Question #1 of 139
Question #1 of 139
When evaluating the fit of a machine learning algorithm, it is most accurate to state that:
The unsupervised machine learning algorithm that reduces highly correlated features into
fewer uncorrelated composite variables by transforming the feature covariance matrix best
describes:
A) k-means clustering.
B) principal components analysis.
C) hierarchical clustering.
B. . K-means partitions observations into a fixed number (k) of non-overlapping clusters. Hierarchical
clustering is an unsupervised iterative algorithm used to build a hierarchy of clusters
David Wellington, CFA, has estimated the following log-linear trend model: LN(xt) = b0 + b1t +
εt. Using six years of quarterly observations, 2001:I to 2006:IV, Wellington gets the following
estimated equation: LN(xt) = 1.4 + 0.02t. The first out-of-sample forecast of xt for 2007:I is
closest to:
A) 1.88.
B) 4.14.
C) 6.69.
C. Wellington's out-of-sample forecast of LN(xt) is 1.9 = 1.4 + 0.02 × 25, and e 1.9 = 6.69. (Six years of
quarterly observations, at 4 per year, takes us up to t = 24. The first time period after that is t = 25.)
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Suppose you estimate the following model of residuals from an autoregressive model:
If the residual at time t is 2.0, the forecasted variance for time t+1 is:
A) 3.2.
B) 3.6.
C) 2.0.
B. The variance at t=t+1 is 0.4 + [0.80 (4.0)] = 0.4 + 3.2. = 3.6.
Which supervised learning model is most appropriate (1) when the Y-variable is continuous
and (2) when the Y-variable is categorical
B) Regression Classification
B
C) Decision trees Regression
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Frank Batchelder and Miriam Yenkin are analysts for Bishop Econometrics. Batchelder and
Yenkin are discussing the models they use to forecast changes in China's GDP and how they
can compare the forecasting accuracy of each model. Batchelder states, "The root mean
squared error (RMSE) criterion is typically used to evaluate the in-sample forecast accuracy
of autoregressive models." Yenkin replies, "If we use the RMSE criterion, the model with the
largest RMSE is the one we should judge as the most accurate."
Barry Phillips, CFA, has estimated an AR(1) relationship (xt = b0 + b1 × xt-1 + et) and got the
following result: xt+1 = 0.5 + 1.0xt + et. Phillips should:
C) not first difference the data because b1 − b0 = 1.0 − 0.5 = 0.5 < 1.
A. The condition b1 = 1 means that the series has a unit root and is not stationary. The
correct way to transform the data in such an instance is to first difference the data.
A) (Salest - Sales t-1)= b0 + b1 (Sales t-1 - Sales t-2) + b2 (Sales t-4 - Sales t-5) + εt.
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Barry Phillips, CFA, has the following time series observations from earliest to latest: (5, 6, 5,
7, 6, 6, 8, 8, 9, 11). Phillips transforms the series so that he will estimate an autoregressive
process on the following data (1, -1, 2, -1, 0, 2, 0, 1, 2). The transformation Phillips employed
is called:
A) beta drift.
B) moving average.
C) first differencing.
C. Phillips obviously first differenced the data because the 1=6-5, -1=5-6, .... 1 = 9 - 8, 2 = 11 - 9.
A) feature design.
B) feature engineering. A
C) feature selection.
Trend models can be useful tools in the evaluation of a time series of data. However, there
are limitations to their usage. Trend models are not appropriate when which of the following
violations of the linear regression assumptions is present?
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A) Model misspecification.
B) Heteroskedasticity.
C) Serial correlation.
C. One of the primary assumptions of linear regression is that the residual terms are not correlated
with each other. If serial correlation, also called autocorrelation, is present, then trend models are not
an appropriate analysis tool.
David Brice, CFA, has used an AR(1) model to forecast the next period's interest rate to be
0.08. The AR(1) has a positive slope coefficient. If the interest rate is a mean reverting
process with an unconditional mean, a.k.a., mean reverting level, equal to 0.09, then which
of the following could be his forecast for two periods ahead?
A) 0.072.
B) 0.081.
C) 0.113.
B. As Brice makes more distant forecasts, each forecast will be closer to the unconditional mean. So, the two
period forecast would be between 0.08 and 0.09, and 0.081 is the only possible answer.
Rhonda Wilson, CFA, is analyzing sales data for the TUV Corp, a current equity holding in her
portfolio. She observes that sales for TUV Corp. have grown at a steadily increasing rate over
the past ten years due to the successful introduction of some new products. Wilson
anticipates that TUV will continue this pattern of success. Which of the following models is
most appropriate in her analysis of sales for TUV Corp?
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A log-linear trend model, because the data series can be graphed using a straight,
A)
upward-sloping line.
A linear trend model, because the data series is equally distributed above and below
B)
the line and the mean is constant.
A log-linear trend model, because the data series exhibits a predictable, exponential
C)
growth trend.
An investor creates a word cloud from financial analysts’ recent research reports
A)
about a company.
