Quiz 1 Winter 2019, answers PDF

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ADM 4356M January 22, 2019

Quiz #1 Version #1 Solutions

Name: __________________________ Student ID #: _____________________

Statement to be signed by the student: I understand the Telfer School Statement of Academic Integrity, and I pledge NOT to have committed or attempted to commit academic fraud in this quiz. Signed:______________________________________ A quiz without a signed statement will NOT be graded & will receive a quiz grade of ZERO.

There are 9 questions on this quiz. Questions 1 - 8 count 1 mark EACH. Question 9 is a problem and count 2 marks. This quiz is designed to be 30 minutes long. 1. (1 mark) Which of the following assets are generally considered to be alternative investments? a. Timberland b. Hedge funds c. Commodities

d. All of the above e. Both a. and c. 2. (1 mark) Which of the following items BEST describes a split estate? a. An investment bank splits the interest and principal payments of a government bond and uses these separate payment streams to guarantee the payment of securities that it issues. b. Your last will & testament specifies that your estate shall be split equally among your children. c. A collateralized mortgage obligation splits payments into ten tranches. Holders of the nth of ten tranches are paid in full so long as at least (n x10%) of the underlying mortgages are paid. d. A credit default swap splits the risk out of a bond, and the risk is borne by the swap issuer.

e. Surface and subsurface rights are separately owned for a plot of land. 3. (1 mark) A(n) ____________ is an option to exchange one risky asset for another. a. Binomial option b. American option c. Real option

d. Exchange option e. European option 4. (1 mark) A commodity futures market is said to have a __________ term structure of forward prices if the price DECREASES as time-to-delivery INCREASES. a. Contango b. Flat

c. Backwardation d. Secular e. None of the above 5. (1 mark) __________ is the length of time from the start of the timber (typically the planting) until the harvest of the timber. a. Planning horizon b. Life cycle c. Rotation d. Growth cycle e. Both a. and b.

© 2019 Dr . Wi l l i a mF . Re n t z&As s o c i a t e sAl lRi g ht sRe s e r v e d 1

ADM 4356M January 22, 2019

Quiz #1 Version #1 Solutions

Name: __________________________ Student ID #: _____________________

6. (1 mark) Which of the following add value to a multiple use option? a. The profitabilities of the uses are close. b. The volatility of the profitability of EACH use is LOW. c. The pairwise correlations between the profitabilities of the uses are HIGH. d. Both b. and c. e. All of the above 7. (1 mark) The __________ is the marginal economic benefits that an investor obtains from having physical ownership of a commodity rather than synthetic ownership. a. Convenience yield b. Risk-neutral yield c. Security yield d. Interest rate risk yield e. Market power yield 8. (1 mark) Which of the following reasons is NOT generally used to assert that commodities should help diversify a portfolio of traditional assets? a. Commodity prices are NOT directly determined by discounting the value of future cash flows.

b. Commodity prices have LOW volatility. c. Commodity prices are driven by different economic fundamentals than are stocks & bonds. d. Nominal commodity prices should be POSITIVELY correlated with inflation. e. Commodity price changes may be NEGATIVELY correlated with stock & bond price returns. 9. (2 marks) Suppose that a plot of land is currently valued at $500,000. Suppose that in one year it will either have an up value of $800,000 or a down value of $300,000. What are the risk-neutral up and down probabilities for this investment? You must SHOW YOUR WORK to receive any credit for this problem. a. P(up) = 0.25; P(down) = 0.75 b. P(up) = 0.75; P(down) = 0.25 c. P(up) = 0.40; P(down) = 0.60 d. P(up) = 0.60; P(down) = 0.40 e. None of the above $500,000 P( up) $800,000  1  P( up)  $300,000 P (up )  $800,000  $300,000  $500,000  $300,000 P (up ) 

$200,000  0.40  P (down )  1 P (up )   0.60 $500,000

1 mark credit for correct formula 1 mark credit for correct answer PROVIDED that your work is correctly displayed

© 2019 Dr . Wi l l i a mF . Re n t z&As s o c i a t e sAl lRi g ht sRe s e r v e d 2...