SOCIETY OF ACTUARIES
EXAM IFM INVESTMENT AND FINANCIAL MARKETS
EXAM IFM SAMPLE QUESTIONS AND SOLUTIONS
FINANCE AND INVESTMENT
These questions and solutions are based on material from the Corporate Finance
textbook by Berk/DeMarzo (Learning Outcomes 1-5 of the Exam IFM syllabus) and two
study notes, IFM-21-18 and IFM-22-18. Questions 1-33 are from Corporate Finance and
Questions 34–43 are from the study notes.
They are representative of the types of questions that might be asked of candidates sitting
for Exam IFM. These questions are intended to represent the depth of understanding
required of candidates. The distribution of questions by topic is not intended to represent the
distribution of questions on future exams.
March 2018 update:
3: Typo in solution corrected
5: Typo in question corrected
8: Changed E(X) to E(Rx) in solution
11: Deleted correlation input, and now require correlation to be derived from the given table.
12: Changed answer C, which could have interpreted as correct
40: Arithmetic error in solution corrected
41: “Only” deleted from answer choice D
Copyright 2018 by the Society of Actuaries
IFM-02-18 1
, Finance and Investment Questions
1) You are given the following information about an asset.
i) Using 36 years of data, the average annual asset return is 10%.
ii) The volatility of the asset’s return, over the same time period, was
estimated to be 27%.
iii) The distributions of each year’s returns are identically distributed and
independent from each other year’s returns.
Calculate the lower bound of the 95% confidence interval for the asset’s annual expected
return, using the approximation formula given in Corporate Finance.
(A) 1.0%
(B) 2.6%
(C) 4.5%
(D) 5.5%
(E) 8.5%
IFM-02-18 2
,Key: A
Because there are 36 years’ worth of data points and the distributions are IID, the
standard error is given by
= = = 0.045
SD 0.27
SE
n 36
Berk/DeMarzo equation 10.9 for the 95% confidence interval is
Historical Average Return ± (2 × Standard Error).
Thus, the lower bound of the 95% confidence interval is
0.10 − 2 × 0.045
= 0.10 − 0.09
= 0.01
= 1%.
Reference: Berk/DeMarzo, Section 10.3
IFM-02-18 3
, 2) You are given the following information about a portfolio with four assets.
Market Value Covariance of asset’s return
Asset
of Asset with the portfolio return
I 40,000 0.15
II 20,000 -0.10
III 10,000 0.20
IV 30,000 -0.05
Calculate the standard deviation of the portfolio return.
(A) 4.50%
(B) 13.2%
(C) 20.0%
(D) 21.2%
(E) 44.7%
IFM-02-18 4
EXAM IFM INVESTMENT AND FINANCIAL MARKETS
EXAM IFM SAMPLE QUESTIONS AND SOLUTIONS
FINANCE AND INVESTMENT
These questions and solutions are based on material from the Corporate Finance
textbook by Berk/DeMarzo (Learning Outcomes 1-5 of the Exam IFM syllabus) and two
study notes, IFM-21-18 and IFM-22-18. Questions 1-33 are from Corporate Finance and
Questions 34–43 are from the study notes.
They are representative of the types of questions that might be asked of candidates sitting
for Exam IFM. These questions are intended to represent the depth of understanding
required of candidates. The distribution of questions by topic is not intended to represent the
distribution of questions on future exams.
March 2018 update:
3: Typo in solution corrected
5: Typo in question corrected
8: Changed E(X) to E(Rx) in solution
11: Deleted correlation input, and now require correlation to be derived from the given table.
12: Changed answer C, which could have interpreted as correct
40: Arithmetic error in solution corrected
41: “Only” deleted from answer choice D
Copyright 2018 by the Society of Actuaries
IFM-02-18 1
, Finance and Investment Questions
1) You are given the following information about an asset.
i) Using 36 years of data, the average annual asset return is 10%.
ii) The volatility of the asset’s return, over the same time period, was
estimated to be 27%.
iii) The distributions of each year’s returns are identically distributed and
independent from each other year’s returns.
Calculate the lower bound of the 95% confidence interval for the asset’s annual expected
return, using the approximation formula given in Corporate Finance.
(A) 1.0%
(B) 2.6%
(C) 4.5%
(D) 5.5%
(E) 8.5%
IFM-02-18 2
,Key: A
Because there are 36 years’ worth of data points and the distributions are IID, the
standard error is given by
= = = 0.045
SD 0.27
SE
n 36
Berk/DeMarzo equation 10.9 for the 95% confidence interval is
Historical Average Return ± (2 × Standard Error).
Thus, the lower bound of the 95% confidence interval is
0.10 − 2 × 0.045
= 0.10 − 0.09
= 0.01
= 1%.
Reference: Berk/DeMarzo, Section 10.3
IFM-02-18 3
, 2) You are given the following information about a portfolio with four assets.
Market Value Covariance of asset’s return
Asset
of Asset with the portfolio return
I 40,000 0.15
II 20,000 -0.10
III 10,000 0.20
IV 30,000 -0.05
Calculate the standard deviation of the portfolio return.
(A) 4.50%
(B) 13.2%
(C) 20.0%
(D) 21.2%
(E) 44.7%
IFM-02-18 4
