Finance 425 Final - Unit 3 Material Investors are slow to update their beliefs when given new evidence.

what is the average gross alpha?

zero

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 loss $300 profit $300 loss $200 profit

$200 loss

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. $200 loss $200 profit $300 profit $600 loss

$300 profit

ssume 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

If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end load of 5%, what is its net asset value?

11.69

pay for marketing expenses

12b-1 fees

You purchase one Facebook October 165 put contract for a premium of $7.00. What is your maximum possible profit? Assume each contract is for 100 units. Potential profit ?

15,800

You purchased 3,000 shares of the New Fund at a price of $25 per share at the beginning of the year. You paid a front-end load of 4%. The securities in which the fund invests increase in value by 12% during the year. The fund's expense ratio is 1.8%. What is your rate of return on the fund if you sell your shares at the end of the year?

5.80

An investor buys a call at a price of $5.70 with an exercise price of $52. At what stock price will the investor break even on the purchase of the call? (Round your answer to 2 decimal places.) Break even price?

57.70

All else the same, an American style option will be ______ valuable than a ______ style option. A. more; European- B. less; European- C. more; Canadian- D. less; Canadian-

A. more; European-

You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a front-end load of 5.75%. If the securities in which the find invested increased in value by 11% during the year, and the funds expense ratio was 1.25%, your return if you sold the fund at the end of the year would be ____________. A. 4.33 B. 3.44 C. 2.45 D. 6.87 E. None of the above

B. 3.44

You purchased shares of a mutual fund at a price of $17 per share at the beginning of the year and paid a front-end load of 5.0%. If the securities in which the find invested increased in value by 12% during the year, and the funds expense ratio was 1.0%, your return if you sold the fund at the end of the year would be ____________. A. 4.75 B. 5.45 C. 5.65 D. 4.39 E. None of the above

B. 5.45

At issue, offering prices of open-end funds will often be A. less than NAV due to loads and commissions. B. greater than NAV due to loads and commissions. C. less than NAV due to limited demand. D. greater than NAV due to excess demand. E. less than or greater than NAV with no apparent pattern

B. greater than NAV due to loads and commissions.

When the stock price falls below a moving average, a possible conclusion is that _____.

B. market momentum has become negative

An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%. What is the offering price?

$11.38

Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value? A. $18.11 B. $18.81 C. $69.96 D. $7.00 E. $181.07

A. $18.11

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. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

A. Max (0, ST - X)

A support level is ___________________.

B. a level below which the market is unlikely to fall

Rank the following fund categories from most risky to least risky: I. Equity growth fund II. Balanced fund III. Sector fund IV. Money market fund

III, I, II, IV

Jill Davis tells her broker that she does not want to sell her stocks that are below the price she paid for them. She believes that if she just holds on to them a little longer, they will recover, at which time she will sell them. What behavioral characteristic does Davis have as the basis for her decision making?

Loss aversion Explanation: Davis uses loss aversion as the basis for her decision making. She holds on to stocks that are down from the purchase price in the hopes that they will recover. She is reluctant to accept a loss.

type of spread - short put + long put

bear spread

investor uses 3rd party broker/financial advisor to select funds to invest in - usually comes with loads

broker sold

characterized by the rapid escalation of asset prices followed by a contraction

bubble

type of spread - long call + short call

bull spread

sales commission paid when the investor purchases the fund

front end load

gross vs. net returns?

gross returns are before deducting fees

out of the money indicates

no intrinsic value

type of single option and stock - long put, long stock

protective put

type of combo long call + long put

straddle

type of combo long put + long call

strangle

Which one of the following statements regarding closed-end mutual funds is false? A. The funds always trade at a discount from NAV. B. The funds redeem shares at their net asset value. C. The funds offer investors professional management. D. A and B. E. None of the above.

D. A and B.

Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000, A. beat the market return in all years. B. beat the market return in most years. C. exceed the return on index funds. D. do not outperform the market E. None of the above is a correct statement.

D. do not outperform the market

A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise price B. buying two options that have the same expiration dates but different strike prices C. selling two options that have the same expiration dates but different strike prices D. selling an option with one expiration date and buying a similar option with a different expiration date

D. selling an option with one expiration date and buying a similar option with a different expiration date

Differences between hedge funds and mutual funds are that A. hedge funds are only subject to minimal SEC regulation. B. hedge funds are typically open only to wealthy or institutional investors. C. hedge funds managers can pursue strategies not available to mutual funds such as short selling, heavy use of derivatives, and leverage. D. are commonly structured as private partnerships. E. all of the above

E. all of the above

closed end fund designed to track a particular index/market sector/industry/etc trades like a stock can be shortened or purchased on margin most are index based

ETFs

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, III

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. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

C. Max (0, X - ST)

Round Barn stock has a required return of 11.00% and is expected to pay a dividend of $2.35 next year. Investors expect a growth rate of 6.00% on the dividends for the foreseeable future. a. What is the current fair price for the stock? b. Suppose the stock is selling at this price, but then investors revise their expectations. The new expectation for the growth rate is 5.80%. If investors are rational, what will be the new price for Round Barn stock?

a. $47 b. $45.19

Consider a mutual fund with $200 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2 million. The stocks included in the fund's portfolio increase in price by 8%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 1%, which are deducted from port-folio assets at year-end. (LO 4-3) a.What is the net asset value at the start and end of the year? b.What is the rate of return for an investor in the fund?

a. 20 b. 7.92%

After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may subsequently increase in price. What behavioral characteristic does Shrum have as the basis for her decision making? (LO 9-1) a.Fear of regret b.Representativeness c.Mental accounting

a.Fear of regret

All of the following actions are consistent with feelings of regret except: (LO 9-1) a.Selling losers quickly. b.Hiring a full-service broker. c.Holding on to losers too long.

