Finance 3316 final

what is the formula for the sharp ratio?

(return - risk free rate) / standard deviation

Assume a stock s returns are normally distributed with a 3% mean and a 10% standard deviation. Write out the NORMDIST function that would tell you the probability of making a return greater than 5% on this stock.

1-NORMDIST(5%,3%,10%,TRUE)

A bond pays a 6% annual coupon rate (semi'annual payments), has 6 years to maturity, currently sells for $979.00, and is callable at face value in exactly one year. Calculate the bond's Yield to Call. Will YTC be a relevant number for this bond Explain why.

2=N FV=1000 PMT=30 PV=-979 I/yr=8.23%, not relevant, no reason to call if the price is below the face value of $1000.

Assume a stocks returns are normally distributed with a 3% mean and a 10% standard deviation. 68% of its returns should be between?

68% of return lye within 1 standard deviation of the mean, 95% of returns lye within 2 standard deviations of the mean, 99.7% of returns lye within 3 standard deviations of the mean. there 68% of returns should be between -7% and 13%.

Assume a stock s returns are normally distributed with a 3% mean and a 10% standard deviation, About 2.5% of its returns should be below what percent

68% of return lye within 1 standard deviation of the mean, 95% of returns lye within 2 standard deviations of the mean, 99.7% of returns lye within 3 standard deviations of the mean. therefore 2.5% of returns should be below -17%.

Assume a stock s returns are normally distributed with a 3% mean and a 10% standard deviation. If I do =Normdist(0%, 3%, 10%, TRUE), the function returns 38%. What is this answer telling you?

=NORMDIST(X,MEAN, STDEV, TRUE) That there is a 38% chance of getting a return less than 0%.

how do you calculate portfolio Beta? Standard deviation?

Average beta of all the stocks within the portfolio. Portfolio standard deviation is less than the average standard deviation b/c some of the risk will be diversified away.

Explain why long-term Treasury rates are usually higher than short-term Treasury rates.

B/c longer maturity equals bigger duration, which in turn equals greater interest rate risk, which in turn equals greater interest rate risk premium.

Explain why short-term Treasury rates are sometimes higher than long-term Treasury rates.

B/c of high, temporary, short term inflation.

Miralda corn's 8% coupon bonds have 20 years of maturity remaining, make semi'annual payments, and sell for $1082. What is their YTM?

BEGIN PMT=-300 N=360 I/yr=.8333 FV= $553,342

What's the significance of a bond having higher or lower duration than another?

Duration is a measure of interest rate risk, the higher a bonds duration the more it will react to changes in rates.

Write the equation for the Capital Asset Pricing Model. Which part of it is the Market Risk Premium? BE SPECIFIC.

Expected Return = Rfr + Beta(Erm - Rfr). (Erm - Rfr) = market risk premium.

Explain what a Monte Carlo simulation does. That is, If I'm defining Vacancy and Rent Growth as Assumption Variables in Crystal Ball and NPV as the Forecast Variable, what does a Monte Carlo simulation (such as Crystal Ball) do with this dat

For a given number of trials, monte carlo simulation pulls values out of a distribution for vacancy and rent growth an uses them to recalculate NPV. the answer equals NPV for every trial.

Suppose you have a 0% coupon bond that matures on Feb 19, 2039. What will be the duration (regular, not modified) of this bond?

If the coupon of a Bond = 0 then the duration of the bond is equal to the maturity. so in this case the duration is equal to 20

Suppose you have a 6% coupon bond that matures on Feb 19, 2039. How will its duration compare to you a bond with a 0% coupon? Explain why.

If the coupon of a bond is greater than 0%, than duration is less than maturity, so in this case it would be less than 20

Expected inflation = 1% 1-Month treasury bill = 2.2% 25yr treasury bond = 3.7% 25yr BBB corporate Bond = 4.8% Why does the 25-year TBond pay 1.5% more than the Tbill. What's this 1.5% called? Give an example of bond where that number would be even larger.

It pays more because it has greater risk, because it has a longer maturity and a lower coupon. That 1.5% is called the interest rate risk premium. a 30yr bond would have an even larger interest rate risk premium.

Dontae can invest $ 10,000 per year hi a retirement account that will earn 10% per year on average. How much money will he have if he does that for 30 years? In 3312, we do -10K PMT, 30 N, 10 I/YR and get FV of$1.645M, Will this answer be correct in real life? Explain why or why not.

No, 10% I/yr assumes he earns 10% every year. Any variation and youre likely to end up with less than $1.65mil.

What does the efficient frontier represent?

Portfolios with max return for a given standard deviation. stocks cant be outside the efficient frontier.

Expected inflation = 1% 1-Month treasury bill = 2.2% 25yr treasury bond = 3.7% 25yr BBB corporate Bond = 4.8% Write out the full extended Fisher Equation for the 1-month TBill's yield. Explain why you chose those numbers for Default Risk Premium and Interest Rate Risk Premium.

R + H + default risk premium + interest rate risk premium 2.2% = 1.2% + 1% + 0% + 0% default risk premium equals 0 because Tbills have no risk of default. interest rate risk premium equals 0 because the duration of the Tbill is 0.

what is the formula to calculate Alpha?

Return - (risk free rate + beta x market risk premium)

Stock X - 10% Standard Deviation, 80% Rsquared Stock Y - 10% Stand Deviaiton, 10% Rsquared Which one is riskier for a normal investor? Explain why

Standard Deviation is a measure of total risk, but Rsquared tells us what percentage of a stocks risk is unsystematic risk, which cannon be diversified away. therefore stock x is riskier.

Expected inflation = 1% 1-Month treasury bill = 2.2% 25yr treasury bond = 3.7% 25yr BBB corporate Bond = 4.8% Why does the BBB Corporate pay 1.1% more than the TBond? What is that number called? Give an example of a bond where that number would be even larger.

That number is called the default risk premium. B/c the treasury can print money, TBonds do not carry in default risk. A CCC corporate bond would have in even greater default risk premium.

what kind of stocks would you trust "NORMDIST to give you good answers? Explain why.

The NORMDIST function works best with stock that have normally distributed returns. Stocks with skewness and kurtosis of less than 1 and greater than -1.

Explain why someone would buy an S&P500 UltraShort fund.

an ultra short fund is supposed to return -3 x the index. youd buy one if you expected the index would do poorly.

Compared to Growth Funds, managed Value Funds should have (higher/lower) dividend yields (higher/lower) PE ratios, and (hlgher/lower) betas.

higher dividend yields, lower PE ratios, and lower betas.

Assume a stock s returns are normally distributed with a 3% mean and a 10% standard deviation, About 2.5% of its returns should be below -17%. How would the change if the data had high positive kurtosis.

more than 2.5% would be below -17%. Kurtosis greater than 0 implies high peaks and fat tails, meaning more outliers within the data.

Assume a bond matures on 12-feb-2038. Its current YTM is 9.31%. It has a duration of 9.79 and a modified duration of 9.35. Calculate its %Change in Price if its YTM falls to 8.31%.

%change in price = -modified duration x %change in YTM -9.35 x -1% = +9.35%