An analyst adjusts daily stock index data from two countries for their different
B)
market holidays.
A data technician accesses an offsite archive to retrieve data that has been stored
C)
there.
B. Curation is ensuring the quality of data, for example by adjusting for bad or missing data. Word clouds are
a visualization technique. Moving data from a storage medium to where they are needed is referred to as
transfer.
Bill Johnson, CFA, has prepared data concerning revenues from sales of winter clothing
made by Polar Corporation. This data is presented (in $ millions) in the following table:
2013.1 182
2013.2 74 −108
2013.3 78 4 −108
2014.3 90 11 −115 4
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The value that Johnson should enter in the table in place of "w" is:
A) 164.
B) −48.
C) −115. A. seasonal lag.
Imagine that Johnson prepares a change-in-sales regression analysis model with seasonality,
which includes the following:
Coefficients
Intercept −6.032
Lag 1 0.017
Lag 4 0.983
Based on the model, expected sales in the first quarter of 2015 will be closest to:
A) 210.
B) 155.
C) 190.
A. Substituting the 1-period lagged data from 2014.4 and the 4-period lagged data from
2014.1 into the model formula, change in sales is predicted to be 6.032 + (0.017 × 170) +
(0.983 × 48) = 50.326. Expected sales are 260 + (50.326) = 209.674.
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To test for covariance-stationarity in the data, Johnson would most likely use a:
A) Dickey-Fuller test.
B) t-test.
C) Durbin-Watson test.
A. The Dickey-Fuller test for unit roots could be used to test whether the data is covariance
non-stationarity. The Durbin-Watson test is used for detecting serial correlation in the residuals of trend
models but cannot be used in AR models. A t-test is used to test for residual autocorrelation in AR
models.
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The data below yields the following AR(1) specification: xt = 0.9 – 0.55xt-1 + Et , and the
indicated fitted values and residuals.
1 1 - -
2 -1 0.35 -1.35
3 2 1.45 0.55
4 -1 -0.2 -0.8
5 0 1.45 -1.45
6 2 0.9 1.1
7 0 -0.2 0.2
8 1 0.9 0.1
9 2 0.35 1.65
The following sets of data are ordered from earliest to latest. To test for ARCH, the
researcher should regress:
William Zox, an analyst for Opal Mountain Capital Management, uses two different models
to forecast changes in the inflation rate in the United Kingdom. Both models were
constructed using U.K. inflation data from 1988-2002. In order to compare the forecasting
accuracy of the models, Zox collected actual U.K. inflation data from 2004-2005, and
compared the actual data to what each model predicted. The first model is an AR(1) model
that was found to have an average squared error of 10.429 over the 12 month period. The
second model is an AR(2) model that was found to have an average squared error of 11.642
over the 12 month period. Zox then computed the root mean squared error for each model
to use as a basis of comparison. Based on the results of his analysis, which model should
Zox conclude is the most accurate?
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Yolanda Seerveld is an analyst studying the growth of sales of a new restaurant chain called
Very Vegan. The increase in the public's awareness of healthful eating habits has had a very
positive effect on Very Vegan's business. Seerveld has gathered quarterly data for the
restaurant's sales for the past three years. Over the twelve periods, sales grew from $17.2
million in the first quarter to $106.3 million in the last quarter. Because Very Vegan has
experienced growth of more than 500% over the three years, the Seerveld suspects an
exponential growth model may be more appropriate than a simple linear trend model.
However, she begins by estimating the simple linear trend model:
(sales)t = α + β × (Trend)t + εt
Regression Statistics
Multiple R 0.952640
R2 0.907523
Adjusted R2 0.898275
Observations 12
ANOVA
df SS
Regression 1 6495.203
Residual 10 661.8659
Total 11 7157.069
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Regression Statistics
Multiple R 0.952028
R2 0.906357
Adjusted R2 0.896992
Observations 12
ANOVA
df SS
Regression 1 2.6892
Residual 10 0.2778
Total 11 2.9670
Seerveld compares the results based upon the output statistics and conducts two-tailed
tests at a 5% level of significance. One concern is the possible problem of autocorrelation,
and Seerveld makes an assessment based upon the first-order autocorrelation coefficient of
the residuals that is listed in each set of output. Another concern is the stationarity of the
data. Finally, the analyst composes a forecast based on each equation for the quarter
following the end of the sample.
A) The simple trend regression is not, but the log-linear trend regression is.
B) Yes, both are significant. B
C) The simple trend regression is, but not the log-linear trend regression.
With respect to the possible problems of autocorrelation and nonstationarity, using the log-
linear transformation appears to have:
Using the simple linear trend model, the forecast of sales for Very Vegan for the first out-of-
sample period is:
A) $97.6 million.
A
B) $113.0 million.
C) $123.0 million.
Using the log-linear trend model, the forecast of sales for Very Vegan for the first out-of-
sample period is:
A) $109.4 million.
B) $117.0 million. B
C) $121.2 million.
