1. Dr. Z has NOE discussed the following investment strategy:
a. Follow Warren Buffet.
b. Use market-to-book ratio to determine if a stock is a growth or a value stock.
c. Golden cross/death cross.
d. Use different orders or leverage when trading.
2. The correct statement is:
a. Efficient frontier is a portfolio that generates the largest returns for a given level of standard deviation.
b. A risk free asset always has a standard deviation less than 1.
c. Based on the CAPM, stocks with a beta of zero offer a required return that is equal to the risk free rate.
d. The correlation between a risk free asset and any other risky asset is always -1.
3. The correct statement is:
a. A seasoned issue is the first time a formerly privately-owned company sells stock to the general public. A stock split is the issuance of stock by a company that has already undergone an IPO.
b. The primary market is the market where newly-issued securities are sold, while the secondary market is the market for trading existing securities. After firms sell their newly-issued stocks to investors in the primary market, new investors purchase stocks from existing investors in the primary market.
c. An earnings report such as 10K or 10Q is a description of the firm and the security it is issuing when a firm plans to undergo an IPO.
d. When executive salaries are linked to lino profits, the firm creates incentives for managers to contribute to the firm's success. However, this may also lead to earnings manipulation or accounting fraud, such as divestment of its subsidiaries or unreasonable revenue recognition. That is what audits and external analysts will look out for.
The UD Capital Index is a price weighted stock index based on the three largest boat manufacturers in that nation. As shown in the Table below the stock prices for the stocks are $10, and $12 on 1/6/20XX. Answer questions 4 to 7.
|
|
1/6/20XX
|
1/7/20XX
|
|
|
Pi
|
Qi
|
P2
|
Q2
|
| Stock a |
10
|
1,000,000
|
11
|
1,000,000
|
| Stock b |
20
|
200
|
18
|
200
|
| Stock c |
12
|
200
|
18
|
200
|
4. What is the price weighted index change (in %) on 1/7 relative to that on 116?
A. 11.90%
B. -33.00%
C. 9.90%
D. -24.81%
5. Let's make the price weighted index on 1/6 is 100; then the index on 1/7 is
A. 124.81
B. 67
C. 75.19
D. 111.90
6. What is the value-weighted index change (in %) on 1/7 relative to that on 1/6?
A. 4.55%
B. 9.90%
C. -33.00%
D. 10%
7. (challenging question) There is a third type of stock index, like ValueLine Index, which is called equally weighted index. The index changes is simply the average of stock price changes (%). For example, if an index has two stocks, and stock A price is up by 10% and stock B is up by 20%; then the index change is 15% (or the average of 10% and 20%). Now go back to the table above. What is the equally weighted index change (in %) on 1/7 relative to that on 1/6?
A. 16.67%
B. -24.81%
C. 9.90%
D. 4.55%
8. The correct statement is___
A. Loans of a given type such as mortgages are placed into a 'pool' and new securities arc issued that use the loan payments as collateral. This process is called ETF.
B. DJIA is a market value weighted index: S&P500 and NASDAQ are market cap weighted indexes.
C. P/E TIM is more important than forward P/E ratio when we try to determine whether a stock is too expensive or cheap.
D. There an: 4 stocks in a portfolio. To estimate the standard deviation of the portfolio. we need 6 correlations.
AAPL (Apple) stock price (close price) is 5502.60 on 2/13/12. On 2/14/12 you purchase I (81 shares of AAPL at $505. Initial margin (IMR) = 46%. WAR = 36%. Answer the problems 9 to 13.
9. What is the initial minimum equity you need to put into the account?
A. $18,180
B. 50%
C. $23,230
D. 550,500
10. What is the maximum loan you can borrow from your broker?
A. $32,320
B. 50%
C. 527.270
D. $27.275
11. If price dropped to $450 per share, what is your margin?
A. $17,730
B. 38.28%
C. $29, 750
D. 39.40%
12. Now far could the price drop before you get a margin call from your broker?
A. E100
B. $426.09
C. $427.31
D). None of the Above
13. Based on the above calculations, you conclude that the smaller the MMR
A. the smaller stock price drops you can bear.
B. the large stock return you can make.
C. the smaller stock returns you can make.
D. the larger stock price drops you can bear.
14. ZYXW stock price (close price) is $402.12 on 2/1320XX. On 2/1420XX it opens at $403.18. You short 100 shares at $406. What is your maximum loss on your short transaction? What is your maximum profit you can expect? Ignore transaction costs.
