mid_solutions_09_Sample - MGT330 Midterm Sample 1 -...

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MGT330 Midterm Sample 1 - Solutions 1. (d). (This question is from the textbook.) 2. False. With a market order to buy, one will transact at the ask price. On the other hand, a market order to sell will be executed at the bid price. 3. Short interest is the total number of shares of stock currently sold short in the market. It may be interpreted as a bullish signal, because all short sales must be covered (i.e., short-sellers eventually must purchase shares to return the ones they have borrowed), and hence short interest represents latent future demand for the stocks. As short sales are covered, the demand created by the sharepurchasew i l lforcepr icesup . 4. False. They f nd that about 90% of time variation of returns of a typical fund is explained by asset allocation policy. About 40% of variation of returns across funds is explained by policy. 5. False. Specialists tend to lose when they deal with traders with superior information and/or superior ability to process new information. This cost is re F ected as the adverse selection component of the bid-ask spread. The component increases around earnings announcements, as specialists try to increase protection against informed traders. The access to limit order books can not protect specialists from informed traders. 6. False. - 6 S E » » » » » » » » » » » » » » » » » » » » » » » » » » » » » »: r f CAL3 y y y B: optimal portfolio of the two risky assets @ @ @I tangency portfolio T H HY B B B B B M increasing utility B B B B B BN A: optimal portfolio of two risky assets and a riskless asset The tangency portfolio T is the portfolio of the two risky assets that has the highest Sharpe ratio. But as shown in the diagram, the optimal portfolio B may be di f erent from T, depending on the indi f erence curves (or the utility function). Thus, it is not always true that the optimal portfolio of 1
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the two risky assets is the tangent portfolio T. (Adding a riskless asset, then the optimal portfolio (i.e., A) is always the portfolio that has the highest Sharpe ratio.) 7. Overreaction: investors have seen good dividends and earnings in the past few quarters and get overex- cited about them, and set prices as if these good earnings were going to persist substantially into the future. This makes prices go up relative to dividends and earnings (i.e., low dividend- and earnings- price ratios). Subsequently, some f rms won’t perform up to the wild expectations of investors and prices will fall (hence low returns) as investors correct their misperceptions. Hence low dividend price ratios are followed by low returns. 8. (a) Just like in our class discussion, we use the approximate the relation ˜ r 1:2 r 1 r 2 . Then E r 1:2 )=2¯ r and var(˜ r 1:2 )=v a r ( ˜ r 1 )+var(˜ r 2 )+2cov(˜ r 1 , ˜ r 2 ) = σ 2 + σ 2 +2 σσ corr(˜ r 1 , ˜ r 2 ) =2 σ 2 (1 + ρ 12 ) where ρ 12 = corr(˜ r 1 , ˜ r 2 ) for short.
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This note was uploaded on 12/20/2011 for the course RSM 330 taught by Professor Stapleton during the Fall '11 term at University of Toronto- Toronto.

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mid_solutions_09_Sample - MGT330 Midterm Sample 1 -...

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