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Alexis Popov, CFA, has estimated the following specification: xt = b0 + b1 × xt-1 + et. Which of
the following would most likely lead Popov to want to change the model's specification?
A) b0 < 0.
Alexis Popov, CFA, is analyzing monthly data. Popov has estimated the model xt = b0 + b1 ×
xt-1 + b2 × xt-2 + et. The researcher finds that the residuals have a significant ARCH process.
The best solution to this is to:
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The estimation results of an AR model involving a time series that is not covariance
A)
stationary are meaningless.
A time series that is covariance stationary may have residuals whose mean changes
B)
over time.
C) A time series may be both covariance stationary and heteroskedastic. A
The table below shows the autocorrelations of the lagged residuals for the first differences
of the natural logarithm of quarterly motorcycle sales that were fit to the AR(1) model: (ln
salest − ln salest − 1) = b0 + b1(ln salest − 1 − ln salest − 2) + εt. The critical t-statistic at 5%
significance is 2.0, which means that there is significant autocorrelation for the lag-4
residual, indicating the presence of seasonality. Assuming the time series is covariance
stationary, which of the following models is most likely to CORRECT for this apparent
seasonality?
Jason Cranwell, CFA, has hypothesized that sales of luxury cars have grown at a constant
rate over the past 15 years.
After discussing the above matter with a colleague, Cranwell finally decides to use an
autoregressive model of order one i.e. AR(1) for the above data. Below is a summary of the
findings of the model:
b0 0.4563
b1 0.6874
R-squared 0.7548
F 12.63
Observations 180
A) 1.26.
B) 1.46. B
C) 1.66.
Cranwell is aware that the Dickey Fuller test can be used to discover whether a model has a
unit root. He is also aware that the test would use a revised set of critical t-values. What
would it mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0) ?
Cranwell would also like to test for serial correlation in his AR(1) model. To do this, Cranwell
should:
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A) use the provided Durbin Watson statistic and compare it to a critical value.
B) use a t-test on the residual autocorrelations over several lags.
determine if the series has a finite and constant covariance between leading and
C)
lagged terms of itself.
B
When using the root mean squared error (RMSE) criterion to evaluate the predictive power
of the model, which of the following is the most appropriate statement?
A) Use the model with the highest RMSE calculated using the in-sample data.
B) Use the model with the lowest RMSE calculated using the out-of-sample data.
C) Use the model with the lowest RMSE calculated using the in-sample data.
Suppose you estimate the following model of residuals from an autoregressive model:
If the residual at time t is 0.9, the forecasted variance for time t+1 is:
A) 0.736.
B) 0.850.
A
C) 0.790.
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The regression results from fitting an AR(1) to a monthly time series are presented below.
What is the mean-reverting level for the model?
A) 0.6151.
B) 1.6258.
B
C) 7.3220.
The degree to which a machine learning model retains its explanatory power when
predicting out-of-sample is most commonly described as:
A) predominance.
B) hegemony.
C) generalization.
C. Generalization describes the degree to which, when predicting out-of-sample, a machine
learning model retains its explanatory power.
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The table below shows the autocorrelations of the lagged residuals for quarterly theater
ticket sales that were estimated using the AR(1) model: ln(salest) = b0 + b1(ln salest − 1) + et.
Assuming the critical t-statistic at 5% significance is 2.0, which of the following is the most
likely conclusion about the appropriateness of the model? The time series:
The process of splitting a given text into separate words is best characterized as:
A) tokenization.
A
B) stemming.
C) bag-of-words.
Consider the estimated model xt = -6.0 + 1.1 xt-1 + 0.3 xt-2 + εt that is estimated over 50
periods. The value of the time series for the 49th observation is 20 and the value of the time
series for the 50th observation is 22. What is the forecast for the 51st observation?
A) 23.
B) 24.2.
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C) 30.2. B
Modeling the trend in a time series of a variable that grows at a constant rate with
continuous compounding is best done with:
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Troy Dillard, CFA, has estimated the following equation using quarterly data: xt = 93 - 0.5×xt–
1 + 0.1×xt– 4 + et. Given the data in the table below, what is Dillard's best estimate of the first
quarter of 2007?
Time Value
2005: I 62
2005: II 62
2005: III 66
2005: IV 66
2006: I 72
2006: II 70
2006: III 64
2006: IV 66
A) 67.20.
B) 66.40.
A
C) 66.60.
A) velocity.
B) veracity. B
C) variety.
Winston Collier, CFA, has been asked by his supervisor to develop a model for predicting the
warranty expense incurred by Premier Snowplow Manufacturing Company in servicing its
plows. Three years ago, major design changes were made on newly manufactured plows in
an effort to reduce warranty expense. Premier warrants its snowplows for 4 years or 18,000
miles, whichever comes first. Warranty expense is higher in winter months, but some of
Premier's customers defer maintenance issues that are not essential to keeping the
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machines functioning to spring or summer seasons. The data that Collier will analyze is in
the following table (in $ millions):
Seasonal Lagged
Change in Lagged Change in
Warranty Change in
Quarter Warranty Warranty
Expense Warranty
Expense yt Expense yt-1
Expense yt-4
2002.1 103
2002.2 52 –51
Winston submits the following results to his supervisor. The first is the estimation of a trend
model for the period 2002:1 to 2004:4. The model is below. The standard errors are in
parentheses.
