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Progress Test QM

Uploaded by

Aziz
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© © All Rights Reserved
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MODULE: QUANTITATIVE TECHNIQUES FOR

FINANCE/ STATISTICS AND ECONOMETRICS FOR


FINANCE

PROGRAM: MFI, MA, MAF, MBF

PROGRESS TEST

ACADEMIC YEAR 2023/2024

DATE: 6th JANUARY 2024

TIME ALLOWED: 2 HOURS

GENERAL INSTRUCTIONS
(i) This paper consists of FOUR (4) Questions; Attempt all.
(ii) Marks are indicated against each question.
(iii) This TEST has FIVE (5) written pages.
(iv) Remember to write your full name and the Registration number cor-
rectly on every page of your answers.
(v) Clearly, use enough and relevant information to satisfy your arguments.
QUESTION ONE

(a) Why is the moment generating function useful? [0.5 Marks]

(b) Using Moment generating functions (MGFs). Prove that if X ∼ Binomial (m, p)
and Y ∼ Binomial (n, p) are independent then X+Y ∼ Binomial (m + n, p).
[1 Mark]

(c) The value of a piece of a factory equipment after three years of use
is 100 (0.5)x where X is a random variable having moment generating
1 1
function Mx (t) = , for t < . Calculate the expected value of
1 − 2t 2
this piece of equipment after three years of use. [1.5 Marks]

(d) A random sample of 100 invoices has been selected from a large file
of a company records if nine were found to contain errors, calculate a
95% confidence interval for the true percentage of invoices from this
company containing errors. [1 Mark]

(e) Matofali imitations company have predicted that their turnover for next
year will be TZS 450,000 and that their costs will be TZS 400,000. They
thus expect to make a profit of TZS 50,000 and are quit happy. As you
talk to the partners, however you realize that there are a whole host
of factors which will affect both the turnover and costs figures. You
persuade them to look at the problem as if each figure were a variable
and suggest that they treat them as having normal distributions. Given
the nature of the business, you decide to assume a standard deviation
of TZS 25,000 for each distribution. What is the probability that the
partnership makes a profit? [1 Mark]

QUESTION TWO

(a) State two ways in which probability distributions are used in finance.[1
Mark]

(b) A Tanzanian market analyst believes that the stock market has a 0.65
probability of going up in the next year if the economy should do well,
and a 0.30 probability of going up if the economy should not do well
during the year. The analyst believes that there is a 0.75 probability
that the economy will do well in the coming year. What is the proba-
bility that the stock market will go up next year? [1 Mark]

1
(c) The length of time in minutes that a customer queues in a post office
is a random variable X, with probability density function.


b (81 − x2 ) for 0≤x≤9
f (x) =
0 otherwise
where ’b’ is constant
1
(i) Show that the value of the constant ’b’ is [1 mark]
486

(ii) Show that the commulative density function F(x) is given by


 0 for x < 0
x x3

f (x) = − for 0 ≤ x ≤ 9
 6 1458

1 for x > 9
[1 Mark]
(iii) Find the probability that a customer will queue for a longer than
3 minutes. A customer has been queuing for 3 minutes [0.5 Marks]
(iv) Find the probability that this customer will be queuing for at least
3 minutes. Three customers are selected at random.[0.5 Marks]
QUESTION THREE
(a) If F is the total of such values for all payments, then F is called the
future amount of a continuous annuity and is given by
Z N
F = f (nj ) einj dn
0

Find the present value (to the nearest TZS) of a continuous annuity at
an annual rate of 5 percent for 10 years if the payment at time t is at
the rate of TZS t2 per year.[1.5 marks]
(b) As always, we state the inputs on a compatible time basis: If cash
flows are annual, n is the project’s life in years and r is an annual rate.
Suppose we are reviewing a proposal that requires an initial outlay of
TZS 2 million (CF = −$2million). We expect that the proposed in-
vestment will generate net positive cash flows of (CF1 = $0.50million)
at the end of the first Year 1, (CF2 = $0.75million) at the end of Year
2, (CF3 = $1.35million) and at the end of Year 3. Using 10 percent as
a discount rate, calculate the NPV. [1.5 marks]

2
(c) Discuss three steps involved in computation of an exact time –weighted
rate of return on a portfolio.[1 mark]

(d) Discuss the assumptions concerning the behavior of investors and fi-
nancial markets under the Markowitz model. [1 mark]

QUESTION FOUR

(a) Systematic risk can be measured statistically by using ordinary least


squares (QLS) simple linear regression analysis. A financial model
called the characteristic line is used to measure both systematic and un-
systematic risk. The equation for the characteristic line (or regression
line) is expressed as

rit = ai + βi rmt + ut

where ai = the intercept for the ith asset.


βi = the slope for the ith asset, a measure of un-diversifiable risk.
ut = the random error around the regression line for security i during
time period t .
The model shows the relationship of one security with the market. It is
sometimes called a market model for one security. OLS regressions are
formulated so that the error terms ut average out to zero. As a result,
the characteristic line is normally written (without the time subscripts)
as

ri = ai + βi rm

(i) Interpret the alpha (intercept) coefficient, term , for security i.[0.5
marks]
(ii) Interpret the beta coefficient, term βi . [0.5 marks]
(iii) Discuss the market imperfections which preclude attainment of
Capital Asset Pricing Model complete equilibrium. [0.5 marks]

(b) Consider the following data on the rate of inflation (X) and on private
investment spending (Y) for the 2011-2020 period

3
Y ear Private investment spending (Billion) (Y ) Inflation(X)
2011 5.5 5.4
2012 3.8 6.2
2013 6.9 6.9
2014 8.2 4.2
2015 6.2 4.8
2016 5.2 5.7
2017 4.2 6.1
2018 6.3 9.5
2019 7.2 6.8
2020 9.9 5.7

Table 1: Private investment spending and inflation, 2011-2020.

(1) Compute the OLS estimators γˆ0 and γˆ1 for the linear regression
model [0.5 marks]

γi = γ0 + γ1 Xi + ui

(2) Calculate the (i) R-squared, (ii) adjusted R-squared, (iii) standard
errors, (iv) t-ratios, (v)F-statistics.[1.5 marks]
(3) What is the fitted equation? Carefully interpret your results.[0.5
marks]
(4) Interpret the (i) adjusted R2 and (ii) F-statistic obtained in the
model.[1 mark]

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