GR 1 Mgt 382

Suppose you hold a particular investment for 4 months. You calculate that your holding-period return is 8.1 percent. What is your annualized return?

(1 + 0.081)12/4 - 1 = 26.32%

A stock has had returns of 26 percent, 12 percent, 5 percent, -12 percent, -7 percent, and 21 percent over the last six years. What are the arithmetic and geometric returns for the stock?

Arithmetic return = (.26 + .12 + .05 − .12 − .07 + .21) / 6 = .1200 or 7.50% Geometric return =[(1 + .26)(1 + .12)(1 + .05)(1 − .12)(1 − .07)(1 + .21)](1/6) − 1 = .0660 or 6.60%

The rate of return on Cherry Jalopies, Inc., stock over the last five years was 25 percent, 11 percent,-7 percent, 6 percent, and 11 percent. Over the same period, the return on Straw Construction Company's stock was 16 percent, 22 percent, -4 percent, 4 percent, and 14 percent. What was the arithmetic average return on each stock over this period?

Cherry average return = (25% + 11% -7% + 6% + 11%) / 5 = 9.2% Straw average return = (16% + 22% -4% + 4% + 14%) / 5 = 10.4%

Which one of the following statements related to common stock is correct?

Corporations have the right to discontinue paying dividends.

Which one of the following decisions falls under the category of asset allocation?

Determining that thirty percent of a portfolio should be invested in bonds

Which one of the following is defined as an option that can only be exercised at expiration?

European style option

The rate of return on Cherry Jalopies, Inc., stock over the last five years was 15 percent, 11 percent, -1 percent, 4 percent, and 13 percent. What is the geometric return for Cherry Jalopies, Inc.?

Geometric return = [(1 + .15)(1 + .11)(1 -.01)(1 + .04)(1 + .13)](1/5) − 1 = .0823 or 8.23%

An increase in which two of the following will have a negative effect on the value of a put option? I. risk-free interest rate II. time to option maturity III. underlying stock price IV. option strike price

I and III only

Which of the following features apply to a futures contract? I. zero-sum game II. derivative security III. maturity date IV. settlement procedure

I, II, III, and IV

Assume a mutual fund is a pure no-load fund. Which of the following costs should an investor still expect to incur? I. contingent deferred sales charge II. management fee III. trading costs IV. redemption fee

II and III only

Suppose you have $30,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $30 per share. You also notice that a call option with a $30 strike price and six months to maturity is available. The premium is $6. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $38 per share? What about $26 per share? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Annualized Return Stock Option $38 per share 60.44 ± 1% % 77.78 ± 1% % $26 per share -24.89 ± 1% % -100.00 ± 1% %

If you buy the stock, your $30,000 will purchase 1,000 shares, or 10 round lots. A call contract costs $600, so you can buy 50 of them. If, in six months, MMEE is selling for $38, your stock will be worth 1,000 shares × $38 = $38,000. Your dollar gain will be $38,000 less the $30,000 you invested, or $8,000. Since you invested $30,000, your return for the six-month period is $8,000 / $30,000 = 26.67%. To annualize your return, we need to compute the effective annual return, recognizing that there are two six-month periods in a year. 1 + EAR = 1.604444 EAR = .6044, or 60.44% Your annualized return on the stock is 60.44%. If MMEE is selling for $26 per share, your loss on the stock investment is −13.3333%, which annualizes as follows: 1 + EAR = .86672 = .75111 EAR = −.2489, or −24.89% At the $38 price, your call options are worth $38 - 30 = $8 each, but now you control 5,000 shares (= 50 contracts), so your options are worth 5,000 shares × $8 = $40,000 total. You invested $30,000, so your dollar return is $40,000 - 30,000 = $10,000, and your percentage return is $10,000 / $30,000 = 33.3333%, compared to 26.67% on the stock investment. This annualizes to: 1 + EAR = 1.33332 = 1.7778 EAR = .7778, or 77.78% However, if MMEE is selling for $26 when your options mature, then you lose everything ($30,000 investment), and your return is −100.00%.

Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg Open Int Mar 455.125 457.000 451.750 452.000 −2.750 597,913 May 467.000 468.000 463.000 463.250 −2.750 137,547 July 477.000 477.500 472.500 473.000 −2.000 153,164 Sep 475.000 475.500 471.750 472.250 −2.000 29,258 Suppose you buy 24 of the September corn futures contracts at the last price of the day. One month from now, the futures price of this contract is 463.5, and you close out your position. Calculate your dollar profit on this investment.

