Investment Management Final

You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

$300 Loss

The following price quotations are for exchange-listed options on Primo Corporation common stock. Company: Primo 61.12 Strike: 54 Expiration: Feb Call: 7.30 Put: 0.47 With transaction costs ignored, how much would a buyer have to pay for one call option contract. Assume each contract is for 100 shares.

$730

M Squared

(Rp-Rf)(SD(M)/SD(P))-(Rm-Rf) (Sharpe Ratio * SDbenchmark) + Rf

Treynor Measure

(Rp-Rf)/Bp

Sharpe ratio

(portfolio risk premium)/(st. dev. of portfolio excess return) (Rp-Rf)/SDp

Payoff for short put

-MAX(K-S(T), 0)

Payoff for short call

-MAX(S(T)-K, 0)

______ option can only be exercised on the expiration date.

A European

Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A; B

Jensen Measure

Alpha(p) = Rp - (Rf+Bp(Rm-Rf))

Information Ratio

Alpha(p)/SD(ep)

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Bull Spread

What strategy is designed to ensure a value within the bounds of two different stock prices?

Collar

There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?

E(Rp) = Rf + B1,p(E(r1)-Rf) + B2,p(E(r2)-Rf) Honestly idk

Alpha

Excess return - (Beta * Market Excess Return) (Rp-Rf) - Bp(Rm-Rf)

Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

I, II, and III

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

Long straddle

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

MAX(0, S(T) - X)

Payoff for long put

MAX(K-S(T), 0)

Payoff for long call

MAX(S(T)-K, 0)

You establish a straddle on Walmart using September call and put options with a strike price of $85. The call premium is $7.25 and the put premium is $8.00. What is the most you can lose on this position? What will be your profit or loss if Walmart is selling for $89 in September? What is the Break-even price for lower bound? What is the Break-even price for upper bound?

Maximum Loss = $15.25 Profit/Loss at $89 = ($11.25) BEP Lower = $69.75 BEP Upper = $100.25

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

Overconfidence

You buy a share of stock, write a one-year call option with X = $27, and buy a one-year put option with X = $27. Your net outlay to establish the entire portfolio is $25.60. What must be the risk-free interest rate? The stock pays no dividends.

Payoff: 27 Risk-free rate: (27/25.6)-1 = 5.47%

An American put option gives its holder the right to _____

Sell the underlying asset at the exercise price on or before the expiration date

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

Speculators; hedgers

Geometric Average

The nth root of the product of n numbers.

Payoff for short sell stock

Worth -S(T) at time T

Payoff for buy stock (long)

Worth S(T) at time T

The weak form of the EMH states that ________ must be reflected in the current stock price.

all past information, including security price and volume data

Arbitrage is based on the idea that _________.

assets with identical risks must have the same expected rate of return

Behaviorists point out that even if market prices are ____________, there may be _______________.

distorted; limited arbitrage opportunities

Futures contracts have many advantages over forward contracts except that _________.

futures contracts are tailored to the specific needs of the investor

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

increase substantially

The Jensen portfolio evaluation measure

is an absolute measure of return over and above that predicted by the CAPM.

A futures contract __________.

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Treynor measure, the performance of Buckeye Fund

is poorer than the performance of Husker Fund.

The daily settlement of obligations on futures positions is called _____________.

marking to market

The possibility of arbitrage arises when ____________.

mispricing among securities creates opportunities for riskless profits

All else the same, an American-style option will be ______ valuable than a ______ style option.

more; European

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

rational; irrational

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

recognizes only one systematic risk factor

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.

representative bias

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

semistrong

One can profit from an arbitrage opportunity by

taking a long position in the cheaper market and a short position in the expensive market.

Random price movements indicate ________.

that markets are functioning efficiently

An important characteristic of market equilibrium is _______________.

the absence of arbitrage opportunities

Arbitrage is __________________________.

the creation of riskless profits made possible by relative mispricing among securities

The geometric average rate of return is based on

the principle of compounding.

The only way for behavioral patterns to persist in prices is if ______________.

there are limits to arbitrage activity

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

worst; best