Exam 1 SP 12.pdf - CV95 FINANCE 4020 — INVESTMENTS EXAM...

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Unformatted text preview: CV95 FINANCE 4020 — INVESTMENTS EXAM ONE SPRING SEMESTER 2012 NAMEMMW STUDENT# I L/ O 3 L'/ 2] g” .. __..__1_1_PAGES (w/ ,cpveLShegt),,, ,,________, W, 52 QUESTIONS ALL QUESTIONS WORTH ONE POINT EACH 75 MINUTES FIN 4020 SPRING 2012 EXAM ONE (rev/7‘)- ( >1: 1. Authorized participants (AP’s) of an exchange traded fund (ETF) are able to buy and sell shares of the ETF directly at the stated NAV. On a given day the price of shares of the ETF are trading in the secondary market at $32. However, AP’s of the fund are quoted a stated NAV of $38. For the AP's of this ETF it represents /a./ A chance to convert shares into debt instruments @ An opportunity for arbitrage profits ,2.’ A realized loss d. An efficiently functioning market . A Connecticut based hedge fund closes the books at year end 2011 with assets of $100million and pays itself $2million management fee per the limited partnership agreement, and also pays itself a performance fee of $2million per the limited partnership agreement which states the general partners are entitled a 20% performance fee for all fund profits in excess of a “high water mark". These fees reduce portfolio assets to $96million at year end 2011. At year end 2012 the fund closes books and states fund assets are $12 Omillion Which of the following is correct concerning fees collected by the general partners X The limited partnership agreement must state management fees will be 2 2 Z V‘ assessed at the industry maximum 3% of assets under management b. At year end 2012 the general‘partners will collect management fee of $2million and performance fees of $20million 0 At year end 2012 the general partners will collect management fee of $2million and performance fees of $4.8million mm year end 2012 the general partners will collect management fee of $2.4million and performance fee of $4million. 3. Concerning question 2, the value of the fund at the close of 2010 must have been a. $80million b. $88million (c c.2 $90million $100m11110n 4. Reason most Exchange Traded Funds (ETF’s) have low expense ratios includes: _ You specify which stocks they should buy. % It should only take a skeleton crew of people with computers to run one. No need for high priced portfolio managers experienced in making asset c. allocation-decisions. @1111 of the above . None of the above FlN 4020 SPRING 2012 EXAM ONE 5. As discussed in class, the purpose of this course is intended to: a. Make you effective day traders b. Give you the tools needed to "Get rich quick" c. Give you tools to make informed investment decisions so you can build riskless portfolios @Help you think about risk so you can make good decisions and build long term wealth 6. The reason Warren Buffett prefers to buy companies in whole rather than just portions of their shares is a. So he can pay himself and other Berkshire Hathaway shareholders a hefty dividend b. So he can pay his management team good bonuses c. .He prefers to liquidate companies and needs majority control to do this QHe wants to decide how to appropriately deploy capital 7. Warren Buffett has stated in the past and still today that the biggest impediment Berkshire Hathaway will have in the future e13 effectively deploying capital b. Is hiring good people c. Is not having enough cash d. Is having split the stock too many times 8. Berkshire Hathaway often splits the stock. 9. As discussed in class, the risk of investing in a Ponzi scheme can be avoided by .arSeeking the advice of your friends when investing (b' Seeking to take on as much systematic risk as possible a.ev Investing 1n hedge funds ""“"*~“""@Seeking high payout 1'3th investments ‘ " ' ‘0’" ' ‘ m ' h “ 7 "WW” W" "WW 7' " 10. The reason the secretary to Warren Buffett pays more in tax than he does is because a. She has more wealth than he does b. Her income is taxed at higher rates than his c. ' She makes more in taxable income than he does . He sells stock when he needs money 11. On average, IPO’s tend to be for average investors and for investment bankers who access the shares in the primary market. ’ a. great performers, great performers b. great performers, poor performers poor performers, poor performers @poor performers, great performers 3 FIN 4020 SPRING 2012 EXAM ONE 12. As discussed in class via an article in the WS], a $50 Billion valuation for Facebook would equate to Facebook being valued at _% the market value of Google, with _/_% the level of profits of Google. 