(14.37) (1.97)
R-squared = 16.2%
Winston also submits the following results for an autoregressive model on the differences in
the expense over the period 2004:to 2004:4. The model is below where "y" represents the
change in expense as defined in the table above. The standard errors are in parentheses.
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R-squared = 99.98%
After receiving the output, Collier's supervisor asks him to compute moving averages of the
sales data.
Collier's supervisors would probably not want to use the results from the trend model for all
of the following reasons EXCEPT:
A
A) the model is a linear trend model and log-linear models are always superior.
B) the slope coefficient is not significant.
it does not give insights into the underlying dynamics of the movement of the
C)
dependent variable.
For this question only, assume that Winston also ran an AR(1) model with the following
results:
yt = −0.9 − 0.23* yt −1 + et
R-squared = 78.3%
(0.823) (0.0222)
A) 1.16.
B) −0.73.
B
C) 0.77.
Based on the autoregressive model, expected warranty expense in the first quarter of 2005
will be closest to:
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A) $51 million.
C
B) $60 million.
C) $65 million.
A) Yes, because the coefficient on yt–4 is large compared to its standard error.
C) No, because the slope coefficients in the autoregressive model have opposite signs.
The coefficient on the 4th lag tests the seasonality component. The t-statistic is equal to 0.83/0.0186 =
44.62, which is greater than the critical t-value (5% LOS, 2-tailed, dof = 4) = 2.78
The regression results from fitting an AR(1) model to the first-differences in enrollment
growth rates at a large university includes a Durbin-Watson statistic of 1.58. The number of
quarterly observations in the time series is 60. At 5% significance, the critical values for the
Durbin-Watson statistic are dl = 1.55 and du = 1.62. Which of the following is the most
accurate interpretation of the DW statistic for the model?
C) Since dl < DW < du, the results of the DW test are inconclusive.
B
Clara Holmes, CFA, is attempting to model the importation of an herbal tea into the United
States which last year was $54 million. She gathers 24 years of annual data, which is in
millions of inflation-adjusted dollars.
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R2 = 0.7942
Adj. R2 = 0.7844
SE = 3.0892
N = 23
Holmes and her colleague, John Briars, CFA, discuss the implication of the model and how
they might improve it. Holmes is fairly satisfied with the results because, as she says "the
model explains 78.44 percent of the variation in the dependent variable." Briars says the
model actually explains more than that.
Briars and Holmes decide to ask their company's statistician about the consequences of
serial correlation. Based on what Briars and Holmes tell the statistician, the statistician
informs them that serial correlation will only affect the standard errors and the coefficients
are still unbiased. The statistician suggests that they employ the Hansen method, which
corrects the standard errors for both serial correlation and heteroskedasticity.
Given the information from the statistician, Briars and Holmes decide to use the estimated
coefficients to make some inferences. Holmes says the results do not look good for the
future of tea imports because the coefficient on (Tea Import)t − 1 is less than one. This means
the process is mean reverting. Using the coefficients in the output, says Holmes, "we know
that whenever tea imports are higher than 41.810, the next year they will tend to fall.
Whenever the tea imports are less than 41.810, then they will tend to rise in the following
year." Briars agrees with the general assertion that the results suggest that imports will not
grow in the long run and tend to revert to a long-run mean, but he says the actual long-run
mean is 54.545. Briars then computes the forecast of imports three years into the future.
With respect to the statement that the company's statistician made concerning the
consequences of serial correlation, assuming the company's statistician is competent, we
would most likely deduce that Holmes and Briars did not tell the statistician:
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The statistician's statement concerning the benefits of the Hansen method is:
correct, because the Hansen method adjusts for problems associated with both
A)
serial correlation and heteroskedasticity.
not correct, because the Hansen method only adjusts for problems associated with
B)
serial correlation but not heteroskedasticity.
not correct, because the Hansen method only adjusts for problems associated with
C)
heteroskedasticity but not serial correlation.
A
Using the model's results, Briar's forecast for three years into the future is:
A) $47.151 million.
B) $54.543 million. C
C) $54.108 million.
With respect to the comments of Holmes and Briars concerning the mean reversion of the
import data, the long-run mean value that:
A
A) Briars computes is correct.
B) Briars computes is not correct, and his conclusion is probably not accurate.
C) Briars computes is not correct, but his conclusion is probably accurate.
What is the appropriate remedy in the presence of excessive number of features in a data
set?
A) Dimension reduction.
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Which of the following statements regarding unit roots in a time series is least accurate?
Even if a time series has a unit root, the predictions from the estimated model are
A)
valid.
B) A time series that is a random walk has a unit root.
C) A time series with a unit root is not covariance stationary.
