fin 401 investments final

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________.

$35.71 Equity = 200P - 5,000 Margin = (200P - 5,000)/200P = .30 200P - 5,000 = 60P 140P = 5,000 P = 35.71429

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

$4,500 Investment = 300(30)(.50) = 4,500

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

$9 NAV = ($500 - $50)/50 = $9

Which of the following correlation coefficients will produce the most diversification benefits?

-.9

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.

.42 15-4.5/25=.42

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 Slope = (16 - 6)/20 = .50

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

.60 Correlation = .0030/[.10(.05)] = .60

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.

0% WA = (.18 - .10)(.05)2 - (.14 - .10)(.05)(.20)(.50) / (.18 - .10)(.05)2 + (.14 - .10)(.20)2 - (.18 - .10 + .14 - .10)(.05)(.20)(.5) WA = 0 Since the numerator equals zero, WA = 0 without any further calculations.

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

1 Market beta always equals 1 regardless of market volatility.

You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

1.048 (20/50 ) (1. 3) + ( 12/50)(1. 0) + ( 18/50)(0. 8) = 1. 048

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%?

1.2 17% = 5% + βs [15% - 5%]; βs = 1.2

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively.

12%; 15.7% E(rp ) =. 7(. 15)+. 3(. 05) = 12% σ(rp ) =. 70(. 05) = 15. 7%

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

13.17% (10,000/9,400)^12/6 -1 = 13.7

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)

16% WB = (.14 - .05)(.392 ) - (.21 - .05)(.20)(.39)(.4) / (.14 - .05)(.392 )+ (.21 - .05)(.202 ) - (.14 - .05 + .21 - .05)(.20)(.39)(.4) WB = 71% and WA = 29% E[rp] = (.29)(.21) + (.71)(.14) = 16.03%

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% E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.

16.25% σc = y × σp =. 25 σc = y×. 20 =. 25 y = .25/.20 = 1.25 1 − y = −.25 E(rc) = 1.25 × 15% − .25 × 10% = 16.25%

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% (if need help look at hw 3 q 10)

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is _________.

21.4% WB = (.14 - .05)(.392 ) - (.21 - .05)(.20)(.39)(.4) / (.14 - .05)(.392 )+ (.21 - .05)(.202 ) - (.14 - .05 + .21 - .05)(.20)(.39)(.4) WB = 71% and WA = 29% σ 2 rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4 σ 2 rp = .045804 σrp = 21.4%

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

21.6% E[rs ] = 6% + 1.3[18% - 6%] = 21.6%

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

23.75% NAV0 = $200/10 = $20.00 NAV1 = [$250 - ($250 × .01)]/11 = $22.50 Gross return = ($22.50 - $20 + $2 + $.25)/$20 = 23.75%

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% α =. 12 − [. 05 + 1. 1(. 08−. 05)] =. 037

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.

40% WB = (.20)2 - (.30)(.20)(-1)/(.30)2 + (.20)2 - 2(.30)(.20)(-1) = .40

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

48% Loss = (22−25)100 $ (300) Amount invested = 0.25 × $25 × 100 $ 625 Return = −$300/$625 -48%

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his aftertax rates of return on the municipal and corporate bonds would be, respectively, _____.

5% and 5.44% After-tax return on municipal bond = 0.05 = 5% After-tax return on corporate bond = 0.064(1 - 0.15) = 0.0544 = 5.44%

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

5.14% E(rp) = (.4)(15%) + (.5)(10%) + (.10)(−3%) = 10.7% σ(rp) = .4(.15 − .107) 2 + .5(.10 − .107) 2 + .10(−.03 − .107) 2 σ(rp) = 5.14%

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

8.74% Real rate = (1.12/1.03) - 1 = 8.74%

The geometric average of -12%, 20%, and 25% is _________.

9.7% [(1 + -.12)(1 + .20)(1 + .25)]1/3 - 1 = 9.70%

__________ are examples of financial intermediaries.

A. Commercial banks B. Insurance companies C.Investment companies D. All of the options

Which of the following is an example of an agency problem? Managers engage in empire building. Managers protect their jobs by avoiding risky projects. Managers overconsume luxuries such as corporate jets. All of the options are examples of agency problems.

All of the options are examples of agency problems.

_____ is an example of an exchange-traded fund.

An SPDR or spider

__________ is the return on a stock beyond what would be predicted from market movements alone.

An abnormal return

______ is (are) real assets.

Bonds -->Production equipment Stocks Life insurance

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index

I and II only

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

I and II only

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.

