Data Science and Machine Learning in Finance (ACCFIN 5246)
Practice Quiz
This practice quiz provides a guidance, in terms of structure and contents, surrounding the formal quiz on 4 Feb which will run via the course Moodle page under section indicated as In-Course Exam (ACCFIN52461C)
General Instruction
— Answer all questions.
— This is an individual assessment.
— The quiz comprises 12 multiple choice questions.
— Select only one option. Each part carries an equal weight. There is no negative mark.
— The computational questions are designed so that a calculator is generally not required, however, you can use a calculator to carry out computations.
— The composition of questions, relating to statistical computations, qualitative questions based on the reading list and empirical facts, etc. may vary in terms of the number of questions appearing in the actual quiz.
Multiple Choice Questions
Question 1 Consider two investment assets X and Y. The observed asset returns generated by X exhibit low volatility and observed to be either +1% and -1%, whereas observed returns generated by Y have been outperforming but with a higher volatility and equal to +2% and +5%. Furthermore, the following table provides pairwise information for the aforementioned asset returns:
Table 1: Each tabulated value associated with X and Y are financial returns in percentage points. Assume the table characterises the population.
The standard deviation of each asset return associated with X and Y , respectively, are (rounded to two decimal points):
(a) 1.50 and 0.87 [x]
(b) 1.50 and 1.00
(c) 1.73 and 0.87
(d) 1.73 and 1.00
Question 2 With reference to Table (1) in Question (1), what is the conditional probability P(X = +5|Y = -1)?
(a) 0
(b) 3/1 [x]
(c) 2/1
(d) 4/3
(e) 1
Question 3 With reference to Table (1) in Question (1), the median returns associated with assets X and Y , respectively, are:
(a) 2 and -1
(b) 2 and +1
(c) 3.5 and -1 [x]
(d) 3.5 and +1
Question 4 A specification model is described as yi = β0 + β1 exp(zi)/xi + ϵi. Specify the model either as linear or nonlinear, and further as identified or not identified:
(a) Linear, identified [x]
(b) Linear, not identified
(c) Nonlinear, identified
(d) Nonlinear, not identified
Question 5 Consider a firm-level dataset providing three characteristics: EBITDA, cash holding and the total assets, described across columns by a 3 × 3 matrix x (each row corresponds to firms 1, 2, 3):
Determine the column rank of the dataset summarised by matrix X:
(a) 0
(b) 1
(c) 2 [x]
(d) 3
(e) 4
Question 6 Suppose the number of outstanding shares of company A held by three investors are summarised by vector q = (45, 55, 65)′ , where each element corresponds to investors 1, 2, 3, respectively. Each investor purchased their shares at a different point in time according to the prevailing prices summarised by p = (£100, £110, £105)′ . What is the firm’s shareholder value formulated by the following inner product q′ .p if each element in p also corresponds respectively to investors 1, 2, 3?
(a) £15,125
(b) £17,375 [x]
(c) £20,225
(d) £25,500
Question 7 Returns generated by company RA are tabulated alongside treasury returns RG . The Sharpe ratio is formulated as where σ(x) is the standard deviation of the argument value x.
What is the Sharpe ratio of returns described for company A according to the table above (assume the table represents the population information):
(a) 2.35
(b) 2.45 [x]
(c) 2.55
(d) 2.65
(e) 2.75
Question 8 What is the correlation coefficient summarising the co-movement between companies A and B asset returns when the table below represents the population data:
(a) −1
(b) −2/1 [x]
(c) 0
(d) +2/1
(e) +1
Question 9 A comprehensive financial dataset including 200,000 observations covering the UK companies is split into two groups G1 and G2 each including 5,000, 195,000 firms, respectively and according to an ascending cash to total assets ratio benchmark (G1 : low cash to total assets and G2 : high cash to total assets). It is desired to learn if firms with lower cash to total assets ratios underperform, in terms of their average interest coverage ratios (ICR, where higher ICR corresponds to better performance), relative to the remaining firms. Propose how you formulate this argument in terms of a testable null hypothesis (H0 ) versus an alternative hypothesis (Ha ), as- suming that the performance associated with high cash to total assets group ICR2 is representative of the population information.
(a) H0 : ICR1 = ICR2 vs. Ha : ICR1 ≠ ICR2
(b) H0 : ICR1 ≥ ICR2 vs. Ha : ICR1 < ICR2 [x]
(c) H0 : ICR1 ≠ ICR2 vs. Ha : ICR1 = ICR2
(d) H0 : ICR1 ≤ ICR2 vs. Ha : ICR1 > ICR2
Question 10 According to “’Financial Constraints, Investment, and the Value of Cash Holding’ by Dennis and Sibilkov (2009), what are the four approaches to quantify the level of financial constraints?
(a) Annual payout ratio, Firm size, Debt rating, Paper rating [x]
(b) Annual payout ratio, Firm location, Debt overhang, Paper rating
(c) Annual payout ratio, Firm industry, Debt rating, liquid assets
(d) Annual dividend policy, year, Debt rating, Paper rating
Questions 11-12 Similar computational or qualitative questions from the reading list.