A. A time series with a unit root will follow a random walk process. Since a time series that
follows a random walk is not covariance stationary, modeling such a time series in an AR
model can lead to incorrect statistical conclusions, and decisions made on the basis of
these conclusions may be wrong.
Bert Smithers, CFA, is a sell-side analyst who has been asked to look at the luxury car sector.
He has hypothesized that sales of luxury cars have grown at a constant rate over the past 15
years.
Exhibit 1
b0 0.4563
b1 0.6874
R-squared 0.7548
Durbin-Watson 1.23
F 12.63
Observations 15
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If his assumption about a constant is correct, which of the following models is most
appropriate for modeling these data?
After discussing the above matter with a colleague, Bert finally decides to use an annual
autoregressive model of Order One [i.e., AR(1)]. Using the data in Exhibit 1, calculate the
mean reverting level of the series.
A) 1.26.
B) 1.46. B
C) 1.66.
Bert is aware that the Dickey Fuller test can be used to discover whether a model has a unit
root. He is also aware that the test would use a revised set of critical t-values. What would it
mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0)?
Bert would also like to test for serial correlation in his AR(1) model. How could this be done?
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When using the root mean squared error (RMSE) criterion to evaluate the predictive power
of the model, which of the following is the most appropriate statement?
A) Use the model with the highest RMSE calculated using the in-sample data.
B) Use the model with the lowest RMSE calculated using the out-of-sample data.
C) Use the model with the lowest RMSE calculated using the in-sample data.
B
Bert would like to use his AR(1) model to forecast future sales of luxury automobiles. What is
the annualized growth rate between today and 20X3?
A) 10%.
B) 12%.
A. The annualized return between 20X1 and 20X3 is, therefore, ((1.27 / 1.05)^0.5) – 1 =
C) 11%. 9.87%.
The primary concern when deciding upon a time series sample period is which of the
following factors?
The table below includes the first eight residual autocorrelations from fitting the first
differenced time series of the absenteeism rates (ABS) at a manufacturing firm with the
model ΔABSt = b0 + b1ΔABSt-1 + εt. Based on the results in the table, which of the following
statements most accurately describes the appropriateness of the specification of the model,
ΔABSt = b0 + b1ΔABSt-1 + εt?
The negative values for the autocorrelations indicate that the model does not fit the
B)
time series.
C) The low values for the t-statistics indicate that the model fits the time series.
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The technique in which a machine learns to model a set of output data from a given set of
inputs is best described as:
A) supervised learning. A
B) unsupervised learning.
C) deep learning.
Albert Morris, CFA, is evaluating the results of an estimation of the number of wireless
phone minutes used on a quarterly basis within the territory of Car-tel International, Inc.
Some of the information is presented below (in billions of minutes):
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Total 27 10,315.051
The variance of the residuals from one time period within the time series is not dependent
on the variance of the residuals in another time period.
Morris also models the monthly revenue of Car-tel using data over 96 monthly observations.
The model is shown below:
The value for WPM this period is 544 billion. Using the results of the model, the forecast
Wireless Phone Minutes three periods in the future is:
A) 691.30.
B) 586.35. C
C) 683.18.
A) 381.29 million.
B) 8.83 million. A
C) 43.2 million.
Morris concludes that the current price of Car-tel stock is consistent with single stage
constant growth model (with g=3%). Based on this information, the sales model is most
likely:
C. Constant growth
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Over the past several years, Kowalski has become aware that investment firms are
increasingly using technology to improve their investment decision making. Kowalski has
become particularly interested in machine learning techniques and how they might be
applied to investment management applications.
Kowalski has read a number of articles about machine learning in various journals for
financial analysts. However, she has only a minimal knowledge of how she might source
appropriate model inputs, interpret model outputs, and translate those outputs into
investment actions.
Kowalski and Nowak meet to discuss plans for incorporating machine learning into their
investment model. Kowalski asks Nowak to research machine learning and report back on
the types of investment problems that machine learning can address, how the algorithms
work, and what the various terminology means.
After spending a few hours researching the topic, Nowak makes a number of statements to
Kowalski on the topics of:
Kowalski is left to work out which of Nowak's statements are fully accurate and which are
not.
Nowak first tries to explain classification and regression tree (CART) to Kowalski. CART is
least likely to be applied to predict a:
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Which of the following statements Nowak makes about hierarchical clustering is most
accurate?
A) In divisive hierarchical clustering, the algorithm seeks out the two closest clusters.
Hierarchical clustering is a supervised iterative algorithm that is used to build a
B)
hierarchy of clusters.
Bottom-up hierarchical clustering begins with each observation being its own
C)
cluster.
C. Clustering is always unsupervised.
Which of the following statements Nowak makes about neural networks is most accurate?
Neural networks:
have four types of layers: an input layer, agglomerative layers, regularization layers,
A)
and an output layer.
have an input layer node that consists of a summation operator and an activation
B)
function.
C) are effective in tasks with non-linearities and complex interactions among variables.
