investment management moreee

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________.

D. productive capacity, real assets

A call option is currently traded on stock XYZ with a strike price of $ 60 and maturity of six months. What will be the profit or loss to an investor who buys the call for $4 and the stock price changes to $65 after six months?

(65-60)-4

Large well-known companies often issue their own short term unsecured debt notes directly to the public, rather than borrowing from banks, their notes are called _________.

D. commercial paper

1. Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. common stock

D. common stock

You purchased one futures contract on corn (each futures contract is for 5000 bushels) at a futures price of 450 per bushel and at the time of expiration the price was 452. What was your profit or loss?

(452-450)*5000 cents

Based on the information given for the three stocks, calculate the first-period net return (from t = 0 to t = 1) on a. a market-value-weighted index. stock a 70 200. 72 200 stock b 85 500. 81 500 stock c 105 300. 98 300

(a) -4.2%. step 1 find weights: wa:(70*200)/((70*200)+(85*500)+(105*300))=.159 wb:.4829 wc:.3579 step 2 find returns: ra:(72-70)/70=.0286 rb:-.0471 rc:-.066667 step 3 combine: (wa*ra)+(wb*rb)+(wc*rc) (.159*.0286)+(.3579*-.0471)+(.4829*-.066667)

Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 30%. The T-bill rate is 10%. Suppose that you have a client that prefers to invest in your risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have an expected rate of return of 15%. What is the investment proportion?

*A. 1 .15=y*.15+.10(1-y) find y

The standard deviation of a portfolio consisting of 30% of Stock X and 70% of Stock Y is: stock/ E(r)/st.dev/corr. coefficient x 5% 20% .4 y 10% 25%

*A. 20.65% sqrt(((.3*.3)*(.2*.2))+((.7*.7))*(.25*.25))+(2*.3*.2*.7*.25*4))

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

*A. asset A a) 15/.4=37.5 b) 20/.3=66.67 (pick lower amount between the two)

When a distribution is positively skewed, ____________.

*A. standard deviation overestimates risk

The term "complete portfolio" refers to a portfolio consisting of _________________.

*A. the risk-free asset combined with at least one risky asset

The covariance between the risk-free rate and a risky asset is equal to:

*B. 0

The risk-free rate has a standard deviation equal to

*B. 0

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 12%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in treasury bills.

*B. 26.8%

You purchased a stock for $50. One year late you received $4 as dividend and sol the share for $48. Your holding period return was

*B. 4% ((48-50)+4)/50

Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive

*B. I and II only

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

*B. requires a risk premium to take on the risk

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

*B. up, left

Which of the following correlations coefficients will produce the least diversification benefit? A. -0.6 B. -0.3 C. 0.5 D. 0

*C. 0.5 pick highest #

Your investment has a 10% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return and a 40% chance of losing 6%. What is your expected return on this investment?

*C. 5.6% (.10*.30)+(.50*.10)+(.40*-.06)

According to the mean-variance criterion, which one of the following investments dominates all others? A. E(r)=0.10; Variance=0.20 B. E(r)=0.20; Variance=0.20 C. E(r)=0.20; Variance=0.10 D. E(r)=0.10; Variance=0.30

*C. E(r)=0.20; Variance=0.10 divide E(r) by variance and pick highest #

Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 (0.5%) basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.

*C. The Federal Reserve increases interest rates 50 (0.5%) basis points.

Consider a T-bill with a rate of return of 5 percent and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the 4 risky securities, would a risk-averse investor always choose his portfolio?

*C. The set of portfolios formed with the T-bill and security C. step 1 get st. dev. sqrt(variance) a. sqrt(.04) = .2 b. sqrt( .0225) = .15 c. sqrt (.01) = .1 d. sqrt( .0625) = .25 step 2 get cv. sd/E(r) a. .2/.15 = 1.3 b. .15/.1 = 1.5 c. .1/.12 = .833 d. .25/ .13 = 1.9 pick lowest number

An investor's degree of risk aversion will determine his or her ______.

*C. optimal mix of the risk-free asset and risky asset

Which risk can be diversified away as additional securities are added to a portfolio? I. Market risk II. Systematic risk III. Firm specific risk

*D. III only

option

A call (put) option gives the holder the right to purchase (sell) an underlying asset for the strike price (exercise price) at the specified expiration date.

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

A. $4,500 (300)(30)(.5)

7. A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010. The effective annual yield is __________. Hint: Use 31 days in a month

A. 12.43% (100,000/99,000)^(365/31)-1

Consider the following limit order book. If a market sell order for 100 shares comes in, at what price will it be filled? Bid prices (person willing to buy) 39.75 100 39.50 100 sell prices (person willing to sell) 40.25 100 40.50 100

A. 39.75

2. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities.

