Finance 469 Exam 1
I and III only
Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000 II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes.
Financial Assets
Claims on real assets or real asset income
investment
Commitment of current resources in the expectation of deriving greater resources in the future.
D) $40.25 or less Explanation: In this case, the specialist would have the option of matching the buy order with the lowest limit sell order ($40.25) or setting an ask price lower than $40.25 ($40 for example) and trading the order from her own stock
Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? Limit Buy Orders Limit Sell Orders Price Shares Price Shares $39.75 100 $40.25 100 $39.50 100 $40.50 100 A) $39.75 B) $40.25 C) $40.375 D) $40.25 or less
I, II, and III
Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds
8.74% Explanation: Real rate=(1.12/1.03)-1=8.74%
If you are promised a nominal rate 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?
C) calculate three covariances
If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A) calculate two covariances and one trivariance B) calculate only two covariances C) calculate three covariances D) average the variances of the individual stocks
D) securities issued by firms in a particular industry
Specialized-sector funds concentrate their investments in _________. A) bonds of a particular maturity B) geographic segments of the real estate market C) government securities D) securities issued by firms in a particular industry
Class B Explanation: Assume $100 is invested Class A: Investment after load = $100-.05($100) = $95 After 4 yrs. = $95(1.10^4) = $95*1.4641 = $139.09 Class B: Rate of Return after 12b-1 fee = 10% - 1% = 9% After 4 yrs. = $100(1.09^4) = $100*1.4116 = $141.16 Class B is better choice
The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.
6% Explanation: APR = .5%*12 = 6%
The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?
-6.44% Explanation: Nominal return on stock: (50+3)/55-1=-3.64% Real return: (1+R)=(1+r)(1+i) 1+r=(1-.0364)/(1.03)=.935 R=.935-1=-.0644
The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return of the year?
B) all of the options
The systemic risk that led to the financial crisis pf 2008 was increased by _______. A) collateralized debt obligations B) all of the options C) credit default swaps D) subprime mortgages
D) $9,878.50 Explanation: $9,878.50 = $10,000 x [1- (.0486x90)/260]
A T-bill quote sheet has a 90-day T-bill quotes with a 4.86% bank discount rate (in other words 4.86 bid). If the bill has a $10,000 face value, an investor could buy this bill for _______. A) $10,000 B) $9,880.16 C) $9,877 D) $9,878.50
.42 Explanation: (15-4.5)/25=0.42
A portfolio with a 25% standard deviation generated a return of 15% when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of _______.
real estate
According to "Flow of Funds Accounts of the United States", the largest single asset of U.S. households is ____________
identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.
12%, 15.7% Explanation: σrp=.70(.05)^½ = 15.7%
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.
40% Explanation: W(B)=[(.20)²-(.30)(.20)(-1)]/[(.30)²+(.20)²-2(.30)(.20)(-1)]=.40
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 _________.
negatively correlated
Diversification is most effective when security returns are ___________.
D) allow most participants to routinely earn high returns with low risk
Financial markets allow for all but which one of the following? A) channel funds from lenders of funds to borrowers of funds B) shift consumption through time from higher-income periods to lower C) price securities according to their riskiness D) allow most participants to routinely earn high returns with low risk
D) None of these options (With a correlation of 1, no risk will be reduced.)
Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A) Market risk B) Unique risk C) Unsystematic risk D) None of these options
I, II, and III
Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return
less than 1
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.
I, II, and III
The cost of buying and selling stock includes: I. Broker's commissions II. Dealer's bid-ask spread III. Price concessions that investors may be forced to make
9.7% Explanation: [(1+-.12)(1+.20)(1+.25)]^(1/3)-1=9.70%
The geometric average of -12%, 20%, and 25% is ____________.
III and IV only
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.
book building
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ___________.
portfolio turnover
The ratio of trading activity of a portfolio to the assets of the portfolio is called the __________.
-.0020 Explanation: Covariance=-.50(.10)(.04)=-.0020
The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.
I, II, and III
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities
8.62% Explanation: ln [1 + .09] = 8.62%
You have an EAR of 9%. The equivalent APR with continuous compounding is ________.
