FINE 441 Midterm Summer 2013 Solutions

FINE 441 Midterm Summer 2013 Solutions - FINE441:...

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Page 1 of 10 FINE 441: Investment Management Summer 2013 Vadim di Pietro Midterm: Solutions Student Name:____________________________________ Student Number:__________________________________ Tuesday July 29 th , 6:05pm to 8:05pm Time: Do not turn past this page until the exam has begun. The exam will be 120 minutes in length. Show your work: In order to receive credit for your answers, you must show your work. Correct answers with no work shown will not receive any credit. Incorrect answers with partial correct work may receive partial credit. The exception to this rule is the multiple choice section, where no explanations are required. Answer questions directly on the exam sheet. The exam is closed book and closed notes. Calculator: You are allowed a non programmable non text storing calculator. The exam is worth a total of 100 points, but the last question (12) is a bonus question worth 5 points. GOOD LUCK!
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Page 2 of 10 1) At 2:05pm the limit order book for GOOG looks like Bid $482 for 1,000 shares Bid $481 for 500 shares Bid $480 for 2,000 shares Offer $483 for 600 shares Offer $484 for 1,500 shares Offer $485 for 3,000 shares An instant later you submit a limit sell order at $483.5 for 1,000 shares. An instant later someone else submits a limit buy order at 482.2. An instant later someone else submits a market sell order for 500 shares. And an instant after that someone else submits a market buy order for 900 shares. After all of this is done, specify how many shares you will have sold and at what price. The market buy order will execute against 600 shares at 483, and 300 shares at your offer of 483.5. Thus you will sell 300 shares at 483.5 each. /10
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Page 3 of 10 2) Goldman Sachs Asset Management is launching a new fund called “Warren Knows Best”. The fund manager’s strategy is as follows: whenever Warren Buffet publicly announces that he has purchased a stock, the fund will purchase the same stock based on the view that Warren Buffet is a very skilled investor who must be able to identify undervalued stocks based on superior information. Explain below how you expect the strategy to perform based on the following alternative assumptions? a) Assume that Warren Buffet is indeed highly skilled, and the market fully understands just how skilled he is. In this case the price will adjust to its new fair value upon the public announcement and the strategy will neither perform well or bad as it would just be buying fairly priced securities. b) Assume that Warren Buffet is indeed highly skilled, but that the market does not realize that he is skilled. In this case the strategy will perform well as the price does not react on the news announcement so the fund can still buy it at a “cheap” price. c) Assume that Warren Buffet is slightly skilled, but that the market thinks he is more skilled than he actually is. Although Buffet will make money, the fund strategy will perform poorly. Example: Buffet buys at 99.5 when fair value is 100. When public announcement is made, the market overreacts, and the price goes to say 101 (because people think that Buffet found a great deal, when really he only found a decent deal). So the fund buys at 101, when the fair value is only 100. Eventually the market realizes that the stock is only worth 100.
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FINE 441 Midterm Summer 2013 Solutions - FINE441:...

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