FIN367 S08Quiz1Bsolutions

FIN367 S08Quiz1Bsolutions - FIN 367 Spring 2008 Quiz 1...

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Unformatted text preview: FIN 367: Spring 2008 Quiz # 1: Basic Intuition about Risk and Return January 28, 2008 (SOLUTI 0 Ms) NAME: SECTION: Time allowed: 20 minutes. Maximum possible score: 20. NOTE: 0 If I cannot understand your calculations, 1 will not be able to give you full credit even if your final answer is correct. You cannot say “these calculations are obvious." o If a problem is missing some key information that you think is necessary to solve the problem, please ask me to clarify the question or state your confusions clearly. Alternatively, please make appropriate assumptions, state them clearly and proceed. No credit will be awarded if you fail to state your confusions or assumptions eXplicitly even if the question is wrong. 0 Partial credits may be awarded if you show your calculations or provide arguments to support your answers. Basic Intuition 1, (2 points) Which of the following statements about risk averse investors is true? They only accept investments that offer risk premium over the risk—free rate. (b) They only care about the rate of return. Mo, 1&5}: (5 Vest! impotha’l‘ v ( c) They accept investments that are fair gambles. ‘ ND, menial 5:;[4 mmprns-a‘hm (d) Both a and b are true statements. ) {:01 “Ifle - (e u ’1 m ni-r “big 2} Wpecirat net (f) a, b, and c are true statements. F a“ ?qja_‘j_¥ ; 0 . Both b and c are true statements, 2. (2 points) Which statement about portfolio diversification is correct? Proper divcrsification can reduce or eliminate idiosyncratic risk. (b) Proper diversification can reduce or eliminate systematic risk. Canno‘l’ get h‘af 9.? .535 . (c) Proper diversification reduces the portfolio’s expected return because it reduces in“; a portfolio’s total risk. (d) The riskvreducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in the portfolio. EVflA no) ik 2 Seen-vibes 753}: (an be “(related . 3. (2 points) In a fully efficient financial market, arbitrage opportunities exist. @ muSt HOt Ct‘rmca :_-> M42wa P‘nkc : ¥u-daue wlal Value (b) must (c) might not 9 NO ATE. oFPOThKHE‘ (d) might 4. (2 points) If some securities are mis—priced relative to their fundamental values, an arbitrage opportunity —-—---m exist in the market. ® might OPPOT {'3 f5 “0+ jua'rawh-ege bCCaqs¢ (b) must it”: M43 19.: MfS?‘}-"c€nj Tefa‘h'vc +0 -Fuualnuem+a£ (0) must not Vfilws butt- no "retaix‘ve mispx‘cxaj _ (d) none of the above 5. (2 points) If investors start to discount the future at a higher rate due to some external shock (e.g., an oil shock) to the economy, the prices of risky assets (cg, stocks) are likely to: d The deemOMln-a‘lot in +k€ Pm‘u‘vj efluaii'aw “0’1”er ecrease Pm‘(c MRS‘!" 38 down. increase (c) remain unchanged ((1) none of the above to 6. (2 points) The owner of an American put option has a specific stock, on or before a specific date, at a specific price. a right: sell YD“ are Moi“ Obilba'i-egQ +13 exerct‘be The Bib-Han. (b) a right, buy ((3) an obligation, sell ((21) an obligation, buy 7. (8 points) You purchase an European call option-on stock XYZ with a strike price of $60. You pay $3 for the call option. Draw a graph indicating your net profit from this investment at the expiration date for stock prices in the range of $0 to $90. Please label the axes clearly. See class notes. ...
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This note was uploaded on 03/30/2010 for the course CH 369 taught by Professor Kbrowning during the Spring '07 term at University of Texas.

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FIN367 S08Quiz1Bsolutions - FIN 367 Spring 2008 Quiz 1...

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