150, 50 . 72, 15 . 53, 10 . 10, 50 13. Active trading in markets and competition among securities analysts helps ensure that I. security prices approach informational efficiency ll. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and 11 only C. II and III only 9/11 and 111 14. The success of common stock investments depends on the success of A. derivative securities - B. fixed income securities he firm and its real assets . government methods of allocating capital 15. The Sarbanes-Oxley Act of 2002 tightened corporate governance rules by requiring Wthe following? A. Required corporations to have more independent directors B. Required the CFO to personally vouch for the corporation' 5 financial statements equired that firms could no longer employ investment bankers to sell securities “A to the public ’ ‘ 1.-“ ”‘ "" mm“ * D. The creation of a new board to oversee the auditing of public companies 16. A is a private investment pool open only to wealthy or institutional investors that IS exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds._ A. mutual fund B. real estate investment trust @edge fund D. money market fund . FIN 4020 SPRING 2012 EXAM ONE 17. Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to earn no more than the Treasury bill rate on either security ‘ ay less for the security that has higher risk tioay less for thesecurity that has lower risk _D. earn more if interest rates are lower ll) 18. Which one of the following is a true statement regarding corporate bonds? A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares B. They are exempt from SEC regulation $21 corporate convertible bond gives its holder the right to exchange it for a specified number of the company' 5 common shares . D. Holders of corporate bonds have voting rights' 1n the company 19. The urimary function of investing is Movement of money through time b. Increase liquidity c. To beat the market return , d. Get rich quick 20. Venture capital is typically provided to a. Mature firms b. ‘fblue-chip” firms ~ c. Investment banks Startup firms 21. The investment instrument which tends to be valued like equity in bull stock markets and valued like fixed-income in bear stock markets 0 Convertible bOnds .--H,,"..________.__k,_w'_..Swap contracts ‘ 7 "T. s._______ "7' _.__..,_. ”A” " ' __ ___.____.__.._..._._ c. ' Preferred equity d. Repurchase agreements 22. What is the financial instrument typically held as collateral in repurchase agreements? - a. High priced stocks b. IPO shares High quality bonds . . Certificates of deposit FIN 4020 SPRING 2012 EXAM ONE (Use the following data for questions 23 — 25) - During 2011, the lone ’ .,- : ne Iohnson’ . - I filed joint tax returns. The ® taxable income was @015 , a-nd—th:O. ‘h‘t'axable income of G. 8 for the tax year ended December 31, 2011. I Sing the following fe . eral tax rates, . ' calculate the taxes for the Jones’ and the Johnson's. Taxable Income Tax Rates Joint Returns ~ 10% '$0 to $16,700 15% $16,701 to $67,900 25% $67,901 to $137,050 "3““ 28% $137,051 to $208,850 Tow" 33% $208,851 to $372,950 35% Over $372,950 23. TaXe orthe‘Iones’: . 