A. A share of common stock

5. Asset allocation refers to the _________.

A. allocation of the investment portfolio across broad asset classes

16. An individual who goes short (sells) in a futures position on a commodity

A. commits to delivering the underlying commodity at contract maturity

Eurodollars are _________.

A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million and $150 million respectively. If you were to construct a price-weighted index of the three stocks what would be the index value?

B. 39 (12+75+30)/3

If you thought prices of stock would be declining over the next few months you may wish to __________________ on the stock.

B. purchase a put option (sell)

limit-buy order

Buy order executed when price falls below a specified limit.

What is not a financial asset? a) common share of Toyota company B) T-bill with maturity 3 months C) Auto plant of Toyota D) A call option on Toyota

C) Auto plant of Toyota

A stock quote indicates a stock price of $60 and an annualized dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. Hint: Compute annual dividend amount and then scale it by 4 to obtain quarterly dividend amount

C. $0.45 (60*3%)/4

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of Microsoft (MSFT) at $25 per share. If the price drops to $ 22, what is your percentage loss?

C. 48% purchase= 100*25=2500 .25*2500=625 loss= (25-22)*100=300 %loss= 300/625

A municipal 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 _________.

C. 8.68% 6.25/(1-28%)

8. Which of the following is not a money market instrument? A. Treasury bill B. Commercial paper C. Preferred stock D. Banker's acceptance

C. Preferred stock

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an ______.

C. price weighted index

15. TIPS are ______.

D. Treasury bonds that protect investors from inflation

6. An investor in a T-bill earns interest by _________.

D. buying the bill at a discount from the face value received at maturity

Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%. a) In light of the apparent inferiority of gold with respect to average return and volatility, would anyone hold gold in his portfolio?

Even though it seems that gold is dominated by stocks, gold might still be an attractive asset to hold as a part of a portfolio.

24. You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information. c. How would it affect the slope of the Capital Market Line if the broker were to charge the full amount of the fee?

If the broker charges the full amount of the fee, the CAL's slope would also be 0.1875, so it would rotate down and be identical to the CML.

futures

In a futures contract the purchaser of the contract (the long) agrees to purchase the specified quantity of the underlying asset at a specified future date at the price (futures price) set in the contract.

Financial Intermediary:

Institutions that connect borrowers and lenders by accepting funds from lenders and lending funds to borrowers.

Capital Market Line (CML):

Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and the market portfolio.

buying on margin

Purchasing stocks on margin means the investor borrows part of the purchase price of the stock from a broker (leverage).

What would be the profit or loss per share of stock to an investor who bought - the October 2015 expiration Apple put option with the exercise price of $100, if the stock price at the expiration of the option is $120? The premium paid to buy the option is equal to 3 dollars.

Put: Profit is -3 dollars because the option expires unexercised and the investor just pays the price of the option

money market:

Short- term (less than 1 year) debt instruments.

Sharpe Ratio

The Sharpe ratio for a risky asset or a risky portfolio is defined as the return on the risky asset minus the risk-free rate, divided by the standard deviation of the risky asset. It is the slope of the capital allocation line formed by the risk-free asset and the risky portfolio under consideration.

Efficient Frontier

The efficient frontier portfolios are dominant or the best diversified possible combinations

price- weighted

The portfolio contains one share of each stock.

equally weighted

The portfolio invests an equal dollar value in each stock.

Equity

The return of buying an equity is given by the dividends plus capital gain.

market-value weighted:

The weights of the shares are proportional to the market capitalization, or value of the company.

stock market indexes

They measure the price of a portfolio of equity. US or international.

derivative

a security with a payoff that depends on the prices of other securities.

You buy 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss ignoring transactions cost?

a) 10,000 20*500

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market portfolio with a beta of 1 is 12%. According to the CAPM: - What is the expected return on the market portfolio?

a) 12%

Assume you purchased 100 shares of XYZ common stock on margin at $60 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is ....

a) 2,400 (100*.6)*(1-.4)

You sold short 500 shares of common stock at $10 per share. The initial margin is 40%. You must put up .....

a) 2000 500*10*.4

You are bullish (i.e., expect price to go up in future) on Telecom stock. The current market price is $50 per share, and you have $10,000 of your own to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%?

a) 35.71 n=20,000/50=400 (400*P-10,000)/400*P solve for p

When computing the bank discount yield you would use ..... days in the year.