a.Selling losers quickly.

option style can be exercised any time until maturity

american

Technical analysis focuses on _____________________. a. finding opportunities for risk-free investing b. finding repeating trends and patterns in prices c. changing prospects for earnings growth of particular firms or industries d. forecasting technical regulatory changes

b. finding repeating trends and patterns in prices

The only way for behavioral patterns to persist in prices is if ______________. a. markets are not weak-form efficient b. there are limits to arbitrage activity c. there are no significant trading costs d. market psychology is inconsistent over time

b. there are limits to arbitrage activity

Which one of the following would be a bullish signal to a technical analyst using moving average rules? (LO 9-4) a.A stock price crosses above its 52-week moving average. b.A stock price crosses below its 52-week moving average. c.The stock's moving average is increasing. d.The stock's moving average is decreasing.

b.A stock price crosses below its 52-week moving average.

sales commission paid when the investor sells the fund

back end load

pays option premium to acquire the right to buy/sell the asset

buyer

right to buy a specific amount of an asset, at a specific price, on or before specified date

call option

mutual fund that trades on exchange like a stock - typically sell at discount/premium from NAV

closed end fund

type of mutual fund do not redeem or issue shares fund has fixed number of shares and trades in the secondary market like a stock share price is determined by supply/demand -- can be above or below NAV

closed end funds

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. representativeness bias framing error conservatism memory bias

conservatism

investors are too slow in updating their beliefs in response to new evidence - underreactions ex. post earnings drift

conservatism

Investors are slow to update their beliefs when given new evidence.

conservatism bias

type of single option and stock - short call, long stock

covered call

at the money

current stock price is exercise price

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $500 profit D. $500 loss

d Long call profit = Max [0, ($123 - $125)(100)] - $500 = -$500

investor and investment company interact directly - no advice/loads - can choose which funds to buy - only charged with ongoing management expenses

direct marketing

The tendency of investors to hold on to losing investments is called the ________.

disposition effec

Investors are reluctant to sell stocks with "paper" losses.

disposition effects

option style can be exercised only at the end of its life (aka expiration) easier to analyze

european

Advantages of investment companies to investors include all but which one of the following? record keeping and administration guaranteed rates of return professional management low-cost diversification

guaranteed rates of return

The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________. by purchasing an equal number of shares of each stock in the S&P 500 by purchasing an equal dollar amount of shares of each stock in the S&P 500 in proportion to the price weight of the stock in the S&P 500 in proportion to the market value weight of the firm's equity in the S&P 500

in proportion to the market value weight of the firm's equity in the S&P 500

collect funds from individual investors and invest those funds in a potentially wide range of securities/other assets - pooling of assets

investment companies

what is the relationship between fees and returns with mutual funds

the higher the fee, the worse the abnormal return

Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of .75%. Economy Fund charges a front-end load of 2%, but has no 12b-1 fee and an expense ratio of .25%. Assume the rate of return on both funds' portfolios (before any fees) is 6% per year. How much will an investment in each fund grow to after: (LO 4-5) a.1 year? b.3 years? c.10 years?

loaded a. Year 1 = $100 (1 + 0.06 - 0.0175) = $104.25 b. Year 3 = $100 (1 + 0.06 - 0.0175)3 = $113.30 c. Year 10 = $100 (1 + 0.06 - 0.0175)10 = $151.62 economy a. Year 1 = $100 0.98 (1 + 0.06 - 0.0025) = $103.64 b. Year 3 = $100 0.98 (1 + 0.06 - 0.0025)3 = $115.90 c. Year 10 = $100 0.98 (1 + 0.06 - 0.0025)10 = $171.41

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. overconfidence representativeness forecast errors mental accounting

mental accounting

Investors exhibit less risk tolerance in their retirement accounts versus their other stock accounts.

mental accounting

money pooled from many investors that is invested in a portfolio fixed for the life of the fund

mutual fund

what is the average net alpha?

negative number

Trading activity and average returns in brokerage accounts tend to be _________. uncorrelated negatively correlated positively correlated positively correlated for women and negatively correlated for men

negatively correlated

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

net asset value

what are the three characteristics of arbitrage

no risk invest no money earn a positive/certain return

type of mutual fund stand ready to redeem or issue shares at their NAV share price = NAV NAV is updated at the end of the day

open end funds

costs of running the fund/managers compensation

operating exp

when investor tends to overestimate the precision of their beliefs/forecasts

overconfidence

in the money indicates

positive intrinsic value

investor is risk averse when thinking about gains and risk loving when thinking about losses - ex disposition effect --> sell winners too quick and ride losers too long

prospect theory

defines the relationship between the portfolio manager and investor

prospectus

right to sell a specific amount of an asset, at a specific price, on or before specified date

put option

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. rational; irrational irrational; rational greedy; philanthropic philanthropic; greedy

rational; irrational

Investors are reluctant to bear losses due to their unconventional decisions.

regret avoidance

If investors overweight recent performance in forecasting the future, they are exhibiting _______. representativeness bias framing error memory bias overconfidence

representativeness bias

Investors disregard sample size when forming views about the future from the past.

representativeness bias

investors place too much emphasis on small/recent samples as a representative of the population - overreactions

representativeness bias

A _________ is a value above which it is difficult for the market to rise

resistance level

investors who want to liquidate their holdings in a closed-end fund may ___________________. 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 back to the fund at net asset value

sell their shares on the open market

receives the option premium upfront but has potential liabilities later

seller

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

They offer investors a guaranteed rate of return