FIN 3324 TTU Exam 1 Review

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

In calculating the Dow Jones Industrial Average, the adjustment for stock splits occurs _______.

by adjusting the denominator

In securities markets, there should be a risk-return trade-off with higher-risk assets having _______ expected returns than lower-risk assets.

higher

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 _______. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

$35.71 .30=(200P-200*50*.5)/200P 60P=200P-(200*50*.5) 60P=200P-5000 5000=140P P=35.71

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

$4500 Investment = 300 × $30 × 0.50 = $4,500

A T-bill quote sheet has 60-day T-bill quotes with a 5.25 ask and a 5.19 bid. If the bill has a $10,000 face value, an investor could sell this bill for _____.

$9913.50 P0=$10,000×[1−(0.0519×60)360]=$9,913.50

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 for the year?

-6.44% Nominal return on stock= (50 − $55 + $3)/$55 = −0.0364 = −3.64% Real return: r = [(1 − 0.0364)/(1 + 0.03)] − 1 = −0.0644 = −6.44%

You have the following rates of return for a risky portfolio for several recent years: r2016 = 35.23% r2017 = 18.67% r2018 = −9.87% r2019 = 23.45% The annualized (geometric) average return on this investment is __________

15.60% Total Return: 1.3523 × 1.1867 × 0.9013 × 1.2345 − 1 = 0.78556 = 78.56% Annualized Geometric Return: 1.785560^.25 − 1 = 0.1560 = 15.60%

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

15.64% Asset Value: $300,000,000 × 1.18 = $354,000,000 Expenses: 0.02 × $354,000,000 = $7,080,000 Holding Period Return: ($354,000,000 − $7,080,000 − $300,000,000)/$300,000,000 = 0.1564=15.64%

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was _______.

17% HPR = [($28 − $25) × 400 − 0.07 × $5,000]/$5,000= 0.17=17%

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is __________.

3% Risk premium = (0.4 × 0.15 + 0.6 × 0.05) − 0.06 = 0.03

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

8.47% Discount NAV = ($300,000,000 − $5,000,000)/9,000,000 = $32.78 Discount = $32.78 − $30.00 = $2.78 Discount as percent of NAV = $2.78/$32.78 = 0.0847 = 8.47%

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; variance = 0.0400 Security B: E(r) = 0.10; variance = 0.0225 Security C: E(r) = 0.12; variance = 0.1000 Security D: E(r) = 0.13; variance = 0.0625 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 __________.

Security A A has the steepest slope, found as: Slope = (E(rP) − rf)/σP = (0.15 − 0.05)/(0.04^.5) = 0.50

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

The effective spread decreased in both cases.

Which of the following is not a typical characteristic of common stock ownership?

Unlimited Liability

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 __________.

borrow $375,000 E(rC) = E(rP) × wP + rf × wf = 0.16 × wP + 0.08 × (1 − wP) = 0.22 wP = 1.75 wf = 1 − 1.75 = −0.75 Invest 1.75 × $500,000 = $875,000 in the risky asset by borrowing $375,000 at the risk-free rate.

Net asset value is defined as _______.

market value of assets minus liabilities divided by shares outstanding

The efficient market hypothesis suggests that _______.

passive portfolio management strategies are the most appropriate investment strategies

The holding period return on a stock is equal to __________.

the capital gain yield over the period plus the dividend yield

In a _______ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

value-weighted index