a) 360

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market portfolio with a beta of 1 is 12%. According to the CAPM: - What would be the expected return on a zero-beta stock?

a) 4%

You purchased 150 shares of common stock on margin for $20 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be .... if you sell the stock at $25 per share. Ignore interest on margin. Hint: your rate of return is the percentage gain based on your initial margin.

a) 41.67% market value @ 0: 150*20=3000 invest: .6*3000=1800 borrow: 3000-1800=1200 invest @ 1: 150*25=3750 gain: ((3750=1200)-1800)/1800

A taxable bond pays 6.5% yield. What is your after tax yield if your tax bracket is 23%?

a) 5.005% 6.5(1-.23)

You sell short 100 shares of stock priced at $50 per share. You pledge 50% as initial margin. - At what stock price do you get a margin call if maintenance margin is 30%?

a) 57.69 (7500-p*100)/(100*p)=.3 solve for p

You sell short 100 shares of stock priced at $50 per share. You pledge 50% as initial margin. - How much do you have invested in the margin account?

a) 7500 dollars (500*1000)=5000 5000/2=2500 5000+2500

What is the Equivalent taxable yield on a municipal tax-free bond that pays 6% yield given your marginal tax rate is 25%?

a) 8% 6/(1-.25)

The first issue of shares of a firm to the general public is called

a) Initial Public Offering

Two portfolio managers are comparing performance. Manager A averaged a 21% rate of return and manager B averaged a 16% rate of return. However, the beta of the first manager (A) was 1.5, whereas that of the second (B) was 1.2. If the T-bill rate were 6% and the market return during the period were 14%, which manager was the superior stock selector? (Please detail the reasoning and passages).

a) Manager A was a better stock selector αA = (21−6)−1.5(14−6) = 3% αB =(16−6)−1.2(14−6)=0.4% (higher #)

19. Which of the following statements on TIPS is not true? a) They are money-market securities b) TIPS means Treasury Inflation Protection Securities c) They provide a constant stream of income in real (inflation-adjusted) dollars d) The principal is adjusted for increase in Consumer Price Index (inflation-adjusted).

a) They are money-market securities

....... portfolio management calls for finding undervalued/ overvalued securities and timing the market.

a) active

An individual who goes long in a futures position on a commodity

a) commits to purchasing the underlying commodity at contract maturity

The intermediate payments that debt securities may offer are called

a) coupons

You decide to create an equity portfolio and you put the same amount of money in 100 shares of stocks of firms. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an .....

a) equal weighted index

Callable bonds .......

a) give the firm the option to repurchase the bond from the holder at a stipulated call price.

. If you thought prices of stock would be increasing over the next few months you may wish to .......

a) go long (buy the stock)

Consider a one factor economy where the risk-free rate is 3%, and portfolios A and B are well diversified portfolios. Portfolio A has a beta of 0.5 and an expected return of 8%, while Portfolio B has a beta of 0.8 and an expected return of 10%. Is there an arbitrage opportunity in this economy? If yes, how could you exploit it?

a) go short the T-bill and you go long the zero-beta portfolio. wA = (−βB )/(βA − βB ) (-.8)/(.5-.8)= 2.6667, wB =βA/(βA−βB) (.5)/(.5-.8)=−1.6667 The return of the portfolio is E[r] = wA ∗ E[rA] + wB ∗ E[rB] (2.6667*.08)+(-1.6667*.1)=4.6667. since E(r) is more than risk free rate (3%) go short

An order to buy a security if the price falls below a specific value is a ......

a) limit buy order

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market portfolio with a beta of 1 is 12%. According to the CAPM: - Suppose you consider buying a share of stock at a price of $40. the stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock has been evaluated at β = −0.5. Is the stock overpriced or underpriced?

a) underpriced Fair rate of return: E (r ) = 4% − 0.5(12%-4%) = 0 Expected rate of return: E(r) = ((41+3)/40) − 1 = 0.10 = 10% since E(r) is over fair rate (0) it is under priced

You are bullish (i.e., expect price to go up in future) on Telecom stock. The current market price is $50 per share, and you have $10,000 of your own to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year?

a). 20% 20,000 + (.1*20,000)=22,000 22,000-20,000=2,000 2,000/10,000=20%

a. Assume that you manage a risky portfolio with an expected rate of return of 20% and a standard deviation of 25%. The T-bill rate is 7%. Suppose that you have a client that prefers to invest in your risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have an expected rate of return of 15%. (1) What is the investment proportion, y? (2.) What is the standard deviation of the rate of return on your client's portfolio?

