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First Midterm Exam Answer

First Midterm Exam Answer - First Mid-term Exam*000 Student...

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Unformatted text preview: First Mid-term Exam March 08, 2010 *****000****** Student name: E11? M NE; U YE” A} Student ID#: Versior. Total 46 points 1.(1p) portfolio construction starts with asset allocation. A. Bottom-up V B. Top-down C. Upside-down D. Side-to-side E. Stock picking 2. (1p) is a mechanism to mitigate potential agency problems. \e’ A. Tying income of managers to success of the firm B. Directors defending top management C. Anti takeover strategies D. Straight voting method of electing the board of directors E. Increasing fixed salary 3. (2p) The price quotations of treasury bonds in the Wall Street Journal show a bid price of 102: 12 and an ask price of 102: 14. If you sold the bond you expect to receive A.$1,024.75 VB. $1,024.38 c.$1,023.75 \ . D.$1,022.50 W \g + £2 .X ( .‘QG" > n \,023.‘7r E.$1,021.00 "—‘ 1" 3;"2 ' zen _ EM BUS321 — First Midterm Exam Page 1 4. (1p) are an indirect way US. investors can invest in foreign companies. A. RDAS B. IRAs C. SDRS ‘/ D. ADRs E. ETFs 5. (2p) A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, What is the one day rate of return on the index? A. 5.78% B. 4.35% C. 6.16% D. 7.42% E. Need more information ”incl-AM Ramrm . (1 p) Real assets represent about " A. 1% B. 30% C. 35% D. 45% E. 80% of total assets for financial institutions. BUS321 — First Midterm Exam Page 2 7. (2p) Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in three months. What are the annual percentage rate (APR) and effective annual rate (EAR) of return for this investment? A. 2.04% and 2.24% v’ B. 8.16% and 8.54% C. 8.54% and 8.16% D. 12.24% and 12.48% E. 12.48% and 12.24% loco: -— CESETB a $952: - .__. 2.0g Q 64807;. .— . a, 1’2, G A98; ”1: 44.95% (/0 is 3 “I 9 Hz; A '1? .... 8 E“ = (/1 -+ 00262-4) _: -—_ gig/O 8. (1p) In 2008 the largest corporate bankruptcy in the U.S. history involved the investment banking firm of “A. Goldman Sachs ' B. Lehman Brothers C. Morgan Stanley D. Merlill Lynch E. Bears Stearns 9. (2p) You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If you purchase or sell the stock you must pay a flat commission of $25 (for every trade). If you buy 100 shares of the stock and immediately sell them, What is your total implied and actual transaction cost in dollars? A. $50 B. $25 JC' $30 ‘ (1y . D. $55 .. ._ .3 n 4. .. ‘ in ,1 8‘3““ E.$60 flee ( {£5.30 .w.l<...‘2.s> 2 (2 M BU5321 — First Midterm Exam Page 3 10. (1p) A dollar denominated deposit at a London bank is called at, A. eurodollars B. LIBOR C. fed funds D. banker's acceptance E. Yankee’s denominated deposit 11. Up) Which one of the following is a true statement? A. Dividends on preferred stocks are tax~deductible to individual investors but not to corporate investors V/B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock C. Preferred stockholders have voting power D. Investors can sue managers for nonpayment of preferred dividends E- Share holders have the right to receive dividends at least once every ten years 12. (2p) A bond issued by the State of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of A. 4.50% B. 7.25% \/ C. 8.68% D. 9.25 E. none of the above 6: ' (L S‘- /\J {‘1 i r. a 3 A. a -» 011% 13. (1p) Which of the following is not a characteristic of a money market instrument? A. Liquidity B. Marketability C. Low risk ‘/ D. Maturity greater than one year E. Consisting of Treasury bills, commercial paper, bankers’ acceptances, certificates of deposit, federal funds BU5321 — First Midterm Exam Page 4 14. (2p) Your investment has a 40% chance of earning a 15% rate of return, a 40% chance of earning a 10% rate of return and a 20% chance of losing 5%. What is the standard deviation of this investment? A.5.14% 50.?) : Grogglfla. {Qfltfl 4- (i) 6-20.35”): 9:44.: B. 6.32% {07.14% a. o ‘ . < -. . “w fl. ‘1 .— 3333; 6. g a»: + to -0...) + at w. . . o r, c. (.2051) _ E) : o no 3'0 :— .. 34 A. 6}: c ‘ 0:3GC ‘5 732% 15. (1p) Commercial paper is a short-term security issued by to raise funds. A. the Federal Reserve . commercial banks ‘ C. large well-known companies D. the New York Stock Exchange E. Start-up firms 16. (213) You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends) A. 10.00% B. 20.00% .. c. 6.67% ( 30 2‘7) .3 y D. 15% - ~— 20/0 E. 25% u: (as) ,_,_.__._._..___......_.- WWW-.. er 3....» kayastW-M _.. “4M” 3“ <03 ~— Karat. V ‘Tew’ Elm“ : 569 ’5 (5O ”17) —’ (Tics) (.- K51.) __ _ 3 k: W {Q W 1" _. , i .. 