FINA 4310 Final Exam Homework Review

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ________ on the investment. $300 profit $200 profit $600 loss $200 loss

$300 profit

You manage a hedge fund with $100 million in assets. Your fee structure provides for a 2% annual management fee with a 20% incentive fee on returns over a 5% benchmark. Incentive fee is paid on returns before consideration of the management fee. If the gross NAV at the end of the 1st year is $130 million and at the end of the second year gross NAV is $140 million, what are total fees paid for year 2? $4.63mln $2.36mln $4.11mln $5.68mln

$4.63mln

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund? 15.05% 17.25% 15.5% 18%

15.05% 250,000,000*1.18 = 295,000,000 .025*295,000,000 = 7,375,000 (295-7.375-250)/(250) = 15.05%

In 1973, trading of standardized options on a national exchange started on the ________. CBOE AMEX NYSE CFTC

CBOE

Find the Closed-end fund JFR (ticker XJFRX) issued by Nuveen. This fund investes in: U.S. growth stocks Adjustable-rate debt Emerging market small-cap China growth

Adjustable-rate debt

Mutual fund returns may be granted pass-through status if ________. All of these options (All of the answers must be true for pass-through status to be granted.) the fund is sufficiently diversified virtually all income is distributed to shareholders the fund qualifies for pass-through status according to the U.S. tax code

All of these options (All of the answers must be true for pass-through status to be granted.)

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ________. index funds asset allocation funds income funds balanced funds

balanced funds

Which type of fund is often priced at a significant discount to net asset value? closed-end fund ETF hedge fund open-end fund

closed-end fund

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ________. a long-short equity hedge convergence play statistical arbitrage pairs trading

convergence play

You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ________. $12,000 $1,000 $120 $11,000

$11,000 Profit = 100(120 - 10) = 11,000

An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? $14.57 $17.55 $16.49 $15.95

$17.55 $16.50/(1-.06) = $17.55

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment. $200 profit $300 profit $200 loss $300 loss

$200 loss

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor? $25 $27.86 $24.15 $25.87

$24.15 Breakeven = 25 - 0.85 = 24.15

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock. 100 1 10 1,000

100

You manage a hedge fund with $300 million in assets. Your fee structure provides for a 1% annual management fee with a 20% incentive on returns over a 12% benchmark. If the fund value, before fees, is $345 million at the end of the year, what is the net return to the investors? 13.40% 14.00% 14.42% 13.33%

13.40% $300,000,000 x 0.01= $3,000,000 $300 million x .12 = $36 million (345 - 300) - 36 = $9 mil x .20 = $1.8 million Total Fee = $3 million + $1.8 million = $4.8 million Investor value at end of year = $345 million - $4.8 million = $340.2 million Net return = 40.2 / 300 = .134 or 13.4%

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250/point. What is the expected quarterly return on the hedged portfolio? 0% 2% 4% 3%

4% E(rp) = E[rf + β(rM - rf) + e + α] = rf+ α = 2% + 2%

You pay $21,600 to the Laramie Fund, which has an NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? 4.23% 4.35% 6.45% 5.63%

4.23% [(21600)(1-.04)(1+.10)(1-.013)]/21600 = 4.23%

Find the Closed-end fund JFR (ticker XJFRX) issued by Nuveen. At its inception, this fund had an NAV of $14.33 per share and was sold to investors for $15 per share. In other words, shares were offered at a premuim of _____ to NAV 4.67% 3% 4.12% 5.1%

4.67% (15-14.33)/14.33 = 4.67%

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250/point. How many S&P 500 contracts do you need to sell to hedge your portfolio? 35 50 60 25

60 [15,000,000/((1200)(250))]*1.2

You have $10,000 to invest in an open-end mutual fund. You need to choose between two share classes, A and C. Assume annual returns of 10% before fees on the underlying fund. Share class A: 4% front load and total expense ratio of 0.30% Share class C: no load and total expense ratio of 0.95% After how many years minimum holding period do class A shares result in a higher HPR? 7 5 9 10

7

You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? 7.45% 7.25% 7.85% 7.1%

7.85% r > .065 + .006 + .0075 = .0785 = 7.85%

You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? 8.19% 7.23% 5.35% 10%

8.19% [((216,000)(0.96)(1.15)(1-.02))/216,000]-1 = 8.19%

Style analysis for hedge funds does not entail which of the following? Analyzing past returns on Fund-of-Funds to determine which underlying funds have contributed most to the overall performance of the fund-of-fund. Determination of factor loadings from past returns for Hedge Funds. Regressing hedge fund returns against a number of systematic risk factors to determine which factor has statistically significant impact. Determining whether or not a fund's stated style is consistent with its systematic risk exposure as expressed by past returns.

Analyzing past returns on Fund-of-Funds to determine which underlying funds have contributed most to the overall performance of the fund-of-fund.

Which of the following is a false statement regarding open-end mutual funds? They offer investors a guaranteed rate of return. They redeem shares at their net asset value. They offer investors a well-diversified portfolio. They offer low-cost diversification.

They offer investors a guaranteed rate of return

The value of an option is always equal to the sum of its intrinsic- and its time value. True/False?

