Fin305 Notes and Questions PDF

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Finance questions and answers. Investing, bonds, stocks, derivatives explained...

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Homework #2 Chapter 5 1. You invest $1,600 in a complete portfolio. The complete portfolio is composed of

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a risky asset with an expected rate of return of 17% and a standard deviation of 20% and a Treasury bill with a rate of return of 8%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 11%. a. 55% You purchased a share of stock for $43. One year later you received $2.75 as dividend and sold the share for $42. Your holding-period return was _________. a. 4.06% You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. What is the geometric average rate of return? a. 1.20% - see notebook for math You are considering investing $2,500 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 75% and 25% respectively. X has an expected rate of return of 18%, and Y has an expected rate of return of 14%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. a. 25%, 19%, 6% You put up $65 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $6.50. Your HPR was ____. a. 14% Treasury bills are paying a 6% rate of return. A risk-averse investor with a risk aversion of A = 4 should invest entirely in a risky portfolio with a standard deviation of 26% only if the risky portfolio's expected return is at least ______. a. 33% A portfolio with a 25% standard deviation generated a return of 19% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. a. 0.58 The arithmetic average of –30%, 53%, and 58% is ________. a. Add #s and divide by 3 An investment earns 35% the first year, earns 40% the second year, and loses 39% the third year. The total compound return over the 3 years was ______. a. 15%

10. The geometric average of −16%, 50%, and 55% is _________. a. 25% 11. Risk Aversion a. R = 11% 12. The ______ measure of returns ignores compounding. a. Arithmetic average 13. 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 _________. a. 3% 14. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment? a. 12.24% 15. If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? a. 3.96% 16. Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. a. 1. Small stocks 2. Large stocks 3. Long terms bonds 4. T-bills 17. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. a. Dollar weighted return 18. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. a. Find percentages from question #4, then multiple amounts by the percentages to get the correct amount in $’s (243, 162, 595) b. https://www.chegg.com/homework-help/questions-and-answers/considerin g-investing-1-000-complete-portfolio-complete-portfolio-composed-treasur y-bills--q10775459?trackid=b21b68cf00a2&strackid=6046d77b9c79 19. You have an APR of 7.5% with continuous compounding. The EAR is _____. a. 7.79%

20. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? a. 6,000 Quiz #2 1. You invest $2,900 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 14% and a standard deviation of 20% and a Treasury bill with a rate of return of 9%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 7%. a. 35% 2. The arithmetic average of –25%, 43%, and 48% is ________. a. 22% 3. You purchased a share of stock for $45. One year later you received $2.80 as dividend and sold the share for $44. Your holding-period return was _________. a. 4% 4. You are considering investing $2,700 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 15%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 9%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. a. Check book 5. A portfolio with a 25% standard deviation generated a return of 19% last year when T-bills were paying 3.5%. This portfolio had a Sharpe ratio of ____. a. 0.62 6. The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. a. Treasury bills, risky assets 7. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. a. 16.25 8. Geometric average return question..see book #8 and question 3 of homeworl

9. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. a. Dollar weighted return 10. Question on means and standard deviations a. Check notebook

Homework #3 1. Asset A has an expected return of 15% and a standard deviation of 20%. The risk-free rate is 5%. What is the reward-to-variability ratio? a. .50 2. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 23%, while stock B has a standard deviation of return of 29%. Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. If the variance of return on the portfolio is 0.042, the correlation coefficient between the returns on A and B is _________. a. 0.304 3. The standard deviation of return on investment A is 18%, while the standard deviation of return on investment B is 13%. If the covariance of returns on A and B is 0.003, the correlation coefficient between the returns on A and B is _________. a. 0.128 4. The standard deviation of return on investment A is 30%, while the standard deviation of return on investment B is 25%. If the correlation coefficient between the returns on A and B is −0.240, the covariance of returns on A and B is _________. a. -0.0180 5. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 19% and a standard deviation of return of 15.0%. Stock B has an expected return of 15% and a standard deviation of return of 6%. The correlation coefficient between the returns of A and B is 0.80. The risk-free rate of return is 11%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. a. 0% 6. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 15% and a standard deviation of return of 29%. Stock B has an expected return of 10% and a standard deviation of return of 14%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of

return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. a. 70% 7. A stock has a correlation with the market of 0.47. The standard deviation of the market is 23%, and the standard deviation of the stock is 31%. What is the stock's beta? a. 0.63 8. You find that the annual Sharpe ratio for stock A returns is equal to 1.90. For a 5-year holding period, the Sharpe ratio would equal _______. a. 4.25 9. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is ____ a. 40 10. Which of the following provides the best example of a systematic-risk event? a. Federal reserve increases interest rates 50 basis points 11. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? a. 20 12. You run a regression for a stock's return on a market index and find the following Excel output: This stock has greater systematic risk than a stock with a beta of ___. 0.50 a. https://www.chegg.com/homework-help/questions-and-answers/run-regres sion-stock-s-return-market-index-find-following-excel-output-multiple-r-035 -r-sq-q41139079 13. Lear Corp. has an expected excess return of 8% next year. Assume Lear’s beta is 1.43. If the economy booms and the stock market beats expectations by 5%, what was Lear’s actual excess return? 15.15 a. https://www.chegg.com/homework-help/questions-and-answers/lear-corpexpected-excessreturn-8-next-year-assume-lear-s-beta-143-economy-boo ms-stock-mar-q31650103 14. Which one of the following stock return statistics fluctuates the most over time? a. Average Return 15. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. a. Less than one 16. The part of a stock's return that is systematic is a function of which of the following variables?

