2 problematic question!Please explain

  1. William Callahan, CFA, is an energy analyst for a large brokerage firm based in Galveston, Texas. His supervisor, Nancy Deininger, CFA, has recently let Callahan cover a few of the firms that Deininger had been covering previously. Deininger gives Callahan specific instructions not to change her prior recommendation on one of the these firms, Mayfield Energy. Which of the following actions by Callahan would be least likely considered to be consistent with CFA Institute Standards? A. Tell Deininger that he cannot cover Mayfield Energy under those restrictions B. Pick up coverage of Mayfield, do his own independent analysis and reach an independent conclusion C. Use subtle, ambiguous language in the report, in order to not mislead the investor, while complying with his employer’s instructions. 2. Jacques Welch, security analyst for Z-Investments, selects stocks based on a proprietary stock screen. Returns on stocks satisfying Welch’s stock screen are assumed to be normally distributed with the following characteristics: Mean Annual Return=10% Standard Deviation=5% Welch’s supervisor at Z-Investments asks Welch to determine the probability that a randomly selected stock satisfying the stock screen will lose money next year. The probability of losing money is closest to: A. 2.5% B. 5.0% C. 10.0%

I would say: C. --> use of subtle and ambiguous language sounds misleading according to me A. --> With a normally distributed random variable, we have a 95% confidence interval for Mu +/- 1.96 Stdev. Thus, here, the probability to loose money is to be below 2 Stdev (i.e. 10% - 2x5%), which is within 2.5% confidence interval (if we look only at one-tail)

1.) uhhhh, C? If it’s not C, the question is just plain wrong. It doesn’t matter what his boss said, he has to use diligence and make his own determinations, or say he cannot cover under the implied restriction 2.) I am not sure but it looks like a Z value without a hypothesized mean to subtract, so lets say its x-m/sigma = (x-0)/sigma or (10-0)/5 = 2 Z value of 2 is 1.96 — 95% confidence index. Probability it’s outside the range is 5%, 2.5 % above (right tail), and 2.5 below (left tail)

I’m not sure about #1, my guess would be C. On #2 I think the answer is A. For returns to be negative it would have to be at least ~2 standard deviations from the mean. Since 95% of returns should be within 2 stdev from the mean, the amount in each tail is 2.5%.

1 - C 2 - B <<< Guessed

Thanks for the answers. #1 is C alright. I got confused because in the Standards of Practice handbook somewhere it is written that Analysts sometimes do use subtle language in such cases. I dont remember whether the Handbook states that it is wrong to do so. #2 for number 2 what I did was ((0-10)/5)=-2. I found out the probability of return less than -2 on the Z table which is around 2.28% i think. My method is different from Scweser (which is the same technique as what you people are using). I would like to know whether I can use mine. Thanks.

They won’t give you a Z table on the exam. Also, your way is slower and since time is critical during the exam, doing it our way and understanding it will let you get through a question like this quickly and use the time on harder questions.

I know it sounds stupid, but draw the normal curve, and plot the points at the std away from it. 1.65xstd down will leave 95% in the right hand side, but in this case we are looking for the left side, 1.96xstd will get us to 97.5% on the right side. 1.96x5% approx. 10%. 0 and 20 are your boudaries for 95% of the shaded middle region. I think trying to use the equations leads many people to lose the concept of the normal curve and its characteristics.

Ethics is killing me. The answer to this question in my opinion should be B! I feel like the more ethics I do the more I get confused.

Never mind, it says least likely… urghhh!

BizBanker Wrote: ------------------------------------------------------- > boudaries for 95% of the shaded middle region. I > think trying to use the equations leads many > people to lose the concept of the normal curve and > its characteristics. Spoken like a true statistician

1- C 2 - A