2». 4 B05321 —— First Midterm Exam Page 5 17. (1p) The bulk of most initial public offerings (IPOS) of equity securities go to VA. institutional investors B. individual investors C. the firm's current shareholders D. day traders E. Exchange brokers 18. (2p) You purchased 1000 shares of ABC common stock on margin at $20 per share. Assume the initial margin is 50% and the maintenance margin is 25%. You will get a margin call if the stock drops below . (Assume the stock pays no dividends and ignore interest on the margin loan.) A. $1000 16:30 P ~— 1000‘0 O .» ... .— —-— _ .2. A . $12.25 “— C. $13.33 1 3 00 V D. $14.25 B. $15.50 7 573 f» -~—,- 10¢?er E) :: $9413 ‘3 5 19. (1p) According to Loughran and Ritter, initial public offerings tend to exhibit performance initially, and performance over the long term. A- had; good B. bad; bad C. good; good Vi). good; bad E. normal; extremely good 20. (2p) You have $400,000 available to invest. The risk-flee rate as well as your borrowing rate is 5%. The return on the risky portfolio is 10%. If you wish to earn a 13% return, you should .1 W“? A. invest $120,000 in the risk-free asset B. invest $240,000 in the risk-free asset ( . “'1' (fir ‘35) (5:13 “*2 gt” C. borrow $120,000 ‘5 ‘11 lilies D. borrow $220,000 3' l 0.5%) «11— C I a 7}) (6'93 .1 ‘3 \/E. borrow $240,000 BU3321 — First Midterm Exam ' Page 6 21. (1p) The inside quotes on a limit order book would be comprised of the VA. highest bid price and the lowest ask price B. lowest bid price and the lowest ask price C. lowest bid price and the highest ask price D. highest bid price and the highest ask price E. Need more information 22. (2p) You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12% E. Need risk-free return to solve this problem .33 ‘1 i 70‘ AU 23.(1p) Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? Limit Buy Orders Limit Sell Orders Price Shares Price Shares $39.75 100 $40.25 100 $39.50 100 $40.50 100 A. $39.75 B. $40.50 or less C. $40.50 '\/D. $40.25 or less E. Average between $39.75 and $40.25 BUSBZl — First Midterm Exam Page 7 24.(2p) Consider a mutual fund with $200 million in assets at the start of the year, and 12 million shares outstanding. If the gross return on assets is 15% and the total expense ratio is 2% of the year end value, what is the rate of return on the fund? . ( W. l A. 10.7% ml 7"“ . ._ La \. . 311.7% gas (Hr) .. we (a. is“) (one) p N/C’ 12.7% g 1’ W D. 13.7% %Om } E. 14.7% 25. ( 1p) Investors who wish to liquidate their holdings in a closed-end fund may A. sell their shares hack to the fund at a discount if they wish \/B. sell their shares back to the fund at net asset value C. sell their shares on the open market D. sell their shares back to the fund at a negotiated price E. wait till the fund is liquidated 26. (2p) The geometric average of -12%, 20% and 25% is A. 8.42% B. 11.00% C. 9.70% D. 18.88% E. Need the arithmetic mean to be given to solve this problem : 97/ 27. (1p) The rate of return on is known at the beginning of the holding period while the rate of return on is not known until the end of the holding period. . risky assets, Treasury bills \l/l; Treasury bills, risky assets C. excess returns, risky assets D. index assets, bonds E. Risky assets, risk—free asset BUS321 — First Midterm Exam Page 8 28. (2p) If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with? A. 3.00% B. 8.00% C. 11.00% D. l 1.24% CLO?) (to?) .3 l :. “-2404 29. (2p) Two assets have the following expected returns and standard deviations when the risk- fiee rate is 4.05%: Asset A E03) = 10% 0A = 20% Asset B E{1‘B) = 15% GB = 27% An investor with a risk aversion of A = 3 would find that on a risk return basis. A. only Asset A is acceptable \/ B. only Asset B is acceptable C. neither Asset A nor Asset B is acceptable D. both Asset A and Asset B are acceptable E. Need more information regarding each asset’s volatility A H6. 50%) 1* ti“.— ‘* “52:05: " qlo‘i"’+ 6?“ .- f . s ELM .5 tit? -+ see“ .1. 4.0% + Mm 30. (1p) Market risk is also called and A. systematic risk, diversifiable risk B. systematic risk, nondiversifiable risk C. unique risk, nondiversifiable risk D. unique risk, diversifiable risk E. Idiosyncratic, unsystematic BUS321 — First Midterm Exam Page 9 31. (2p) What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the correlation coefficient between the two stocks is -.23. v6“ A. 9.7% B. 12.2% C. 14.0% D. 15.6% E. 16.5% ~M~ 5-: \-9:.:3V+ .611th 2 (—13303) GWCQK‘S); :1 5319:0017 :2 (1.762 BU5321 — First Midterm Exam Page 10 ...
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