Initial value of position = 24(5,000)($4.7225) = $566,700.00 Final value of position = 24(5,000)($4.63500) = $556,200.00 Dollar profit = $556,200 - 566,700 = -$10,500.00

Suppose you're evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.5 percent. The second fund buys only taxable, short-term commercial paper and yields 5.5 percent. Your federal income tax rate is 35 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.2 percent. Which MMMF offers you the highest yield if you are a resident of Texas, which has no state income tax? 1. Calculate the return for a resident of Texas for each of the alternatives. (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Resident of Texas Municipal Fund 3.50 ± 1% % Taxable Fund 3.58 ± 1% % New Jersey Municipal Fund 3.20 ± 1% % 2. Which MMMF offers you the highest yield if you are a resident of Texas, which has no state income tax? Taxable Fund

Municipal fund: aftertax yield = 3.50% Taxable fund: aftertax yield = .055 (1 - .35) = 3.58% New Jersey municipal fund: aftertax yield = 3.20% Choose the Taxable Fund.

The World Income Appreciation Fund has current assets with a market value of $12.3 billion and has 620 million shares outstanding. What is the net asset value (NAV) for this mutual fund? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Net asset value $ 19.84 ± 1%

NAV = $12,300,000,000 / 620,000,000 = $19.84

The 47.50 put on a stock is trading at 1.32 bid and 1.37 ask. To buy one option contract, you must pay _____ at the time the contract is purchased.

Option premium = 100 × $1.37 = $137

A stock has returns of -11 percent, 12 percent, 12 percent, 18 percent, and -3 percent. What are the arithmetic and geometric returns?

RA = (- 0.11 + 0.12 + 0.12 + 0.18 - 0.03)/5 = 0.056 or 5.6% RG = [(1+ - 0.11)(1 + 0.12)(1 + 0.12)(1 + 0.18)(1 - 0.03)]1/5 − 1 = 0.050258 or 5.03%

VIX represents the volatility index on which one of the following?

S&P 500 index

Which one of the following statements correctly relates to closed-end funds?

Shares of closed-end funds trade just like stocks.

A particular stock has a dividend yield of 1.1 percent. Last year, the stock price fell from $68 to $62. What was the return for the year?

The capital gains yield is ($62 − 68)/$68 = -0.08824 or -8.82% (notice the negative sign). With a dividend yield of 1.1 percent, the total return is -7.72%.

You are long 55 Jan 2010 Soybean oil futures contracts. Calculate your dollar profit or loss from this trading day. (Negative answers should be indicated by a minus sign. Omit the "$" sign in your response.) Gain/Loss by $ 1,980 ± 1%

The contract settled Up 0.06 cents, so a long position Profit: 55 × 60,000 × $0.0006 = $1,980.

Stock in Cheezy-Poofs Manufacturing is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $2.5. Compare the percentage gains and losses from a $12,500 investment in the stock versus the option in 90 days for stock prices of $45, $50, and $55. (Input all amounts as positive values. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" and select "None" wherever required. Omit the "%" sign in your response.) Options Stock % gain/loss % gain/loss $45 100 Loss 10.00 Loss $50 100 Loss 0 None $55 100 Gain 10.00 Gain

The stock costs $50 per share, so if you invest $12,500, you'll get 250 shares. The option premium is $2.5, so an option contract costs $250. If you invest $12,500, you'll get $12,500/$250 = 50 contracts. If the stock is selling for $55 in 90 days, your payoff on the stock is $5 per share, or $1,250 total. The percentage gain is $1,250/$12,500 = 10%. Your options are worth $5 per share, or $500 per contract. However, you have 50 contracts, so your options are worth $25,000 in all. Since you paid $12,500 for the 50 contracts, your profit is $12,500. Your percentage gain is a pleasant $12,500/$12,500 = 100%. If the stock is selling for $50, your profit is $0 on the stock, so your percentage return is 0%. Your option is worthless (why?); the percentage loss is -100%. If the stock is selling for $45, verify that your percentage loss on the stock is -10% and your loss on the option is again -100%.