$10,000
You short-sell 200 shares of Tucker Trading Co., now selling for $50 per share. What is your maximum possible gain?
5.14% Explanation: E(rp) = (.4)(15%) + (.5)(10%) + (.10)(-3%) = 10.7% σrp = .4(.15-.107)²+.5(.10-.107)²+.10(-.03-.107)² σrp=5.14%
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?
C) Real, financial
______ assets generate net income to the economy, and ______ assets define allocation of income among investors. A) Real, real B) Financial, financial C) Real, financial D) Financial, real
B) A share of common stock
__________ is not a derivative security. A) None of the options. (They're all derivatives) B) A share of common stock C) A call option D) A futures
B) Open-end investment companies
___________ are often called mutual funds A) Unit investment trusts B) Open-end investment companies C) Closed-end investment companies D) REITs
C) Open-end
___________ funds stand ready to redeem or issue shares at their net asset value (NAV) A) Closed-end B) Index C) Open-end D) Hedge
I, II, and III
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.
up, left
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the _______.
D) Guaranteed rates of return
Advantages of investment companies to investors include all but which of the following? A) Record keeping and administration B) Low-cost diversification C) Professional management D) Guaranteed rates of return
11.32% Explanation: (1.10)(1.15)(1-.12) - 1 = 11.32%
An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the three years was _________.
underpriced
Initial public offerings (IPOs) are usually _________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.
D) Unique risk
Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A) Market risk B) Nondiversifiable risk C) Systematic risk D) Unique risk
C) sell their shares on the open market
Investors who want to liquidate their holdings in a closed-end fund may: A) sell their shares back to the fund at a discount if they wish B) sell their shares back to the fund at net asset value (NAV) C) sell their shares on the open market D) sell their shares at a premium to net asset value if they wish
balanced funds
Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called __________.
D) good, bad
According to multiple studies by Ritter, initial public offerings tend to exhibit ____ performance initially and ________ performance over the long term. A) bad, good B) bad, bad C) good, good D) good, bad
0% Explanation: W(A)=[(.18-.10)(.05)²-(.14-.10)(.05)(.20)(.50)]/[(.18-.10)(.05)²+(.14-.10)(.20)²-(.18-.10+.14-.10)(.05)(.20)(.5)] W(A)=0
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 _________.
21.4% Explanation: W(B)=[(.14-.05)(.39²)-(.21-.05)(.20)(.39)(.4)]/[(.14-.05)(.39²)+(.21-.05)(.20²)-(.14-.05+.21-.05)(.20)(.39)(.4)] W(B)=71% and W(A)=29% σ²(rp)=(.29²)(.39²)+(.71²)(.20²)+2(.29)(.71)(.39)(.20).4 σ²(rp)=.045804 σ(rp)=21.4%
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 the returns on the optimal risky portfolio is _________.
C) optimal mix of the risk-free asset and risky asset
An investor's degree of risk aversion will determine his or her _________. A) optimal risky portfolio B) risk-free rate C) optimal mix of the risk-free asset and risky asset D) capital allocation line
market order
An order to buy or sell a security at the current price is a ________
Asset A
Asset A has an expected rate of 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 ___________.
$9 Explanation: NAV = (assets - liabilities)/shares outstanding = ($500-$50)/50 = $9
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?
$8,000
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 ________.
stock's standard deviation
If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.
C) stop-loss, stop-buy
If an investor places a ________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a _______ order, the stock will be bought if its price rises above the stipulated level. A) stop-buy, stop-loss B) market, limit C) stop-loss, stop-buy D) limit, market
48% Explanation: Loss = (22-25)*100 = -$300 Amount invested = .25*$25*100 = $625 Return = -$300/$625 = -48%
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?
B) -.9
Which of the following correlation coefficients will produce the most diversification benefits? A) -.6 B) -.9 C) 0 D) .4
$62.50 Explanation: Amount received from short sale = 200*$50 = $10,000 Loss = $2,500 = 200p - 10,000 $12,500 = 200p p = $12,500/200 = $62.50
You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at _________.
Unlimited
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
.583 Explanation: .0380=(.62)(.242)+(.42)(.182)+2(.6)(.4)(.24)(.18)ρ ρ=.583
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.
