Midterm Spring 2010 Solution

Midterm Spring 2010 Solution - Hong Kong University of...

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1 Hong Kong University of Science and Technology FINA 221: Investment Analysis and Portfolio Management Spring 2010 Instructor: Prof. Darwin Choi Midterm Examination Date: March 25, 2010 Registered section (circle one – 1 point for correct answer) L3: 12pm-1:20pm L4: 1:30pm-2:50pm Name (in block letters) Suggested Solution _________________________________ I agree to abide by the HKUST Academic Honor Code in taking this exam. Sign _________________________________________________ Instructions: 1. Fill in the information above. 2. This is a closed-book, closed-notes exam. 3. Please check to be certain that your exam contains 11 pages. 4. You have 2 hours to complete this exam. 5. Total points: 120. Please answer all questions. Partial credit will be given if you provide sufficient evidence of approaching the problems correctly. 6. You may use the basic math functions of a calculator. 7. Be clear and brief. Vagueness and unnecessary wordiness may be penalized. 8. If you need more space you could use the back of each page, but make sure that your answers are easily identified. 9. Do not turn the page until instructed to do so. 10. Good luck!
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2 I. True or False. Circle the correct answer and briefly explain. (Total: 45 points) (1) (5 points) A call option gives its holder the right to sell an asset for a specified price on or before a specified expiration date. TRUE or FALSE (briefly explain) FALSE. A call option gives its holder the right to buy an asset for a specified price on or before a specified expiration date. (2) (5 points) If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, the stock with the largest market capitalization will have the greatest impact on the DJIA. TRUE or FALSE (briefly explain) FALSE. The DJIA is a price-weighted index. In this case the stock with the highest price per share will have the greatest impact on the DJIA. (All stocks have the same % impact, but the stock with the highest price has the greatest level of impact.) (3) (5 points) If the CAPM holds, stocks with a beta of one should be perfectly correlated (i.e., correlation = 1) with the market portfolio. TRUE or FALSE (briefly explain) FALSE. Consider a stock X with = 1. This means XM / 2 M = 1, or XM X M / 2 M = 1, XM = M X If stock X has firm-specific risk, then M   X and the correlation is not equal to 1.
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3 (4) (5 points) Under the Arbitrage Pricing Theory (APT), it is possible for two stocks to have the same standard deviation of return but different expected returns. TRUE or FALSE (briefly explain) TRUE. Two stocks with the same standard deviation of return can have different systematic risk, and therefore can earn different expected returns. (5) (5 points)
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Midterm Spring 2010 Solution - Hong Kong University of...

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