Which one of the following statements concerning option prices is correct?

There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices.

Suppose you purchase eight call contracts on Macron Technology stock. The strike price is $65, and the premium is $2.4. If, at expiration, the stock is selling for $72 per share, what are your call options worth? What is your net profit? (Omit the "$" sign in your response.) Call options worth $ 5,600 ± 0.1% Net profit $ 3,680 ± 0.1%

Your options are worth $72 − 65 = $7 each, or $700 per contract. With eight contracts, the total value is $5,600. Your net profit is $5,600 less the $1,920 (8 contracts at $240 each) you invested, or $3,680.

Suppose you purchase five put contracts on Testaburger Co. The strike price is $95, and the premium is $5.2. If, at expiration, the stock is selling for $81 per share, what are your put options worth? What is your net profit? (Omit the "$" sign in your response.) Put options worth $ 7,000 ± 0.1% Net profit $ 4,400 ± 0.1%

Your options are worth $95 − 81 = $14 each, or $1,400 per contract. With five contracts, the total value is $7,000. Your net profit is $7,000 less the $2,600 (5 contracts at $520 each) you invested, or $4,400.

A fixed-income security is defined as

a long-term debt obligation that pays scheduled fixed payments.

The turnover for a mutual fund refers to

a measure of trading activity.

To be considered liquid, a security must

be able to be sold quickly with little, if any, price concession.

Market timing is the

buying and selling of securities in anticipation of the overall direction of the market.

An investment company that issues a fixed number of shares which can only be resold in the open stock market is called a(n) _____ fund.

closed-end

Selling a call option on stock which you own is referred to as which one of the following strategies?

covered call

Which one of the following is the best definition of a money market instrument?

debt issued by the government or a corporation that matures in one year or less

A financial asset that represents a claim on another financial asset is classified as a _____ asset.

derivative

Asset allocation is the

distribution of investment funds among various broad asset classes.

A fund that is basically an index fund that trades like a closed-end fund is called a(n)

exchange-traded fund.

A fee that is charged at the time mutual fund shares are purchased by an investor is called a

front-end load.

A call option is an agreement that

gives the buyer the right to purchase an asset at some point in the future.

Which one of the following describes an investment company that generally has an unrestricted investment strategy and is not accessible to the general public?

hedge fund

An investor who shifts risk is referred to as which one of the following?

hedger

A mutual fund is owned by

its shareholders.

You have a market position which allows you to profit when market prices increase but causes you a loss when market prices decline. This position is defined by which one of the following terms?

long position

You are a baker and need to purchase a substantial amount of wheat flour three months from now in preparation for your busy season. Your concern is that the price of wheat will increase substantially before you make your purchase. Which one of the following positions in wheat would be an effective hedge for you?

long position in futures market

Which of the following are three key advantages of mutual funds?

low initial investments, professional management, diversification

Which one of the following variables is NOT included in the Black-Scholes option pricing model?

market rate of return

Shares in closed-end funds

may sell for more or less than the NAV.

An investor who follows a fully active strategy will

move money between asset classes as well as try to select the best performers in each class.

The value of a load mutual fund's assets less its liabilities, divided by the number of shares outstanding is referred to as the fund's

net asset value.

An investment company that will repurchase shares at any time is called a(n) _____ fund.

open-end

An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) _____ contract.

option

An option that would NOT yield a positive payoff if exercised today is referred to by which one of the following terms?

out-of-the-money option

An investment company

pools funds from individual investors.

A security originally sold by a business or government to raise money is called a(n)

primary asset.

A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified price is called a

put option.

Jesse is researching chemical companies in an effort to determine which company's stock he should purchase. This process is known as

security selection.

Which one of the following is defined as the price at which an option will be exercised?

strike

Lucas owns a large farming operation which encompasses over 5,000 acres of corn. The crop this year is abundant and will be ready for harvesting next month. Lucas likes the market prices today but expects the prices to decline over the next month as the supply of corn increases. Which one of the following positions should Lucas take to hedge his corn crop?

take a short futures position

A 12b-1 fee is a fee charged by a mutual fund

to cover marketing costs.

A futures contract is an agreement

to exchange goods on a specified date in the future at a price that is agreed upon today.

Which one of the following is NOT included in the fee table found in a mutual fund prospectus?

turnover rate