73% Explanation: E(rp)=(.60)(1)+(.40)(-.5)=.40 σ²(rp)=(.60)(1-.40)²+(.40)(-.5-.40)²=.54 σ(rp)=.73
A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?
23.83% Explanation: Value of stock + Dividends received - Interest due - loan payoff = Ending account balance Value of stock = $23*($16,000/$20) = $18,400 Dividends received = $0.50*($16,000/$20) = $400 Interest due = .08*[$16,000(1-.60)] = $512 loan payoff = $16,000*(1-0.60) = $6,400 Return = [(18,400+400-512-6,400)-($16,000*0.60)]/($16,000*0.60) = 0.2383
An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?
$30.29 Explanation: A margin call will occur if Equity/Market value = .30 or less. Equity = Market value - margin loan - interest payable Market value = Price per share (p)* # of shares Shares = $8,000/$40 = 200 shares Margin loan = 50%*$8,000 = $4,000 Interest payable = 6%*$4,000 = $240 30%=(200p - $4,000 - $240)/200p 200p*30% = 60p = 200p - $4,240 $4,240 = 200p - 60p = 140p p = $4,240/140 = $30.29
An investor buys $8,000 worth of stock priced at $40 per share using a 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 _______.
14% Explanation: W(a)=[(.18-.10)(.05)²-(.14-.10)(.05)(.20)(.50)]/[(.18-.10)(.05)²+(.14-.10)(.20)²-(.18-.10+.14-.10)(.05)(.20)(.5)] W(a) = 0 E(rp) = 1(.14) = .1400 Since W(A) = 0 and W(B) = 1, the risky portfolio's expected return is the same as asset B's expected return.
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 expected return on the optimal risky portfolio is _________.
security A Explanation: A has the steepest slope, found as: Slope=(.15-.05)/(.04)^.5 = .5000
Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be __________.
D) a real estate brokerage firm
Which of the following is not a financial intermediary? A) an insurance company B) a credit union C) a mutual fund D) a real estate brokerage firm
I, III, II, IV
Rank the following from the highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills
D) common stock
Real assets in the economy include all but which one of the following? A) buildings B) land C) consumer durables D) common stock
13.17% Explanation: [10,000/9400]^(12/6) - 1 = 13.17%
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?
A) reduces capital requirements for banks
The Dodd-Frank Reform Act does all of the following except: A) reduces capital requirements for banks B) requires public companies to set "claw-back" provisions C) creates an office within the SEC to oversee credit rating agencies D) increases transparency in the derivatives market E) limits the risk-taking in which banks can engage
D) Required that firms could no longer employ investment bankers to sell securities to the public.
The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A) Required that corporations have more independent directors B) Required that the CFO personally vouch for the corporation's financial statements. C) Required the creation of a new board to oversee the auditing of public companies. D) Required that firms could no longer employ investment bankers to sell securities to the public.
C) highest; steepest
The _________ reward-to-variability ratio is found on the ________ capital market line. A) lowest; steepest B) highest; flattest C) highest; steepest D) lowest; flattest
11.5%
The historical average rate of return on large company stocks since 1926 has been _______.
12b-1 charges
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ___________.
9.7% Explanation: σ-√[(.40)²(.18)²+(.60)²(.14)²+.2(-.23)(.18)(.14)(.40)(.60)]=.097
What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.
B) maturity greater than 1 year
Which of the following is not a characteristic of a money market instrument? A) low risk B) maturity greater than 1 year C) marketability D) liquidity
II and III only
Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.
B) Variance
Which of the following statistics cannot be negative? A) Covariance B) Variance C) E(r) D) Correlation coefficient
C) Average return
Which of the following stock return statistics fluctuates the most over time? A) Covariance of returns B) Variance of returns C) Average return D) Correlation coefficient
D) U.S. T-bill whose return was indexed to inflation
Which of the following would be considered a risk-free asset in real terms as opposed to nominal? A) Money market fund B) U.S. T-bill C) Short-term corporate bonds D) U.S. T-bill whose return was indexed to inflation
B) A municipal bond is a debt obligation issued by the federal government.