I, II, III, and IV

An example of a real asset is: I. A college education II. Customer goodwill III. A patent

I, II, and III

Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers

I, II, and III

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I, II, and III

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III.The Wilshire 5000

I, II, and III

Which of the following result in a taxable event for investors? I. Short-term capital gain distributions from the fund II. Dividend distributions from the fund III. Long-term capital gain distributions from the fund

I, II, and III

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

Which of the following is not an example of a financial intermediary? Goldman Sachs Allstate Insurance First Interstate Bank IBM

IBM

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

III and IV only

Which one of the following statements about IPOs is not true? IPOs generally have been poor long-term investments. IPOs often provide very good initial returns to investors. IPOs generally provide superior long-term performance as compared to other stocks. Shares in IPOs are often primarily allocated to institutional investors.

IPOs generally provide superior long-term performance as compared to other stocks.

Which of the following would violate the efficient market hypothesis?

Investors earn abnormal returns months after a firm announces surprise earnings.

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks.

____ assets generate net income to the economy, and __________ assets define allocation of income among investors.

Real, financial

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

SML

The most marketable money market security is _____.

Treasury bills

_____ is a mechanism for mitigating potential agency problems.

Tying income of managers to success of the firm

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

U.S. T-bill whose return was indexed to inflation

A fund that invests in securities worldwide, including the United States, is called ______.

a global fund

According to the capital asset pricing model, in equilibrium _________.

all securities' returns must lie on the security market line

The type of mutual fund that primarily engages in market timing is called _______.

an asset allocation fund

The ______ measure of returns ignores compounding

arithmetic average

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 ______.

asset A

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

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

buying the bill at a discount from the face value to be received at maturity

The systemic risk that led to the financial crisis of 2008 was increased by _____ .

collateralized debt obligations subprime mortgages credit default swaps --->all of the options

Mutual funds provide the following for their shareholders

diversification professional management record keeping and administration --->all of these options

The Fama and French evidence that high book-to-market firms outperform low bookto-market firms even after adjusting for beta means that _________.

either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

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

expected returns to fall; risk premiums to fall

When the market risk premium rises, stock prices will ______.

fall

Which of the following funds invest specifically in stocks of fast-growing companies?

growth equity funds

Advantages of investment companies to investors include all but which one of the following?

guaranteed rates of return

If all investors become more risk averse, the SML will _______________ and stock prices will _______________.

have the same intercept with a steeper slope; fall

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

hedge fund

The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

higher; lower

Purchases of new issues of stock take place _________.

in the primary market

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund.

index

Which type of fund generally has the lowest average expense ratio?

indexed funds

Underwriting is one of the services provided by _____.

investment bankers

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

investment banks

Most tests of semistrong efficiency are _________.

joint tests of market efficiency and the risk-adjustment measure

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes?

large U.S. stocks

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

large well-known companies

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.

more than 12% but less than 18% σ 2 p = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%

Diversification is most effective when security returns are _________.

negatively correlated

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.

net asset value

Market signals will help to allocate capital efficiently only if investors are acting _____ .

on accurate information

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

optimal mix of the risk-free asset and risky asset

According to the capital asset pricing model, a security with a _________.

positive alpha is considered underpriced

Market anomaly refers to _______.

price behavior that differs from the behavior predicted by the efficient market hypothesis

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

real; financial

A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________.

securitization

Investors who want to liquidate their holdings in a closed-end fund may __________________.

sell their shares on the open market

Financial markets allow for all but which one of the following

shift consumption through time from higher-income periods to lower price securities according to their riskiness channel funds from lenders of funds to borrowers of funds --->allow most participants to routinely earn high returns with low risk

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________.

small firms are riskier than large firms

The term random walk is used in investments to refer to ______________.

stock price changes that are random and unpredictable

If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.

the NAV calculated at the market close at 4 pm New York time

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

the returns on the stock and bond portfolios tend to vary independently of each other

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

the risk-free asset combined with at least one risky asset

The reward-to-volatility ratio is given by _________.

the slope of the capital allocation line

Risk that can be eliminated through diversification is called ______ risk.

unique firm-specific diversifiable --->all of these options

Which of the following is not a type of managed investment company?

unit investment trusts

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

unlimited

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.

use a passive trading strategy such as purchasing an index fund or an ETF

Which of the following statistics cannot be negative?

variance

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

varying risk premiums

According to the capital asset pricing model, fairly priced securities have _________.

zero alphas