exam1_solutions_Spring2008

exam1_solutions_Spring2008 - EXAM 1 SOLUTIONS Finance 34600...

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EXAM 1 SOLUTIONS Finance 34600 – Investment Theory Professor Shane A. Corwin University of Notre Dame, London Centre Spring Semester 2008 February 13, 2008 INSTRUCTIONS : 1. Provide an ID number and initial above if you would like your exam scores posted during the semester. 2. You have 75 minutes to complete the exam. 3. The exam is worth a total of 100 points. 4. You may use a calculator and an 8 ½ by 11 inch formula sheet. You must hand in the formula sheet with your exam (put your name on it). 5. Allocate your time wisely. Use the number of points assigned to each problem as your guide. 6. In order to get full credit on the problems, you must show ALL your work!
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Finance 34600 – Exam 1 1 February 13, 2008 Multiple Choice (32 points) Choose the best answer for each of the following questions. The questions are worth 4 points each. 1. Suppose you sell short 500 shares of stock that is currently selling for $40 per share. The initial margin requirement is 70% and your broker requires a 30% maintenance margin. What is the percentage margin in your account if the stock price increases to $60? (Note: You use the full amount of margin and earn no interest on the funds in your margin account.) a) 11.8% b) 20.0% c) 13.3% d) 46.7% 2. The rate of return for a market-value weighted index equals the rate of return that would be earned by an investor holding a portfolio comprised of all firms in the index: a) with one share of each stock b) with equal dollar amounts in each stock c) weighting each firm in proportion to its profitability d) weighting each firm in proportion to its price e) None of the above 3. FBN, Inc. has just sold 1,000,000 shares in an initial public offering. The underwriter’s spread was 7%. The offering price of the shares was $50, but the shares immediately jumped to $53 at the start of secondary market trading and closed at this price on the first day. How much money did FBN, Inc. raise from this issue after underwriting fees? a) $46.5 million b) $49.3 million c) $3.5 million d) $50.0 million e) None of the above 4. You currently own 500 shares of Google stock. You purchased the stock at $500 per share and it has since risen to $520 per share. You would like to sell the stock if it either rises to $550 or drops to $490. Which of the following combinations of orders should you submit? a) Limit sell at $490 and Stop Loss at $550 b) Short sell at $550 and Stop Loss at $490 c) Market Sell at $550 and Limit Sell at $490 d) Stop Loss at $490 and Limit Sell at $550 e) Either choice (a) or choice (c) would work
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Finance 34600 – Exam 1 2 February 13, 2008 5. The covariance between the returns on IBM stock and the returns on the S&P 500 index is 0.013. The standard deviation of IBM returns is 16% and the standard deviation of S&P 500 returns is
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This note was uploaded on 04/11/2010 for the course BUSINESS FIN taught by Professor Sata during the Spring '10 term at A.T. Still University.

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exam1_solutions_Spring2008 - EXAM 1 SOLUTIONS Finance 34600...

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