A. unlimited loss. $40,600 profit
B. $40.400 loss, 0 profit
C. 0 loss. $40,400 profit
D. $60.600 loss, unlimited profit
15. You short-sell 200 shares of Rock Creek Fly Fishing Co. © $50 per share. If you wish to limit your loss to $4,000, you should place a order at
A. Stop buy; $70.00
B. Stop sell; $65.00
C. Limit buy; $30.00
D. Stop buy; $30.00
16. The correct statement is ____.
A. If you buy a bond, you expect to get profit from price appreciation and dividend payment; while if you buy a stock, you expect to receive interest payment.
13. Dollar denominated (time) deposits held outside the U.S.. such as in Japan. is called
Asia dollar.
C. The key problem for MPT (modem portfolio theory) is how to create a portfolio with the highest possible return and simultaneously with the lowest standard deviation.
D. LIBOR is the interest rate at which municipal bonds are being issued.
17. The correct statement is
A. Sarbanes-Ox ley Act was passed in 2003 and it mainly requires firms to strengthen their corporate governance.
B. When a firm has negative earnings surprise, its stock price generally will go up.
C. The risk-return trade-off states that assets with higher expected returns should have higher correlation with other assets.
D. Stock SPLT recently made a I-for-3 "split" announcement. This is a reverse stock split and we generally want to short this stock and expect stock price to drop further.
18. _____ is the extent to which financial assets move in relation to one another and it is denoted as
A. Standard deviation, σ
B. Expected return, E(R)
C Correlation, ρ
D. Systematic risk, β
19. Which statement is NOT correct?
A. If asset A will always move at twice the magnitude of Asset B, then the correlation between A and B must be positive I.
B. A portfolio has stock A and 13; then its risk is equal to the weighted average of each stock's risk when A and B has a positive 1 correlation.
C. Your preferred direction is southeast on a risk-return tradeoff map (if we assume return is on the horizontal axis and risk is on the vertical axis).
D. The average P/E ratio for the US stock market is around 27.
20. What do you call the following chart?
A. Risk return trade-off between two assets
B. MVP
C. Efficient frontier
D. Investment opportunity set with various correlations between two risky assets
Answer problem 21 to 26 are based on the following chart, which shows the expected returns and risk of variables portfolios with different weights of bond and stocks, as well as different assumptions of correlations between stock and bond.
21. The horizontal axis of the chart above is:
A. Expected variance
B. standard deviation
C. Risk free rate
D. Expected returns
22. The straight line A:
A. indicates the investment opportunity set when the stock and bond arc perfectly positively correlated
B. indicates the investment opportunity set when the correlation between stock and bond is equal to 0
C. indicates the investment opportunity set when the correlation between stock and bond is equal to +2
D. indicates the investment opportunity set when the stock and bond are perfectly negatively correlated
23. The lines II (two connected lines):
A. indicates the smallest diversification effect that can be achieved
B. indicates the investment opportunity set when the correlation between stock and bond
is equal to 0
C. indicates the largest diversification effect that can be achieved
D. indicates the investment opportunity set when the standard deviation between stock
and bond is equal to -1
24.The correct statement is____.
A. The assumed correlation between stock and bond that is used to construct the curve C must be bigger than the assumed correlation used to construct the curve D.
B. The efficient curve is It where h is located at the farthest northeastern direction.
C. This chart is called "Investment opportunity set with various correlations between two risky assets"
D. Portfolio V (the end point of straight line A) is constructed by investing 100% of wealth into stock and 0% into bond
25. Portfolio g is located on the straight line A (the line connecting portfolio A and 5). Portfolios i and j are located on the line connecting portfolio h and S, as shown above. The correct statement is:
A. Portfolio i is being dominated by ponfoliot
B. Portfolio g is being dominated by portfolio j.
C. Portfolio i dominates portfolio/.
D. Portfolio g dominates portfolio/
26. What does this chart tell you?
A. The lower the correlation between the returns of stock and bond, all else equal, the greater the portfolio standard deviation.
B. The largest diversification benefits can be achieved when the correlation between stock and bond is 0.
C. The largest diversification benefits can be achieved as long as the standard deviation between stock and bond is less than
D. The lower the correlation between the returns of stock and bond, all else equal, the smaller the portfolio standard deviation. the greater the diversification benefits.
27. The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. is current Chairman of Federal Reserve. When the Chairman of the Fed speaks. the world listens.
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