38,103.50 6. $45,728.50 // @$49,840.00 09860 . $58,740.00 - ML / 24. Taxes for the Johnson’s: y , 0% la 43'1“” $11,700.00 $11,875.00 MW, . ,.. $19,500.00 to} $25,740.00 09 25. If you were to calculate the ratio of the Jones' to the Johnson’s taxable income, and also the ratio of the Iones’ to the Johnson’s taxes paid, what conclusions could you ’ make about the federal income tax structure? a. Those who earn higher incomes pay a lower proportion of their income in 4~ — ~ ~ taxes. hose who earn higher incomes pay a higher proportion of their income in taxes. c. Those who earn lower incomes pay a higher proportion of their income in taxes. (1. Everyone pays the same proportion oftheir income in taxes. FIN 4020 SPRING 2012 EXAM ONE 26. You purchase 100 shares of a stock for $53.45 per share, using as little of your own money as possible. Your broker has a 59% initial margin requirement and a 34% maintenance marginrequirement. The price of the stock falls to $22.50 per share, wha ust happen? ‘ éEYou need to add $432.70 to maintain the position at the minimum margin b. You need to add,$539.70 to maintain the position at the minimum margin fl You need to add $706.45 to maintain the position at the minimum margin. /d./ Your equity is completely depleted and your broker will liquidate the account. - .,9— ~ 3 .73; mm mm ,a o ) 27. The events of 9/11/01 and the effect on the valuations of financial assets is an example of a. Unsystematic risk @ Systematic risk c. Business risk d. Financial risk 28. You sell 100 shares of a stock short for $48 per share. You want to limit your loss on this transaction to no more than $500. What order should you place? /a./ Market order ' Stop-li'mitordelr top-loss order Churn order 29. Investing in the stock market through shares of a Vanguard fund is an example of a direct investment? a. True (9 False . 30. Options give the holder the obligation to buy or sell another security at a specified price over a given period of time? ‘ rue alse 31. A private placement of debt or equity securities by a firm requires registration with the SEC? ' True "' False __._ . . ,. ___ ___..____._._ __._. _. r— , ___._-_,_,,V,_i4_a____.._ _.V__.. FIN 4020 SPRING 2012 EXAM ONE ‘ 32. When foreign stocks are purchased in-the form of American Depository Shares [ADS or ADR’s) you will reap added gain or loss on your investment due to currency apprec1ation or depreciation of the dollar($) versus the foreign currency where the com an operates? True ‘ False \ 33. often accompany short sales, and are used to limit potential losses from the sho ’osition. @311; orders B. Restricted orders ‘ C. Limit-loss orders fitop-buy orders 34. A growth oriented portfolio manager should a. Buy stocks for current income b. Buy equity in mature firms c. Buy penny stocks on speculation 69 Think long-term and seek value 35. The two main costs of raising capital in the primary markets are a. Overpricing of the securities and explicit fees zb’ Overpricing of the securities and loss of business competitiveness @gnder' pricing of the securities and explicit fees xplicit fees and loss of competitiveness 36. Which one of the following provides the best example of securitization? A. convertible bond B. call option @nortgage pass-through security D. preferred stock 37. An investor buys a bond for $10,000. The bond pays $371 interest every six months. After 18 months the investor sells the bond for $9,600. What types of income and/ or loss would the investor have? X$400 capital loss, $371 current income, total dollar return of $771 . b. $400 capital gain, $1, 113' 1n current income, total dollar return of $1,513 $400 capital loss, $1,113 in current income, total dollar return is $713 ,d/$1,113 capital loss, $400 in current income, total dollar return of $713 FIN 4020 SPRING 2012 EXAM ONE 38. You purchased a share of stock for $78.00 one year ago, sold it today for $86.88, and during the year received a dividend payment of $5.24, calculate the current income, capital gain (or loss), and total return in dollars and as a percentage of the original investment. ' I Murrent income of $8.88, capital gain of $5.24, Total return of $14.12 (18.10%) yin/Current income of $5.24, capital gain of $14 12, Total return of $19. 36 (24. 82%) c. Current income of $14.12, capital gain of $8.88, Total return of $23.00 (29.49%) flurrent income of $5.24, capital gain of $8. 