C. Neural networks have three types of layers: an input layer, hidden layers, and an output layer.
The hidden layer nodes (not the input layer nodes) each consist of a summation operator
and an activation function; these nodes are where learning takes place.
Nowak tries to explain the reinforcement learning (RL) algorithm to Kowalski and makes a
number of statements about it. The reinforcement learning (RL) algorithm involves an agent
that is most likely to:
Which of the following statements regarding time series analysis is least accurate?
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Freja Karlsson is a bond analyst with Storbank AB. Over the past several months, Karlsson
has been working to develop her own machine learning (ML) model that she plans to use to
predict default of the various bonds that she covers. The inputs to the model are various
pieces of financial data that Karlsson has compiled from multiple sources.
After Karlsson has constructed the model using her knowledge of appropriate variables,
Karlsson runs the model on the training set. Each firm's bonds are classified as predicted- to-
default or predicted-not-to-default. When Karlsson's model predicts that a bond will default
and the bond actually defaults, Karlsson considers this to be a true positive. Karlsson then
evaluates the performance of her model using error analysis. The confusion matrix that
results is shown in Exhibit 1.
No Default 23 113
A) 91%.
B) 81%. A
C) 71%.
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Karlsson is especially concerned about the possibility that her model may indicate that a
bond will not default, but then the bond actually defaults. Karlsson decides to use the
model's recall to evaluate this possibility. Based on the data in Exhibit 1, the model's recall is
closest to:
A) 83%.
B) 73%.
C) 93%. C
Karlsson would like to gain a sense of her model's overall performance. In her research,
Karlsson learns about the F1 score, which she hopes will provide a useful measure. Based on
Exhibit 1, Karlsson's model's F1 score is closest to:
A) 72%.
B) 82%. C
C) 92%.
Karlsson also learns of the model measure of accuracy. Based on Exhibit 1, Karlsson's
model's accuracy metric is closest to:
A) 79%.
B) 69%.
C) 89%.
C
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Dianne Hart, CFA, is considering the purchase of an equity position in Book World, Inc, a
leading seller of books in the United States. Hart has obtained monthly sales data for the
past seven years, and has plotted the data points on a graph. Hart notices that the revenues
are growing at approximately 4.5% per year. Which of the following statements regarding
Hart's analysis of the data time series of Book World's sales is most accurate? Hart should
utilize a:
mean-reverting model to analyze the data because the time series pattern is
B)
covariance stationary.
C) linear model to analyze the data because the mean appears to be constant.
(Salest - Sales t-1)= 100 - 1.5 (Sales t-1 - Sales t-2) + 1.2 (Sales t-4 - Sales t-5) t=1,2,.. T
t Period Sales
T 2000.2 $1,000
A) $1,430.00.
B) $1,730.00. A
C) $730.00.
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Which of the following is NOT a requirement for a series to be covariance stationary? The:
Which of the following is least likely a consequence of a model containing ARCH(1) errors?
The:
Which of the following statements regarding the instability of time-series models is most
accurate? Models estimated with:
a greater number of independent variables are usually more stable than those with
A)
a smaller number.
B) longer time series are usually more stable than those with shorter time series.
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C) shorter time series are usually more stable than those with longer time series.
C. Those models with a shorter time series are usually more stable because there is less opportunity
for variance in the estimated regression coefficients between the different time periods.
Alexis Popov, CFA, wants to estimate how sales have grown from one quarter to the next on
average. The most direct way for Popov to estimate this would be:
A) an AR(1) model.
B) a linear trend model. B
C) an AR(1) model with a seasonal lag.
Vikas Rathod, an enrolled candidate for the CFA Level II examination, has decided to perform
a calendar test to examine whether there is any abnormal return associated with
investments and disinvestments made in blue-chip stocks on particular days of the week. As
a proxy for blue-chips, he has decided to use the S&P 500 index. The analysis will involve the
use of dummy variables and is based on the past 780 trading days. Here are selected
findings of his study:
RSS 0.0039
SSE 0.9534
SST 0.9573
R-squared 0.004
SEE 0.035
Jessica Jones, CFA, a friend of Rathod, overhears that he is interested in regression analysis
and warns him that whenever heteroskedasticity is present in multiple regression this could
undermine the regression results. She mentions that one easy way to spot conditional
heteroskedasticity is through a scatter plot, but she adds that there is a more formal test.
Unfortunately, she can't quite remember its name. Jessica believes that heteroskedasticity
can be rectified using White-corrected standard errors. Her son Jonathan who has also taken
part in the discussion, hears this comment and argues that White correction would typically
reduce the number of Type I errors in financial data.
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A) Six.
B) Four. B
C) Five.
What can be said of the overall explanatory power of the model at the 5% significance?
The coefficient of determination for the above regression is significantly higher than
A)
the standard error of the estimate, and therefore there is value to calendar trading.
B) There is value to calendar trading.
C) There is no value to calendar trading. C
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Are Jessica and her son Jonathan, correct in terms of the method used to correct for
heteroskedasticity and the likely effects?
A) One is correct.
