430 Final

Given the performance metrics, answer the questions Stock A 0.82 (Sharpe) 0.78 (Treynor) 12.5 (Information) Stock B 0.56 (Sharpe) 1.20 (Treynor) 8.3 (Information) If you are an investment manager of multiple funds, which stock would be the better option? (A or B)

Stock B

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______.

21.28%; 3=(ER-.04)/.24^2

What is the alpha of the stock fund?

.0360; (12%-(2%+.8(10%-2%)))

What is the risk measure associated with the security market line (SML)?

Beta

Which of the following portfolios most likely falls below the efficient frontier?

Portfolio C

New issues of securities occur in the:

primary markets

Consider an index that consists of stock A, B, and C. Calculate the index returns for case 1 using price-weighted approach. (keep your numerical answers in 4 decimal places, not in percentage, for example, 0.1234 not 12.34%.)

.0909; Pb=(20+80+50)/3=50 Stock Split (choose lower)=(20+40+50)/50=2.2 P1=(25+40+55)/2.2=54.5455 (54.5455/50)-1=.0909

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.

.50; 16%-6%/20%

What is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the market is offering 14%?

11.9%; 7%+.7(14%-7%)

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

16.25%; 7%+.5(1%)+1.25(7%)

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________.

3%; (15%*40%)+(60%*5%)-6%

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

3.7%; (12%-(5%+1.1(8%-5%))

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year, the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been ____.

30.29; shares: 8,000/40=200 Initial margin: 8000*.5=4,000 8,000-4,000=4,000 Broker Charge 4,000*.06=240 .3P=(200P-4,000-240)/200P

You have an APR of 7.5% with continuous compounding. The EAR is _____.

7.79%

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.

8,000; (500*40)=20K 20K*.6=12K 20K-12K=8K

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

8.68%; .0625/(1-.28)

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for_____.

9,878.50; (10,000*(1-((.0486*90)/360))

Use the following data to answer the following 4 questions: An investor short sells 200 shares of ABC. The market price is $40 at the time of short sales. The initial margin requirement is 50%. The maintenance margin requirement is 25%. A. How much equity must the investor have in the account? B. At what price will the investor get a margin call? C. If the price of the stock rises to $45, what is the equity balance in the margin account? D. If the stock is sold one year later for $42, what is the investor's rate of return?

A. 4,000

Which of the following is not a money market security?

common stock

Rank the following types of markets from least integrated and organized to most integrated and organized:

Direct search markets, brokered markets, dealer markets, continuous auction markets

Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion.

I, II, and III only

In an efficient market, professional portfolio management can offer all of the following benefits except which of the following?

a superior risk-return trade-off

In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets. IV. the market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

all

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ .

asset allocation

For which of the following indexes will rebalancing occur most frequently?

equal-weighted

If enough investors decide to sell stocks, they are likely to drive down stock prices, thereby causing _____________ and ___________.

expected returns to rise; risk premiums to rise

Which of the following statements about correlation is least likely correct?

if the correlation coefficient were 0, a zero-variance portfolio could be constructed

According to the CAPM, which of the following is not a true statement regarding the market portfolio.

it is always the minimum-variance portfolio on the efficient frontier

Commercial paper is a short-term security issued by __________ to raise funds.

large well-known companies

Diversification is most effective when security returns are _________.

negatively correlated

the risk-free rate is 5% and the expected market return is 15%. An investor sees a stock with a beta of 1.2 selling for $20 that will pay a $1 dividend next year. If he thinks the stock will be selling for $22 at year end, he thinks it is:

overpriced, so short it

Which index weighting scheme would produce returns closest to those of a portfolio of index stocks with an equal number of shares of each index stock?

price-weighted

The strong form EMH asserts that stock prices fully reflect which of the following types of information?

public and private

Turf Town Software Company develops a new software. It sells the software to Google in exchange for 2,000 shares of Google common stock. Turf Town Software has exchanged a _____ asset for a _____ asset in this transaction.

real; financial

When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed.

rise; fewer

Money market securities are sometimes referred to as cash equivalents because _____.

safe and marketable

A stock is selling at $55. An investor's valuation model predicts that it should be selling at $45. If she believes her model, she would most likely place a:

short sale order

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013.

small stocks, large stocks, long-term bonds, t-bills

Market risk is also called __________ and _________.

systematic risk; nondiversifiable risk

The weak-form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

technical analysis cannot; fundamental analysis can

The bid-ask spread exists because of _______________.

the need for dealers to cover expenses and make a profit

Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.

weak-form EMH