Investment Management Exam #2

According to the CAPM, what is the expected rate of return for a stock w a beta of 1.2 when the risk-free rate is 6% and the market rate of return is 12%?

13.2%

What is the unemployment rate at?

5.1%

What is the number of UIT and how much assets are under management

5000 and 100 billion

What is the number of close end funds and how much assets are under management

600 and 300 trillion

What is the participation rate

62.4%

An investor put 60% of his portfolio into a risky asset offering a 10% return w a std. dev. of returns of 8% and put the balance of his portfolio in a risk-free asset offering 5%. What is the expected return and std. dev. of his portfolio?

8% and 4.8%

What is the number of mutual funds and how much assets are under management

8000 and 16 trillion

A long time horizon and low liquidity requirements best describe the investment needs of an a) endowment b) insurance company c) bank

A

In a defined contribution pension plan: a) employee accepts the investment risk b)the plan sponsor promises a predetermined retirement income to participants c) plan manager attempts to match fund's assets to liabilities

A

What is the number of ETF and how much assets are under management

1500 and 2 trillion $

When did SPY begin

1993

The covariance of the market's returns w a stock's returns is .005 and the std. dev. of the market's return is .05. what is the stock's beta?

2

What is the standard deviation of the market?

20%

What is variance in relation to standard dev

It is the std dev squared

Covariance

the measure of how the returns of two risky assets move in relation to each other

Return on a stock given PV FV and dividend

(FV-PV+div)/PV

The variance of returns is .09 for Stock A and .04 for Stock B. The covariance between the returns of A and B is .006. What is the correlation between A and B

.10

The covariance of the market's returns with a stock return is .008. The std. dev of the market's return is .08 and the std. dev. of the stock's returns is .11. What is the correlation coefficient of the returns of the stock and the returns of the market?

.91

What are the steps to find the standard deviation?

1) find the mean annual return 2)find all of the squared devs. from the mean and sum 3) Take the variance 4) Take the square root to find the std. dev

What is the number of hedge funds and how much assets are under management

10,000 and 3 trillion

What is the portfolio std. dev if the correlation coefficient is .75 or -.75? A portfolio was created by investing 25% of the funds in Asset A (std. dev=15%) and funds in Asset B (std dev=10%).

10.6% and 5.3%

According to the CAPM, what is the required rate of return for a stock w a beta of .7 when the risk-free rate is 7% and the expected market rate of return is 14%?

11.9%

As the number of stocks in a portfolio increase the portfolio's systematic risk: A. can increase or decrease B. decreases at a decreasing rate C. Increases at an increasing rate

A, can increase or decrease

Which of the following asset classes has historically had the highest returns and std. dev.? A. small-cap stocks B. Large Cap Stocks C. Long-term corporate bonds

A. small-cap stocks have had the highest annual return and std. dev of return over time

How do you know how a stock is priced in relation to the SML?

Above

Which of the following statements about correlation are the least accurate A. diversification reduces risk when correlation is less than 1 B. If the correlation coefficient is 0, a zero variance portfolio can be constructed C. The lower the correlation coefficient, the greater the potential benefits from diversification

B, a zero variance portfolio can only be constructed if the correlation coefficient between assets is -1

Which of the following statements about risk-averse investors is most accurate? A risk averse investor: A. seeks out the investment w/ minimum risk, while return is not a major consideration B. Will take additional investment risk if sufficiently compensated for this risk C. Avoids participating in global equity markets

B, are willing to take on risky investments if thee is a sufficient return

An investor who chooses a fund of funds as an alternative to a single hedge fund is most likely to benefit from which of the following, A. lower fees B. Higher returns C. more due diligence

C

Hedge funds most likely a) have stricter reporting requirements than a typical investment firm b) hold equal values of long and short securities c) are not offered for sale to the gen. public

C

Total risk equals: A. unique plus diversifiable risk B. market plus nondiversifiable risk C. systematic plus unsystematic risk

C

Low risk tolerance and high liquidity requirements best describe the typical investment needs of a: a)defined-benefit pension plan b) foundation c) insurance company

C)

Compared to alternative investments, traditional investments tend to: A. Be less liquid B. Be less regulated C. Require lower fees

C, Trad. investments require lower fees are more regulated and more liquid

VS traditional investments what are managers of alternative investments most likely to have fewer restrictions on and why? A. holding cash B. Buying stocks C. Using Derivatives

C, Using derivatives, traditional managers can hold cash and buy stocks but may be restricted from using derivatives

What is the formula for correlation

Correlation coefficient of the returns=covariance/std dev of market*std dev of stock

Who was the speaker and what company was he from?