B) Neither is correct.
C
C) Both are correct.
Assuming the a1 term of an ARCH(1) model is significant, the following can be forecast:
A) supervised learning.
B) clustering.
C
C) unsupervised learning.
Considering the various supervised machine learning algorithms, a linear classifier that
seeks the optimal hyperplane and is typically used for classification, best describes:
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C. Since each tree only uses a subset of features, random forests can mitigate the problem of
overfitting. Because errors across different trees tend to cancel each other out, using random
forests can increase the signal-to-noise ratio.
David Brice, CFA, has tried to use an AR(1) model to predict a given exchange rate. Brice has
concluded the exchange rate follows a random walk without a drift. The current value of the
exchange rate is 2.2. Under these conditions, which of the following would be least likely?
Which of the following statements regarding a mean reverting time series is least accurate?
If the current value of the time series is above the mean reverting level, the
B)
prediction is that the time series will increase.
If the current value of the time series is above the mean reverting level, the
C)
prediction is that the time series will decrease. B
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Autoregressive Model
Regression Statistics
R-squared 0.767
Observations 64
Autocorrelation of Residuals
Quarter Observation
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What is the forecast for the gross margin in the first quarter of 2004?
A) 0.246.
B) 0.250.
C
C) 0.256.
A) nothing.
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Supposing the time series is actually a random walk, which of the following approaches
would be appropriate prior to using an autoregressive model?
Troy Dillard, CFA, has estimated the following equation using semiannual data: xt = 44 +
0.1×xt– 1 – 0.25×xt– 2 - 0.15×xt– 3 + et. Given the data in the table below, what is Dillard's best
forecast of the second half of 2007?
Time Value
2003: I 31
2003: II 31
2004: I 33
2004: II 33
2005: I 36
2005: II 35
2006: I 32
2006: II 33
A) 34.36.
A
B) 34.05.
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C) 33.74.
Suppose that the time series designated as Y is mean reverting. If Yt+1 = 0.2 + 0.6 Yt, the best
prediction of Yt+1 is:
A) 0.3.
B) 0.8. C
C) 0.5.
A time series x that is a random walk with a drift is best described as:
A) xt = b0 + b1xt − 1 + εt.
B) xt = b0 + b1 xt − 1.
C) xt = xt − 1 + εt. A
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An analyst modeled the time series of annual earnings per share in the specialty department
store industry as an AR(3) process. Upon examination of the residuals from this model, she
found that there is a significant autocorrelation for the residuals of this model. This indicates
that she needs to:
B
A) switch models to a moving average model.
B) revise the model to include at least another lag of the dependent variable.
C) alter the model to an ARCH model.
Given an AR(1) process represented by xt+1 = b0 + b1×xt + et, the process would not be a
random walk if:
A) b1 = 1.
C
B) E(et)=0.
A) AR(12).
B) AR(2).
B
C) AR(1).
Consider the estimated AR(2) model, xt = 2.5 + 3.0 xt-1 + 1.5 xt-2 + εt t=1,2,...50. Making a
prediction for values of x for 1 ≤ t ≤ 50 is referred to as:
A) an out-of-sample forecast.
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B) an in-sample forecast.
C) requires more information to answer the question. B
A time series that has a unit root can be transformed into a time series without a unit root
through:
A) first differencing.
A
B) mean reversion.
C) calculating moving average of the residuals.
An analyst wants to model quarterly sales data using an autoregressive model. She has
found that an AR(1) model with a seasonal lag has significant slope coefficients. She also
finds that when a second and third seasonal lag are added to the model, all slope
coefficients are significant too. Based on this, the best model to use would most likely be an:
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B) ARCH(1).
C
C) AR(1) model with 3 seasonal lags.
To qualify as a covariance stationary process, which of the following does not have to be
true?
B) E[xt] = E[xt+1]. A
A) Forecasting is not possible for autoregressive models with more than two lags.
Out-of-sample forecasts are of more importance than in-sample forecasts to the
B)
analyst using an estimated time-series model.
There is more error associated with out-of-sample forecasts, as compared to in-
C)
sample forecasts.
A
Not correcting for seasonality when, in fact, seasonality exists in the time series
A)
results in a violation of an assumption of linear regression.
The presence of seasonality makes it impossible to forecast using a time-series
B)
model.
B
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(Salest - Sales t-1) = 30 + 1.25 (Sales t-1 - Sales t-2) + 1.1 (Sales t-4 - Sales t-5) t=1,2,.. T
t Period Sales
T 2000.2 $2,000
A) $1,730.00.
B) $2,270.00.
A
C) $2,625.00.
Suppose that the following time-series model is found to have a unit root:
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Joyce Tan manages a medium-sized investment fund at Marina Bay Advisors that specializes
in international large cap equities. Over the four years that she has been portfolio manager,
Tan has been invested in approximately 40 stocks at a time.
Tan has used a number of methodologies to select investment opportunities from the
universe of investable stocks. In some cases, Tan uses quantitative measures such as
accounting ratios to find the most promising investment candidates. In other cases, her
team of analysts suggest investments based on qualitative factors and various investment
hypotheses.