a. 15.38% .15=.2y+.07(1-y) solve for y (y)(.25)=.1538

Stocks A and B have the following returns in each of the states given below: good/bad/ugly a 10% -1% -10% b 2% 0% -3% The probability of the good state is 0.4, the probability of the bad state is 0.3 and the probability of the ugly state is 0.3. What is the covariance between the returns of A and B?

a. 17.07 E(ra)= (.4*.1) + (.3*-.01) +(.3*-.1)=.007 E(rb)= (.4*.02) + (.3*0) +(.3* -.03)=-.001 cov= .4(.1-.007) * (.02+.001) + .3(-.01-.007) * (0+.001) + .3(-.1-.007) * (-.3 + .001). =

You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information. b. What is the maximum fee your broker could charge and still leave you as well off as if you had invested in the passive market fund? (Assume that the fee would be a percentage of the investment in the broker's fund, and would be deducted at the end of the year.)

a. 5.25% (16-7-x)/20 solve for x

a. The expected rates of return for stocks A and B are 28% and 22% respectively. The T-bill rate is 12% and the expected rate of return on S&P 500 index is 24%. The standard deviation of stock A is 22% while that of B is 20%. If you could invest only in T-bills plus one of these stocks, which stock would you choose?

a. Sharpe ratio A a) (28-12)/22 = .7273 b) (22-12)/20 = .5 pick highest #

Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%. a) Assume that the correlation between Stocks and Gold is -0.5. Find the weights wS and wG of the efficient risky portfolio which is invested in Stocks and Gold and which has an expected return of 15%.

a. wS=0.625, wG=0.375 0.15=wS*0.18+(1-wS)*0.1 solve for ws 1-ws= wg 1-.625=.375

3. Active trading in markets and competition among securities analysts helps ensure that __________. I. security prices approach informational efficiency II. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities

all the above

What would be the profit or loss per share of stock to an investor who bought - the October 2015 expiration Apple call option with the exercise price of $100, if the stock price at the expiration of the option is $120? The premium paid to buy the option is equal to 3 dollars.

b) Call: Profit = Payoff of the option - Price of the option = 20 - 3 = 17

18. Which of the following statements on common stocks is not true: a) Common stocks represent ownership shares in a corporation. b) Common stocks are residual claims: stockholders are the last in line of all those who have a claim on the assets and income of the corporation. c) Common stocks can receive payments in the form of cash dividends. d) Common shares are always traded in electronic exchanges.

d) Common shares are always traded in electronic exchanges.

What is not a debt security? a) International bond b) Certificate of Deposit c) Commercial paper d) Depositary receipt

d) Depositary receipt

Convertible bond:

gives the bondholders option to convert the bonds into a pre-specified number of shares of stock

Federal Funds Rate

lending rate between banks to maintain the minimum deposit with the Federal Reserve Bank.

Consider the three stocks in the following table. Based on this information, compute the following: Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t=1). p0/q0/p1/q1 a. 150 100 190 100 b. 80 200 90 200 c. 250 200 220 200

price weighted index: .0416 p0: (150+80+250)/3=160 p1:(190+90+220)/3=166.66 r: (166.66-160)/160=.0416

Consider the three stocks in the following table. Based on this information, compute the following: Calculate the rate of return on a value-weighted index of the three stocks for the first period (t=0 to t=1). Note: The subscripts 0, and 1 indicate time t = 0 and t = 1 respectively. P indicates price and Q indicates quantity (number of shares) p0/q0/p1/q1 a. 150 100 190 100 b. 80 200 90 200 c. 250 200 220 200

weighted value index= 0% weight: wa: (150*100)/(150*100)+(80*200)+(250*200)=.1852 wb: (80*200)/81000=.1975 wc:(250*200)/81000=.6173 returns: ra=(190-150)/150=.2667 rb=(90-80)/80=.125 rc=(220-250)/250=-.12 portfolio returns: (.1852*.2667)+(.1975*.125)+(.6173*-.12)

You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information. a. What is the slope of the Capital Market Line? What is the slope of the Capital Allocation Line offered by your broker's fund?

slope of CML= (10-7)/16 = .1875 slope of CAL= (16-7)/20=.45

Based on the information given for the three stocks, calculate the first-period net return (from t = 0 to t = 1) on b. an equally-weighted index. stock a 70 200. 72 200 stock b 85 500. 81 500 stock c 105 300. 98 300

step 1 find returns: ra=(72-70)/70=.0286 rb=-.0471 rc=-.06667 step 2 divide by number of stocks: (.0286+(-.0471)+(-.06667))/3