For question 1 and 2 use following table

T Market Return Stock X return

1.05.25

2-.10.15

3.05-.25

4.25.45

5.00.15

1. ______What is the sample Variance of return to the stock X

  1. .0650
  2. .0300
  3. .1500
  4. .25495
  5. None of the above

2.______What is the sample covariance of return between the stock and the market portfolio?

  1. .
  2. .0250
  3. .16823
  4. .0150
  5. .0400
  6. None of the above

3.______If the covariance between two securities is positive, when the realized returns on one security are greater than expected, the returns on the other will______be______its expected return.

  1. Always; greater than
  2. Always; less than
  3. Never; equal to
  4. Tend to;greater than
  5. Tend to;less than

4.______The possible values for a correlation coefficient are:

  1. From -infinity to +infinity
  2. From 0 to +infinity
  3. From –1 to +1
  4. From 0 to +1
  5. From –1 to 0

The Next Three Questions relate to a portfolio of two stocks, A and B.

5.______If you have equity of $1000 and you sell short $300 in stock B and invest $1300 in stock A, the value for A1(XA) is:

  1. .81
  2. 1.30
  3. -.30
  4. 1.60
  5. None of the above

6.______The value for B1(XB) is:

  1. .81
  2. 1.30
  3. -.30
  4. 1.60
  5. None of the above

7.______If in the next period the rate of return on stock B was 5% and the rate of return of stock A was 10%, the rate of return on the portfolio would be: (assume senerio in Q5)

  1. 10%
  2. 20%
  3. 15%
  4. 13%
  5. None of the above

8.______If you sell Asset A short in the amount of $500 and invest the proceeds plus $1000 of your own money in asset C, what is the portfolio weight for asset A?

  1. 1.5
  2. –1.5
  3. .5
  4. -.5
  5. None of the above

9.______An investor plans to invest $10,000 of his equity. His plans are to buy $5000 of stock A, sell short $2000 of stock B, and buy $4000 of stock C, and then either buy or sell short Stock D as needed to “balance” his resources and uses of funds. What will be his portfolio weight for stock D?

  1. .7
  2. .3
  3. .9
  4. -.3
  5. None of the above

10.______Given a portfolio formed from two securities with expected return portfolio = E(RP) = 12%: Security 1 with E(R1) = 5% and security 2 with E(R2) = 10%, Which of the following statements is true?

  1. Security 1 is being sold short.
  2. Security 2 is being sold short.
  3. Neither security is being sold short.
  4. The security that is being sold short depends on the correlation of the securities with the market.
  5. None of the above.

11.______An investor expects the stock price on a certain stock to fall, he should?

  1. Buy a Call
  2. Sell a Call
  3. Buy a Put
  4. Sell a Put
  5. Both B and C

12.______An investor expects the stock price on a certain stock to fall, he should?

  1. Sell short
  2. Buy a Put
  3. Sell a Call
  4. Both B and C
  5. All of the Above

13.______Which is NOT a Fixed income security?

  1. Bonds
  2. Common Stock
  3. Preferred Stock
  4. Treasury notes
  5. Both B and C

14.______If I purchase stock A for $50.00 and sold it 2 months later for $52.50 plus I received a $1.00 dividend each month, what is my annualized rate of return?

  1. 7%
  2. 9%
  3. 42%
  4. 54%
  5. None of the above

15.______Which of these bonds market price can change even though interests rates stay the same?

  1. Municipal bonds
  2. Treasury bonds
  3. Debenture bonds
  4. Convertible bonds
  5. None of the above

16.______. Suppose you are trying to find the present value of two different cash flows. One is $100 two periods from now, the other a $100 flow three periods from now. Which of the following is/are true about the discount factors used to value the cash flows?

  1. The factor for the flow three periods away is always more than the factor for the flow that is received two periods from now.
  2. The factor for the flow three periods away is always less than the factor for the flow that is received two periods from now.
  3. Whether one factor is larger than the other will depend on the interest rate.
  4. Since the payments are for the same amount, the factors will yield present values that are the same.
  5. None of the above statements are true.

17.______What is the present value of a stream of $2,500 semiannual payments received at the end of each period for the next 10 years? The APR is 6%.(compound Semiannually)

  1. 35,810
  2. 36,885
  3. 37,194
  4. 38,310
  5. None of the above

18.______Your mortgage payment is $600 per month. There is exactly 180 payments remaining on the mortgage. The interest rate s 8.0%, compounded monthly. The first payment is due in exactly one month. What is the balance of the loan? [Balance = PV of remaining payments.]

  1. $77,205
  2. $63,203
  3. $82,502
  4. $85,107
  5. None of the above

19. ______You are given the option of receiving $1,000 now or an annuity of $85 per month for 12 months. Which of the following is correct?

  1. You cannot choose between the two without computing present values.
  2. You cannot choose between the two without computing future values.
  3. You will always choose the lump sum payment.
  4. You will always choose the annuity.
  5. The choice you would make when comparing the future value of each would be the same as the choice you would make when comparing present values.

20. What is the value of the following set of cash flows today? The interest rate is 8.5%.

Year Cash Flow (compound annually)

0: -$1,000 1: $ 200 2: $ 400 3: $ 600 4: $ 1000

  1. $ 800
  2. $ 571
  3. $1715
  4. $987
  5. None of the above

Problem 1 (15 Points)

An Investor is considering two options on how to invest $100,000 for the down payment of a home. Option 1 is a money market account paying 1.5% interest. Option 2 is a 10 year bond with par at $1,000, coupon rate of 5.5 percent and currently selling at par. If he needs the money in 1 year and is assuming interest rates will rise to 6%, which investment should he choose? How much more did he make on the better investment? (Compound Annually, Show all WORK)

Problem 2 (35 Points)

ReturnsReturns

TStock-1(X)Stock-2(Y)

186

2-4-4

348

442

5-23

What is the MVP (Minimum Variance Portfolio) weights for each stock?(Show all work)

At the MVP Portfolio weights, what is the expected return?(Show all Work)

Solutions

  1. A
  2. D
  3. D
  4. C
  5. B
  6. C
  7. E
  8. D
  9. B
  10. A
  11. E
  12. E
  13. B
  14. D
  15. D
  16. B
  17. C
  18. E
  19. E
  20. E

Problem 1

Bank Return=1500

Bond Return=2098.84

Bond made 598.84 more

Problem 2

Mean X=2

Mean Y=3

Var(X)=24

Var(Y)=21

Cov(X,Y)=17

MVP X1=.36 X2=.64

Expected return=.36X2+.64X3=2.64