Investments

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104:08 and a bid price of 104:04. As a buyer of the bond, what is the dollar price you expect to pay?

$1,042.50. You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1,042.50.

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?

$18.11 ($457,000,000 - 17,000,000)/24,300,000 = $18.11

You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

$50 100 shares × $70 × .5 = $7,000 × 0.5 = $3,500 (loan amount 0.30 = (100P - $3,500)/100P; 30P = 100P - $3,500; -70P = -$3,500; P = $50.)

Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker?

$6,300 (200 shares × $70/share × (1 - 0.55) = $14,000 × (0.45) = $6,300)

You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60% and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.

-41.67% (300($60)(0.60) = $10,800 investment; 300($60) = $18,000 × (0.40) = $7,200 loan; proceeds after selling stock and repaying loan: $13,500 - $7,200 = $6,300; Return = ($6,300 - $10,800)/$10,800 = -41.67%.)

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be:

0.32 (12 - 4)/25 = 0.32

Consider the following probability distribution for stocks A and B: State: Probability: Return on A: Return on B: 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% The coefficient of correlation between A and B is:

0.46 We need to first compute, respectively: the expected returns of A and B, their standard deviations, and their covariance. E(RA) = 0.1(10%) + 0.2(13%) + 0.2(12%) + 0.3(14%) + 0.2(15%) = 13.2%; E(RB) = 0.1(8%) + 0.2(7%) + 0.2(6%) + 0.3(9%) + 0.2(8%) = 7.7%. sA = [0.1(10% - 13.2%)^2 + 0.2(13% - 13.2%)^2 + 0.2(12% - 13.2%)^2 + 0.3(14% - 13.2%)^2 + 0.2(15% - 13.2%)^2]^1/2 = 1.5%; sB = [0.1(8% - 7.7%)^2 + 0.2(7% - 7.7%)^2 + 0.2(6% - 7.7%)^2 + 0.3(9% - 7.7%)^2 + 0.2(8% - 7.7%)^2]^1/2 = 1.1%. covA,B = 0.1(10% - 13.2%)(8% - 7.7%) + 0.2(13% - 13.2%)(7% - 7.7%) + 0.2(12% - 13.2%)(6% - 7.7%) + 0.3(14% - 13.2%)(9% - 7.7%) + 0.2(15% - 13.2%)(8% - 7.7%) = 0.76 in % squared; rho_A,B = 0.76/[(1.1)(1.5)] = 0.46.

You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?

100 shares (.5 = [(Q × $60) - $3,000]/(Q × $60); $30Q = $60Q - $3,000; $30Q = $3,000; Q = 100)

If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 34%, the risk premium would be:

13%. 18% - 5% = 13%

The Yachtsman Fund had NAV per share of $36.12 on January 1, 2012. On December 31 of the same year the fund's NAV was $39.71. Income distributions were $0.64 and the fund had capital gain distributions of $1.13. Without considering taxes and transactions costs, what rate of return did an investor receive on the Yachtsman Fund in the year 2012?

14.84% R = ($39.71 - 36.12 + .64 + 1.13)/$36.12 = 14.84%

A mutual fund had average daily assets of $3.0 billion in 2012. The fund sold $600 million worth of stock and purchased $700 million worth of stock during the year. The fund's turnover ratio is:

20% 600,000,000/3,000,000,000 = 20%.

In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?

28% (.0612 = .085(1 - t); (1 - t) = 0.72; t = .28.)

Over the past year you earned a nominal rate of interest of 8% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was:

3.8% r = (1 + R)/(1 + I) - 1; 1.08%/1.04% - 1 = 3.8%.

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin?

40% (AM = [300 ($25) - .5(300) ($30)]/[300 ($25)] = .40)

Consider the following three stocks: Stock: Price: Shares Outstanding: Stock A $40 200 Stock B $70 500 Stock C $10 600 The price-weighted index constructed with the three stocks is:

40. (($40 + $70 + $10)/3 = $40)

Consider the following three stocks: Stock: Price: Shares Outstanding: Stock A $40 200 Stock B $70 500 Stock C $10 600 Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

490 (Value-weighted indexes are not affected by stock splits.)

Consider the following three stocks: Stock: Price: Shares Outstanding: Stock A $40 200 Stock B $70 500 Stock C $10 600 The value-weighted index constructed with the three stocks above using a divisor of 100 is:

490. [($40 × 200) + ($70 × 500) + ($10 × 600)]/100 = 490.

If an investment provides a 1.25% return quarterly, its effective annual rate is:

5.09%. (1.0125)4 - 1 = 5.09%.

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.09?

57% and 43% 9% = w1(12%) + (1 - w1)(5%); 9% = 12%w1 + 5% - 5%w1; 4% = 7%w1; w1 = 0.57; 1 - w1 = 0.43; Verifying, we have: 0.57(12%) + 0.43(5%) = 8.99%; i.e., 9%.