Drew Mason from Dillon Gage metals division

What are four examples of investment companies' funds?

Exchange-traded funds (ETFs), Unit investment trust, Closed End funds, Open end funds

Why is market not NAV?

FInd close end fund's market value at a discount b/c mutual funds have bad tax consequences because people see the potential capital gains

Private Investment Funds

Hedge funds, Private equity funds, Venture capital funds

In a 5 yr period the annual returns on an investment were 5, -3,-4, 2, and 6% the std. dev. of annual returns on this investment is?

Mean annual return=1.2% how far from mean? sum of squared devs. sample variance std. dev=4.55%

A stock with a beta of .7 currently priced at $50 is expected to increase in price to $55 by year-end and pay a $1 dividend. The expected market return 15% and the risk-free rate is 8%. The stock is:

Overpriced, so do not buy Req. rate: 12.9% Return on the stock: 12%

What is the combination line?

Return % vs risk (std dev) %

Expected/required rate of return using beta

Rf+B(Rm-Rf)

Which of the following statements about the SML and CML is least accurate? a. securities that plot above the SML are undervalued b. investors expect to be compensated for systematic risk c. securities that plot on the SML have no value to investors

Securities that plot on the SML are expected to earn their equilibrium rate of return

What is the variance formula?

Sum of all of the returns squared/T-1

Why is the market going up?

The fed is causing it to

When comparing portfolios how do you know which one might fall below the efficient frontier?

The portfolio that has a lower return but a higher risk

What is the risk measure associated w the capital market line

Total risk

Who invented the CAPM

William Sharp invented it in 1964

What does it mean when you are short beared?

YOu win when the asset is going down- if the market is down 1% then you are up 2%

How do you calculate the NAV or net asset value?

You take the value of assets in the fund and divide that by the number of shares

A portfolio to the right of the market portfolio on the CML is?

a borrowing portfolio

mean annual return formula

all of the means added and divided by the number of means

SPY

an exchange traded fund that mimics the price movement of the S&P 500

Compared to ETFs, open-end mutual funds are typically associated w/ lower

brokerage costs

Institutional investors

come in and buy a bunch of SPY and take shares to "in-kind exchange"

What is the formula for beta?

covariance/variance

Compared to investing in a single security diversification provides investors a way to:

decrease the volatility of returns

market risk premium

difference between expected return on the market and risk-free rate

How does a top-down security analysis begin?

examining economic conditions

Loads

extra fee to get in/out of an investment- financial advisors benefit from selling investments w these front end and back end

Harry Markowitz

father of modern portfolio theory

Exchange traded funds (ETF)

fund that mimics the price movement of an index or commodity

What is gold?

gold is money

How is gold affected by inflation

gold thrives during inflation because it is not correlated w cash and bonds

What will high systematic risk lead to

high return

beta of a stock

how the stock moves w the system

What do all ETFs rely on?

in kind exchange

NAV

net asset value in a mutual fund

Mutual funds

not sold on market- have NAV- buy and sell at NAV but NAV is only calculated once a day so they are not liquid - usually part of a 401-k

What kind of losses is portfolio diversification least likely to prevent against

severe market turmoil

James Tobin

suggested adding risk-free portfolio to efficient frontier and CML

how do you find total risk

systematic risk+unsystematic risk

unsystematic risk

the risk that is eliminated by diversification

systematic risk

the risk that remains and cannot be diversified away

What is a huge problem with Unit investment trusts?

they're unmanaged so you buy the stock and then don't do anything until it sells at maturity- They charge hefty management fees and are a rip off

Close end funds

trade on NYSE and NASDAQ- only way to grow is internally- growing shares isn't good when stock market goes down- trade on the market managed redeem shares by selling back to fund company have an IPO and that's it have fixed # shares

The risk-free rate is 6% and the expected market return is 15%. A stock with a beta of 1.2 is selling for $25 and will pay a $1 dividend at the end of the year. if the stock is priced at $30 at year-end it is:

underpriced, so buy it. required rate = 12.9% Return on stock= 12%

Unit Investment Trusts

unmanaged w a fixed time frame (maturity date)

Market characteristic line

when you regress a stock vs the market