a. (1) Volatility in excess returns of the stock market, (2) The sensitivity of the stock's returns to changes in the stock market, (3) The variance in the stock's returns that is unrelated to the overall stock market b. ANSWER: 1 and 2 17. Diversification is most effective when security returns are _________. a. Negatively Correlated 18. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. a. https://www.chegg.com/homework-help/questions-and-answers/asset-exp ected-return-15-reward-variability-ratio-4-asset-b-expected-return-20-rewa rd-vari-q36003137?trackid=722fa3f90713&strackid=2c8727e78629 b. Asset a 19. Calculate the values of mean return and variance for the stock fund. a. https://www.chegg.com/homework-help/questions-and-answers/calculatevalues-mean-return-variance-stock-fund-calculate-value-covariance-stockbond-fun-q9492055?trackid=cb2572d70bc6&strackid=56789576ab90 b. 9.4 , 471.64 , -23.12 Quiz #3 1. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 14% and a standard deviation of return of 24%. Stock B has an expected return of 9% and a standard deviation of return of 9%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. a. 82% 2. The expected return of a portfolio is 9.3%, and the risk-free rate is 3%. If the portfolio standard deviation is 16%, what is the reward-to-variability ratio of the portfolio? a. 0.39 3. The standard deviation of return on investment A is 22%, while the standard deviation of return on investment B is 17%. If the covariance of returns on A and B is 0.007, the correlation coefficient between the returns on A and B is _________. a. 0.187 4. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 22%, while stock B has a standard deviation of return of 28%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If

the variance of return on the portfolio is 0.046, the correlation coefficient between the returns on A and B is _________. a. 0.542 5. A project has a 0.64 chance of doubling your investment in a year and a 0.36 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment? a. https://www.chegg.com/homework-help/questions-and-answers/project-06 4-chance-doubling-investment-year-036-chance-halving-investment-yearstandard-de-q31410835?trackid=e241f37f490a&strackid=bd126f30069e 6. Firm-specific risk is also called __________ and __________. a. Unique and diversified 7. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ the current investment opportunity set. a. Left and above 8. A security's beta coefficient will be negative if ____________. a. Negative correlated 9. The market value weighted-average beta of firms included in the market index will always be _____________. a. 1 10. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23. a. .097

HW #4 1. According to the CAPM, what is the market risk premium given an expected return on a security of 18.7%, a stock beta of 1.3, and a risk-free interest rate of 7%? a. 9% 2. You invest $1,200 in security A with a beta of 1.5 and $1,000 in security B with a beta of 0.9. The beta of this portfolio is _________. a. 1.23 3. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. ANSWER D

a. https://www.chegg.com/homework-help/questions-and-answers/simple-ca pm-valid-portfolios-priced-correctly-situations-possible-consider-situation-i ndep-q33039773?trackid=05627b74ae03&strackid=0ce5de99263d 4. You have a $48,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $11,200 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta? a. 1.055 5. Consider the single factor APT. Portfolio A has a beta of 1.2 and an expected return of 24%. Portfolio B has a beta of .8 and an expected return of 20%. The risk-free rate of return is 7%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. a. A, B 6. In his famous critique of the CAPM, Roll argued that the CAPM ______________. a. Is not testable bc true market can’t be observed 7. One of the main problems with the arbitrage pricing theory is __________. a. Model fails to identify key macroeconomic variables 8. According to the capital asset pricing model, a security with a _________. a. Positive alpha considered underpriced 9. An important characteristic of market equilibrium is _______________. a. Absence of arbitrage opportunities 10. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. a. Recognizes only one systematic risk factor 11. According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? a. 14% 12. Empirical results estimated from historical data indicate that betas _________. a. Seems to regress toward 1 over time 13. The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? a. 19.5%

14. According to the capital asset pricing model, fairly priced securities have _________. a. Zero alphas 15. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________. a. Buy stock x bc its underpriced 16. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. a. Beta 17. The CAPM _______. a. Predicts relationship between risk and expected return b. Provides benchmark rate of return for evaluating investments c. Help us make educated guess as to exp return on assets that havent been traded 18. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time. a. 1 19. What must be the beta of a portfolio with E(rP) = 18.25%, if rf = 6% and E(rM) = 13%? a. 1.75 20. Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 55%. Portfolios A and B are both well diversified. a. https://www.chegg.com/homework-help/questions-and-answers/suppose-t wo-independent-economic-factors-m1-m2-risk-free-rate-7-stocks-indepen dent-firm-sp-q15511451?trackid=3109d3a87863&strackid=9566dea22ea5 Quiz #4 1. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 13%. What is the expected return on a stock with a beta of 1.4? a. 15.8% 2. According to the CAPM, what is the market risk premium given an expected return on a security of 15.8%, a stock beta of 1.1, and a risk-free interest rate of 7%? a. 8% 3. You invest $1,600 in security A with a beta of 1.5 and $1,400 in security B with a beta of 0.8. The beta of this portfolio is _________. a. 1,17

4. The expected return on the market portfolio is 17%. The risk-free rate is 9%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.80. Within the context of the capital asset pricing model, _________. a. Stocks alpha is -7.4% 5. Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 57%. Portfolios A and B are both well diversified. a. https://www.chegg.com/homework-help/questions-and-answers/suppose-t wo-independent-economic-factors-m1-m2-risk-free-rate-4-stocks-indepen dent-firm-sp-q11045997 i. 4% + 5.78% + 9.64% 6. The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? a. 11.2% 7. According to the CAPM, which of the following is not a true statement regarding the market portfolio. a. Always the minimum variance portfolio on the efficient frontier 8. Consider the capital ...