Tan begins to wonder if her team could leverage financial technology to make better
decisions. Specifically, she has read about various machine learning techniques to extract
useful information from large financial datasets, in order to uncover new sources of alpha.
Tan is interested in using a supervised learning algorithm to analyze stocks. This task is least
likely to be a classification problem if the target variable is:
A) categorical.
B) ordinal.
C
C) continuous.
After Tan implements a particular new supervised machine learning algorithm, she begins to
suspect that the holdout samples she is using are reducing the training set size too much. As
a result, she begins to make use of K-fold cross-validation. In the K-fold cross-validation
technique, after Tan shuffles the data randomly it is most likely that:
At first Tan bases her stock picks on the results of a single machine-learning model, but then
begins to wonder if she should instead be using the predictions of a group of models.
Compared to a single machine-learning model, an ensemble machine learning algorithm is
most likely to produce predictions that are:
Tan is interested in applying neural networks, deep learning nets, and reinforcement
learning to her investment process. Regarding these techniques, which of the following
statements is most accurate?
Besides constructing a forecast for the foreclosure percentage, Smith wants to address the
following two questions:
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Smith contends that adjustable rate mortgages often are used by higher risk borrowers and
that their homes are at higher risk of foreclosure. Therefore, Smith decides to use short-
term interest rates as one of the independent variables to test Research Question 1.
Smith uses quarterly data over the past 5 years to derive her regression. Smith's regression
equation is provided in Exhibit 1:
where:
= the quarterly change in the 1-year Treasury bill rate (e.g., ΔINT = 2 for a
ΔINT
two percentage point increase in interest rates)
STIM = 1 for quarters in which a Federal fiscal stimulus package was in place
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Regression 3 15 5.0000
Error 16 5 0.3125
Total 19 20
Smith expresses the following concerns about the test statistics derived in her regression:
Before completing her analysis, Smith runs a regression of the changes in foreclosure share
on its lagged value. The following regression results and autocorrelations were derived using
quarterly data over the past 5 years ( Exhibit 4 and Exhibit 5, respectively):
1 0.05 0.22
2 -0.35 -1.53
3 0.25 1.09
4 0.10 0.44
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The most appropriate interpretation from the foreclosure share regression equation model
is:
Based on her regression results in Exhibit 2, using a 5% level of significance, Smith should
conclude that:
A) 0.53.
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B) 0.16.
C
C) 0.56.
The most recent change in foreclosure share was +1 percent. Smith decides to base her
analysis on the data and methods provided in Exhibit 4 and Exhibit 5, and determines that
the two-step ahead forecast for the change in foreclosure share (in percent) is 0.125, and
that the mean reverting value for the change in foreclosure share (in percent) is 0.071. Is
Smith correct?
Assume for this question that Smith finds that the foreclosure share series has a unit root.
Under these conditions, she can most reliably regress foreclosure share against the change
in interest rates (ΔINT) if:
C
A) ΔINT does not have unit root.
B) ΔINT has unit root and is not cointegrated with foreclosure share.
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2/2/23, 12:15 PM Kaplanlearn - Quiz
The main reason why financial and time series intrinsically exhibit some form of
nonstationarity is that:
most financial and economic relationships are dynamic and the estimated
A)
regression coefficients can vary greatly between periods.
most financial and time series have a natural tendency to revert toward their
B)
means.
serial correlation, a contributing factor to nonstationarity, is always present to a
C)
certain degree in most financial and time series.
A
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2/2/23, 12:15 PM Kaplanlearn - Quiz
A monthly time series of changes in maintenance expenses (ΔExp) for an equipment rental
company was fit to an AR(1) model over 100 months. The results of the regression and the
first twelve lagged residual autocorrelations are shown in the tables below. Based on the
information in these tables, does the model appear to be appropriately specified? (Assume a
5% level of significance.)
An executive describes her company's "low latency, multiple terabyte" requirements for
managing Big Data. To which characteristics of Big Data is the executive referring?
Barry Phillips, CFA, is analyzing quarterly data. He has estimated an AR(1) relationship (xt =
b0 + b1 × xt-1 + et) and wants to test for seasonality. To do this he would want to see if which
of the following statistics is significantly different from zero?
A) Correlation(et, et-5).
B) Correlation(et, et-1).
C) Correlation(et, et-4).
C. 4th lag is the value that corresponds to the same season
as the predicted variable in the analysis of quarterly data.
Consider the estimated model xt = −6.0 + 1.1 xt − 1 + 0.3 xt − 2 + εt that is estimated over 50
periods. The value of the time series for the 49th observation is 20 and the value of the time
series for the 50th observation is 22. What is the forecast for the 52nd observation?
A) 27.22.
B) 42. A
C) 24.2.
An algorithm that involves an agent that performs actions that will maximize its rewards
over time, taking into consideration the constraints of its environment, best describes:
C) neural networks.
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