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

7.5% and 7.73% (rm = 0.075(1 - 0) = 7.5%. rc = 0.10.3(1 - 0.25) = 0.0773, or 7.73%)

You have been given this probability distribution for the holding-period return for KMP stock as follows: State of the Economy: Probability: HPR: Boom 0.3 18% Normal Growth 0.5 12% Recession 0.2 -5% What is the standard deviation for KMP stock?

8.13% Expected return: .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%. S.D. : s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2]1/2 = 8.13%.

Consider the following probability distribution for stocks A and B: State: Probability: Return on A: Return on B: 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% If you invest 40% of your money in A and 60% in B, what would be, respectively, your portfolio's expected rate of return and standard deviation?

9.9%; 1.1% E(RP) = 0.4(13.2%) + 0.6(7.7%) = 9.9%; sP = [(0.4)^2(1.5)^2 + (0.6)^2(1.1)^2 + 2(0.4)(0.6)(1.5)(1.1)(0.46)]^1/2 = 1.1%.

Jargon Rapid Growth is a mutual fund that has traditionally accepted funds from new investors and issued new shares at net asset value. Jeremy Jargon manages the fund himself and has become concerned that its level of assets has become too high for his management abilities. He issues a statement that Jargon will no longer accept funds from new investors, but will continue to accept additional investments from current shareholders. Which of the following is true about Jargon Rapid Growth fund? A. Jargon used to be an open-end fund but has now become a closed-end fund. B. Jargon has always been an open-end fund and will remain an open-end fund. C. Jargon has always been a closed-end fund and will remain a closed-end fund. D. Jargon is an open-end fund but would change to a closed-end fund if it wouldn't accept additional funds from current investors. E. Jargon is violating SEC policy by refusing to accept new investors.

A. Jargon used to be an open-end fund but has now become a closed-end fund. Because Jargon accepts funds from investors, it is an open-end fund. However, when the decision was made to stop accepting investments from new investors, it became a closed-end fund.

When a distribution is positively skewed, (pick one) A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

A. standard deviation overestimates risk.

According to the mean-variance criterion, which of the statements below is correct? Investment E(r) Standard Deviation A 10% 5% B 21% 11% C 18% 23% D 24% 16% A. Investment B dominates investment A. B. Investment B dominates investment C. Investment B has a higher return and a lower standard deviation (risk) than investment C. C. Investment D dominates all of the other investments. D. Investment D dominates only investment B. E. Investment C dominates investment A.

B. Investment B dominates investment C. Investment B has a higher return and a lower standard deviation (risk) than investment C.

Which of the following is not a component of the money market? A. Repurchase agreements B. Eurodollars C. Real estate investment trusts (they are not short-term investments) D. Money market mutual funds E. Commercial paper

C. Real estate investment trusts (they are not short-term investments)

Which of the following statements regarding the capital allocation line (CAL) is false? A. The CAL shows risk-return combinations. B. The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation. C. The slope of the CAL is also called the reward-to-volatility ratio. D. The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset.

D. The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. The CAL consists of combinations of a risky asset and a risk-free asset whose slope is the reward-to-volatility ratio; thus, all statements except D are true.

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. The funds always trade at a discount from NAV and redeem shares at their net asset value. E. None of the above

D. The funds always trade at a discount from NAV and redeem shares at their net asset value. Closed-end funds are sold at the prevailing market price.

The ____ is an example of a U.S. index capturing the movements of large firms.

DJIA (The DJIA contains 30 of some of the largest firms in the U.S.)

Money market securities: A. are short term. B. are highly marketable. C. are generally very low risk. D. are very marketable and are generally very low risk. E. All of the above

E. All of the above

The Sarbanes-Oxley Act A. requires corporations to have more independent directors. B. requires the firm's CFO to personally vouch for the firm's accounting statements. C. prohibits auditing firms from providing other services to clients. D. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E. All of the above

E. All of the above

Treasury Inflation-Protected Securities (TIPS) A. pay a fixed interest rate for life. B. pay a variable interest rate that is indexed to inflation, but maintain a constant principal. C. provide a constant stream of income in real (inflation-adjusted) dollars. D. have their principal adjusted in proportion to the Consumer Price Index. E. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

E. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

Deposits of commercial banks at the Federal Reserve Bank are called:

Federal Funds (They are required to meet regulatory reserves.)

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.

Glass-Steagall

Which financial asset makes up the greatest proportion of the financial assets held by U.S. households?

Pension Reserves

Consider a portfolio in stocks A, B, and C at times 𝑡 = 0, 𝑡 = 1, and 𝑡 = 2. For each of these stocks, and at each of the three times, their prices and quantities are listed below: P0 Q0 P1 Q1 P2 Q2 Stock A $70 200 $72 200 $36 400 Stock B $85 500 $81 500 $81 500 Stock C $105 300 $98 300 $98 300 Based on the information given, for a price-weighted index of the three stocks calculate the value of the divisor in the second period (t = 2). Assume that Stock A had a 2-1 split during this period.