True

A restriction under which investors cannot withdraw their funds for as long as several months or years is called ________. convertible arbitrage a back-end load a lock-up period transparency

a lock-up period

The writer of a put option ________. has the right to sell shares at a set price has the right to buy shares at a set price agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

Mutual funds provide the following for their shareholders. diversification professional management all of these options record keeping and administration

all of these options

The difference between balanced funds and asset allocation funds is that ________. balanced funds invest in bonds while asset allocation funds do not balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds asset allocation funds invest in bonds while balanced funds do not

balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

The maximum loss a buyer of a stock call option can suffer is the ________. call premium strike price minus the stock price stock price minus the value of the call stock price

call premium

What strategy could be considered insurance for an investment in a portfolio of stocks? protective put covered call straddle short put

protective put

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________. short stroll long straddle protective put naked put

protective put

Investors who want to liquidate their holdings in a unit investment trust may ________. sell their shares back to the trustee at a discount sell their shares at a premium to net asset value sell their shares on the open market sell their shares back to the trustee at net asset value

sell their shares back to the trustee at net asset value

Investors who want to liquidate their holdings in a closed-end fund may ________. sell their shares back to the fund at net asset value sell their shares back to the fund at a discount if they wish sell their shares at a premium to net asset value if they wish sell their shares on the open market

sell their shares on the open market

Exchange-traded stock options expire on the ________ of the expiration month. second Monday second Thursday third Wednesday third Friday

third Friday

Which one of the following invests in a portfolio that is fixed for the life of the fund? mutual fund money market fund unit investment trust managed investment company

unit investment trust

Which of the following are not managed investment companies? closed-end funds unit investment trusts open-end funds hedge funds

unit investment trusts

The potential loss for a writer of a naked call option on a stock is ________. larger the lower the stock price equal to the call premium limited unlimited

unlimited

Hedge funds tend to produce excess returns during calm periods in the market because their strategy, on average, is akin to: writing insurance against tail risk in return for a premium selling call options on the S&P500 buying insurance against huge market swings none of the above

writing insurance against tail risk in return for a premium

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. Class A. There is no difference. The answer cannot be determined from the information given. Class B.

Class B Assume $100 is invested. Class A: Investment after load = $100 - .05($100) = $95 After four years = $95(1.10^4) = $95 × 1.4641 = $139.09 Class B: Rate of return after 12b-1 fee = 10% - 1% = 9% After four years = $100(1.09^4) = $100 × 1.4116 = $141.16 Class B is the better choice.

Which one of the statements about margin requirements on option positions is not correct? If the required margin exceeds the posted margin, the option writer will receive a margin call. A buyer of a put or call option does not have to post margin. Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash. The margin required will be lower if the option is in the money.

Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

An American style option on a non-dividend paying stock can under certain circumstances have an early exercise value that is greater than its fair market value in the secondary market. True/False?

False

Being short a naked Put option has unlimited loss potential. True/False?

False

Which of the following typically employ significant amounts of leverage? I. Hedge funds II. REITs III. Money market funds IV. Equity mutual funds I, II, and III only III and IV only II and III only I and II only

I and II only

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 and II only I only II only I, II, and III

I, II, and III

The difference between market-neutral and long-short hedges is that market-neutral hedge funds ________. invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds invest only in equities and bonds while long-short funds use only derivatives establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market allocate money to several other funds while long-short funds do not

establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

A(n) ________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization. managed futures event-driven multi-strategy dedicated short bias

event-driven

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. back-end load; front-end load 12b-1 fee; front-end load 12b-1 fee; back-end load front-end load; 12b-1 fee

front-end load; 12b-1 fee

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is ________ than if you buy at-the-money puts and your maximum gain is ________. lower; greater lower; lower greater; greater greater; lower

greater; greater

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 commingled pool unit trust money market fund

hedge fund

Convertible arbitrage hedge funds ________. hold long positions in convertible bonds and offsetting short positions in stocks establish long and short positions in global capital markets use derivative products to hedge their short positions in convertible bonds attempt to profit from mispriced interest-sensitive securities

hold long positions in convertible bonds and offsetting short positions in stocks

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________. out of the money knocked out at the money in the money

in the money

The initial maturities of most exchange-traded options are generally ________. between 1 and 3 years less than 2 years between 1 and 2 years less than 1 year

less than 1 year

Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for ________ risk. interest rate market systematic liquidity

liquidity

You purchase a call option on a stock. The profit at contract maturity of the option position is ________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. max (C0, ST - X + C0) max (-C0, ST - X - C0) max (0, ST - X - C0) min (-C0, ST - X - C0)

max (-C0, ST - X - C0)

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, X - ST) max (0, ST - X) min (0, X - ST) min (0, ST - X)

max (0, ST - X)

At contract maturity the value of a put option is ________, where X equals the option's strike price and ST is the stock price at contract expiration. min (0, ST - X) min (0, X - ST) max (0, X - ST) max (0, ST - X)

max (0, X - ST)

The NAV of which funds is fixed at $1 per share? fixed-income funds equity funds money market funds commingled funds

money market funds

The primary measurement unit used for assessing the value of one's stake in an investment company is ________. gross asset value net asset value average asset value total asset value

net asset value