Which one of the following is not a true statement regarding municipal bonds? A) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. B) A municipal bond is a debt obligation issued by the federal government. C) A municipal bond is a debt obligation issued by state or local governments. D) The interest income from a municipal bond is exempt from federal income taxation.
I and III only
Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk
I, II, and III
You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio
40%, 24%, 16% Explanation: E(rp) = .6(14) + .4(10) = 12.4% .08=W(rp)(.124)+(1-W(rp))(.05) W(rp)≈40% W(x) in complete portfolio=.40(.60)=24% W(y) in complete portfolio=.40(.40)=16%
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 two 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 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately _________ in the risky portfolio. This will mean you will also invest approximately ___________ and __________ of your complete portfolio in security X and Y, respectively.
B) front-end load, 12b-1 fee
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a _____________, everything else equal. A) 12b-1 fee, front-end load B) front-end load, 12b-1 fee C) back-end load, front-end load D) 12b-1 fee, back-end load
3.12 Explanation: The Sharpe ration grows at a rate of S(1)√(T) so the 3-year Sharpe ration would be 1.8×√(3)= 3.12.
You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.
D) borrow $375,00 Explanation: y*.16 + (1 - y)*.08 = .22 .16y - .08y + .08 = .22 .08y = .14 y = 1.75 Put 1.75 * $500,000 = $875,000 in the risky asset by borrowing $375,000
You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should ___________. A) invest $125,000 in the risk-free asset B) invest $375,000 in the risk-free asset C) borrow $125,000 D) borrow $375,000
arithmetic average return
You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by _________.
.74% Explanation: [(-50*100)/(1+IRR)⁰]+[(-55*50)/(1+IRR)¹]+[(75*51)/(1+IRR)²]+[(54*75)/(1+IRR)³]=.74%
You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year Beginning of #of shares Year Price bought/sold 2008 $50.00 100 bought 2009 $55.00 50 bought 2010 $51.00 75 sold 2011 $54.00 75 sold What is the dollar weighted return over the entire time period?
2.6% Explanation: yr 1: (55-50)/50=10% yr 2: (51-55)/55=-7.27% yr 3: (54-51)/51=5.88% [(1.10)(1+-.0727)(1.0588)]^(1/3)-1=2.60%
You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year Beginning of #of shares Year Price bought/sold 2008 $50.00 100 bought 2009 $55.00 50 bought 2010 $51.00 75 sold 2011 $54.00 75 sold What is the geometric average return for the period?
$1,785.56 Explanation: $1,000(1.3523)(1.1867)(1 - .0987)(1.2345) = $1,785.56
You have the following rates of return for a risky portfolio for several recent years: 2008 35.23% 2009 18.67% 2010 -9.87% 2011 23.45% If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be _________.
45% Explanation: σ(c)=y*σ(p) 9%=y*20% y=9/20=45%
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%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.
Stop-loss order
You purchased XYZ stock at $50 per share. The stock price is currently selling at $65. Your gains could be protected by placing a _____________.
4.31% Explanation: (28+2.25-29)/29=4.31%
You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was __________.
C) more than 12% but less than 18% Explanation: σ²(p)=(.5²)(.24²)+(.5²)(.12²)+2(.5)(.5)(.24)(.12)(.55) σ²(p)=0.02592 σ=16.1%
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 ________________.
$28.85 Explanation: Margin call if Equity/Market Value = .3 or less Equity = Market value at short sale + Initial Margin - Market Value Market Value at Sale = $25*200 = $5000 Initial Margin = $5,000*50% = $2,500 Market value = 200p 30% = ($7,500 - 200p)/200p 200p*30% = 60p = $7,500 - 200p 200p + 60p = 260p = $7,500 p = $7,500/260 = $28.85
You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post a 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay dividends.)
9.2% Explanation: (.2)(30%) + (.5)(10%) + (.3)(-6%) = 9.2%
Your investment has a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?
A) An SPDR or spider
___________ is an example of an exchange-traded fund. A) An SPDR or spider B) A samurai C) A Vanguard D) An open-end fund
common stock
___________ represents an ownership share in a corporation.
Stop-buy orders
_____________ often accompany short sales and are used to limit potential losses from the short position.