88, Total return of $14.12 (18.10%) 39. Given a real rate of interest of 2.6%, an expected inflation premium of 6.8%, and risk premiums for investments A and B of 4.7% and 6.4% respectively, Calculate the risk free rate and required returns for investments A and B. a. Risk free rate. is 6.8%, required returns of 14.1% and 15.8% for A and B respectively a Risk free rate is 9. 4%, required returns of 14.1% and 15. 8% for A and B , respectively c. Risk free rate is 2. 6%, required returns of 14. 1% and 15. 8% for A and B respectively d. Risk free rate is 6. 8%, required returns of 11.5% and 13. 2% for A and B respectively 40. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been _per, share. $0.55 B. 1.80 _ . .. 0.45 D. $1.25 41. Would you be better off taking your inheritance in 50,000 cash $US Dollars today or $50, 000 US in 20 years and then $10, 000 per year for years 21- 30? Assume .you can earn the historical average return in the US stock market of 11.2%. QTake the money now b. Take the money in the future FIN 4020 SPRING 2012 EXAM ONE For the following set of questions please select whether the period indicated was an overall bear or bull market for the American stock market. 42. Period of 1990-1999. a. Bear market (I; Bull market 43. Per' 0 - 0f2000-2003. 'ear market 6} Bull market 44. Period of 2004-2006. e. Bear market @ Bull market 45. Period 0f2007- 2009. @ Bear market . Bull market For questions 46-52 please provide an answer in one or two sentences unless otherwise instructed. 4.6 Explain the difference between a pure investor and an active portfolio manager? A _/Oor1l’fi"("° M’M’Mfilf Mfifiu’,€4' L117 ;q.Lr/LWM)5— Mane gage/cam;— E> ) VC/ [/Mk 4.. [0th ,(AA—V LfJ-u/ [IE/{'9’ 0W I’D/Q” M‘l’l‘iic (4‘)" W47 W, .5th “.5 47. Give one good reason why a buy and hold (long-term) investor may disagree that higher beta stocks are riskier? T%Y;’ AZ \Aqm 5; fl»? m‘S éel-a : 7' £1.7éqf)yé;erm 7L Nb"! 5},— ...---...._7)o.4,- “a... .9001}? ,. COM/)qflae___..__wL lt___M W_j.(vr7L""’J .. a (41': RF 694% W6»? 30 0(qu fa. 0\ [59 cf marge/g: 0L €004 '9: WA W I' (( Mod/u, FCWMr—I "N 7LL-E l(all; {-44 ’— g 48. Why did the collapse of Lehman Brothers 1n the fall of 2008 have such an effect on worldwide liquidity markets? Lflldwwm war lea/{pluck MFWAFJJ‘ of" go, | Oh HAL A“ H“ 1" m U/H‘qfir 7.411%}, caquL I 66, can YTAL’LL 5‘46 “fl’EM- £143 - \a max/ (‘9’, w0~4( wk W‘l/ID’ %<’!/ ,y a Shy/v Okra/o A (H' fl ft? 1’“. “A ‘H ""‘w* 9" 6‘ ’7 7&9. .mw é? a 963.4" w [dc/(4 ’flufllk. W focl’t AAJLW I oMF “‘4 ‘JLOMA 0 d; card‘s“: . I ’— ‘ é FIN 4020 SPRING 2012 EXAM ONE 49. Does Warren Buffett ever pay dividends from Berkshire Hathaway? Explain why or why not. No“ he Gelsever 6w. com {rem}; be-H-Cr valw— ire—Mk m fi‘V/M Yr CVOLIO’I M ’l/(Aqq Ll ;)/ l' ,1 VLLg’A/b’. CO“ {A Wren? U 50. In class we discussed five or six options available to finance managers concerning what to do with profits. Please list four. , gar/HI“; ,‘/\ M COM/99"} l/ ”a“ dr'V-WQ/ifl/ / i %~/' ”A o‘Ht/ com/0.9mm!“ 5%)ch 4 [go/Ag Ave) 7 [N ( ‘FVWL I./\ 7’19 Saw/{Ivyf . _ a 51. Explain the inherent conflict of interest in a broker/ dealer scenario and why many investors will specify the way in which trades are executed? I; flour 6/9 @«fir {5’ Q, [3'9 0x {gigagQ/‘E L‘Q» Imfiaéfz 5Q malt , I — 0% :5» \pVédTbljg (7 . It 0 Leolz )m 5% 7 L W .Aslcr/l 75 \\ , fiance“ , I . {LL firewall J/L‘AH ‘ (3&3 f—fl—Q—Fo-vk. 1:4 Uuijv/‘j’ f {cffi 7“? .~ Vflj" M WLLt/CK +111»? avg {MMWL +0 ,0fii?.~%‘v L- ‘vz, (offer Y” ”H“? Jaq’l/ MEL 5 51 94ml}. 0J9, glad; pacer ’2‘1' 7. ~,> WWW ”52: ’Bfiéflfiifilfifh‘ifié‘ 'b‘éhEfiE’df c'ournbi‘ning negatively correlated secfir‘ifiég'i‘n‘é“_‘“““ W (“A portfolio? I” ‘ / . J n N. F, m gem «l’o W270L-7Liviéj/ CGf/‘Q’AkJ SEkM/F' 3C3 71VQ’ IVUCFI- {'3 ... l 132%, 0\ K o (“l/LO (,‘o I 4w W 99 "’11 3'11 Myrz‘Mx: #15.“ 7,7 OéDWV’fiS o :- 73 ‘4,” w-Lu'oia c-«f’dw‘a’lf [9 ”£fo ‘ V , . i A / 5 Short Answer Score ' 5 Scantron Score 77 L Overall Score 3/0 ’ 3' Su/ 11 ...
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