The divisor must change to reflect the stock split. Because nothing else fundamentally changed, the value of the index should remain 83.67. So the new divisor is (36 + 81 + 98)/83.67 = 2.57. The index value is (36 + 81 + 98)/2.57 = 83.67.

Consider the following probability distribution for stocks A and B: State: Probability: Return on A: Return on B: 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% Which of the following portfolio(s) is (are) on the efficient frontier?

The portfolio with 26 percent in A and 74 percent in B The Portfolios' expected returns, standard deviations and Reward/volatility ratios are Portfolio E(R_p) SD_p Sharpe ratio 20A/80B 8.8% 1.05% 8.38 15A/85B 8.53% 1.06% 8.07 26A/74B 9.13% 1.05% 8.70 10A/90B 8.25% 1.07% 7.73 The portfolio with 26% in A and 74% in B dominates all of the other portfolios by virtue of the Sharpe ratio (mean-variance criterion.)

Consider a portfolio in stocks A, B, and C at times 𝑡 = 0, 𝑡 = 1, and 𝑡 = 2. For each of these stocks, and at each of the three times, their prices and quantities are listed below: P0 Q0 P1 Q1 P2 Q2 Stock A $70 200 $72 200 $36 400 Stock B $85 500 $81 500 $81 500 Stock C $105 300 $98 300 $98 300 Based on the information given, for a price-weighted index of the three stocks calculate the rate of return for the first period (t = 0 to t = 1).

The price-weighted index at time 0 is (70 + 85 + 105)/3 = 86.67. The price-weighted index at time 1 is (72 + 81 + 98)/3 = 83.67. The return on the index is 83.67/86.67 - 1 = -3.46%.

Consider a portfolio in stocks A, B, and C at times 𝑡 = 0, 𝑡 = 1, and 𝑡 = 2. For each of these stocks, and at each of the three times, their prices and quantities are listed below: P0 Q0 P1 Q1 P2 Q2 Stock A $70 200 $72 200 $36 400 Stock B $85 500 $81 500 $81 500 Stock C $105 300 $98 300 $98 300 Based on the information given, for a price-weighted index of the three stocks calculate the rate of return for the second period (t = 1 to t = 2).

The rate of return for the second period is 83.67/83.67 - 1 = 0.00%.

Consider a portfolio in stocks A, B, and C at times 𝑡 = 0, 𝑡 = 1, and 𝑡 = 2. For each of these stocks, and at each of the three times, their prices and quantities are listed below: P0 Q0 P1 Q1 P2 Q2 Stock A $70 200 $72 200 $36 400 Stock B $85 500 $81 500 $81 500 Stock C $105 300 $98 300 $98 300 Calculate the first-period rates of return (from t = 0 to t = 1) on an equally weighted index.

The return on Stock A for the first period is $72/$70 - 1 = 2.86%. The return on Stock B for the first period is $81/$85 - 1 = -4.71%. The return on Stock C for the first period is $98/$105 - 1 = -6.67%. The return on an equally weighted index of the three stocks is (2.86% - 4.71% - 6.67%)/3 = -2.84%.

Consider a portfolio in stocks A, B, and C at times 𝑡 = 0, 𝑡 = 1, and 𝑡 = 2. For each of these stocks, and at each of the three times, their prices and quantities are listed below: P0 Q0 P1 Q1 P2 Q2 Stock A $70 200 $72 200 $36 400 Stock B $85 500 $81 500 $81 500 Stock C $105 300 $98 300 $98 300 Calculate the first-period rates of return (from t = 0 to t = 1) on a market-value-weighted index.

The total market value at time 0 is $70 × 200 + $85 × 500 + $105 × 300 = $88,000. The total market value at time 1 is $72 × 200 + $81 × 500 + $98 × 300 = $84,300. The return is $84,300/$88,000-1 = -4.20%.

The ultimate stock index in the U.S. is the:

Wilshire 5000. The Wilshire 5000 is the broadest U.S. index and contains more than 7000 stocks. Note, however, that in practice, the S&P 500 index is considered sufficient to capture most of what can be captured with the Wilshire 5000. In addition, it is easier to construct indextracking mutual fund portfolios with 500 stocks than with 7,000+ stocks.

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. A portfolio that has an expected outcome of $115 is formed by:

borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset. For $100: the expected return is (115 - 100)/100 = 15%; Next, we solve for the proportion w1 of wealth invested in the risky asset (and thus 1- w1 will be invested in the T-bill) through the equation .15 = w1(.12) + (1 - w1)(.05); which can be re-written as .15 = .12w1 + .05 - .05w1; or 0.10 = 0.07w1; leading to w1 = 1.43. Hence the amount invested in the risky asset is 1.43*($100) = $143; The amount invested in the T-bill is: (1 - w1)$100 = -$43.

You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a:

limit-sell order With a limit-sell order, your stock will be sold only at a specified price, or better. Thus, such an order would protect your gains. None of the other orders are applicable to this situation.

The risk that cannot be diversified away is:

market risk