.70/0.76)(0.40)=0.37or37%.
Question#116of117 QuestionID:413120
GivenP(X=2,Y=10)=0.3,P(X=6,Y=2.5)=0.4,andP(X=10,Y=0)=0.3,thenCOV(XY)is:
A) 12.0.
B) 24.0.
C) 6.0.
Explanation
Theexpectedvaluesare:E(X)=(0.32)+(0.46)+(0.310)=6andE(Y)=(0.310.0)+(0.42.5)+(0.30.0)=4.
ThecovarianceisCOV(XY)=((0.3((26)(104)))+((0.4((66)(2.54)))+(0.3((106)(04)))=12.
Question#117of117 QuestionID:434203
Asupervisorisevaluatingtensubordinatesfortheirannualperformancereviews.Accordingtoanewcorporatepolicy,for
everytenemployees,twomustbeevaluatedas"exceedsexpectations,"sevenas"meetsexpectations,"andoneas"doesnot
meetexpectations."Howmanydifferentwaysisitpossibleforthesupervisortoassigntheseratings?
A) 360.
B) 10,080.
C) 5,040.
Explanation
Thenumberofdifferentwaystoassigntheselabelsis: