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22. An analyst gathers the price-earnings ratios (P/E) for the firms in the S& 500 and then ranks the firms from highest to lowest P/E. She then assigns the number 1 to the group with the lowest P/E ratios, the number 2 to the group with the second lowest P/E ratios, and so on. The measurement scale used by the analyst is best described as:

A. ordinal.
B. interval.
C. nominal.

23. Using Chebyshev’s inequality, what is the minimum proportion of observations from a population of 500 that must lie within two standard deviations of the mean, regardless of the shape of the distribution?

A. 75%
B. 89%
C. 99%

24. If a distribution exhibits positive skewness, then the mean most likely is located to the:

A. left of both the median and mode.
B. right of both the median and mode.
C. left of the median and right of the mode.

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19. A money manager has $1,000,000 to invest for one year. She has identified three alternative one-year certificates of deposit (CD) shown below:

	Compounding frequency	Annual interest rate
CD1 CD2 CD3	Monthly        Quarterly      Continuously	7.82%        8.00%        7.95%

Which CD has the highest effective annual rate (EAR)?

A. CD 1
B. CD 2
C. CD 3

Answer: C
“The Time Value of Money,” Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle 2008 Modular Level I, Volume 1, pp. 179-183
Study Session 2-5-c
Calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding, and solve time value of money problems when compounding periods are other than annual.
Use the EAR (effective annual rate) to compare the investments:



20. A consumer is shopping for a home. His budget will support a monthly payment of $1,300 on a 30-year mortgage with an annual interest rate of 7.2 percent. If the consumer puts a 10 percent down payment on the home, the most he can pay for his new home is closest to:

A. $191,518.
B. $210,840.
C. $212,800.

Answer: C
“The Time Value of Money,” Richard A. Defusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA 2009 Modular Level I, Volume 1, pp. 190-208
Study Session 2-5-d, e
Calculate and interpret the future value (FV) and present value (PV) of a single sum of money, an ordinary annuity, an annuity due, a perpetuity (PV only), and a series of unequal cash flows.
Draw a time line, and solve time value of money applications (for example, mortgages and savings for college tuition or retirement).
The consumer’s budget will support a monthly payment of $1,300. Given a 30-year mortgage at 7.2 percent, the loan amount will be $191,517.76 (N = 360, %I = 0.6, PMT = 1,300, solve for PV). If he makes a 10% down payment, then the most he can pay for his new home = $191,517.76 / (1 – 0.10) = $212,797.51 ≈ $212,800.

21. An analyst gathers the following information about a common stock investment:

Date

Amount