BM 410 HW #3
Multiple Choice
1) Which of the following is true about a continuous PDF?
a) The value of the PDF function tells us the exact probability of getting a specific
outcome.
b) The PDF as a finite number of potential outcomes.
c) The integral of t
BM 410 HW#17
Multiple Choice
1) Holding all else constant, a higher price implies a _ risk premium.
A) lower
B) higher
C) more accurate
D) none of the above
2) The aggregation assumption of the CAPM (assumption 1) allows us to
A) Conclude that the R-inves
BM 410 HW #16
Free Response
1. Use the following table to answer the following questions.
A) Suppose you create a portfolio with 80% in A and 20% in B. What would have
been the portfolio return for each month?
B) Using the portfolio returns from part A, e
A
regression line, a+bX, is interpreted as
E[Y|X], the conditional expectation of Y given
X.
The
slope of a regression line in general can
be estimated as
b=Cov(X,Y)/Var(X).
The
intercept of a regression line in general
can be estimated as
a=E[Y]-b*E[X]
BM 410 HW #15
Free Response
1) Assume there are two risky stocks available, stock A and stock B.
Stock A: E[r] = 17%, =0.16
Stock B: E[r] = 25%, =0.26
=0.20
A) Fill in the following table:
wA
(1-wA)
E[rp]
Var[rp]
Stdev[rp]
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.
BM 410 HW #14
Free Response
1) Assume the following:
x, and e are random variables, each with their own PDFs
Cov(x,e)=0
y=3x+e
Var(x)=10
Var(e)=50
A) According to Stat Rule #3, what is the total variance of y?
B) What fraction of the variance of y is
Regression
StatisticsRule#3
If
XandYarerandomvariables
aandbareconstants
Z=aX+bY
Then
Var(Z)=a2Var(x)+b2Var(y)+2abCov(x,y)
Worksforbothparameterscalculatedfroma
PDF,andparametersestimatedfroma
randomsample.
StatisticsRule#3:application
If
r1andr2
BM 410 HW #14
Free Response
1) Assume the following:
x, and e are random variables, each with their own PDFs
Cov(x,e)=0
y=3x+e
Var(x)=10
Var(e)=50
A) According to Stat Rule #3, what is the total variance of y?
Var(y)=9*10+50=140
B) What fraction of t
BM 410 HW #13
Use the joint PDF below for the return on stock A and an index fund to answer questions 1-8.
2
2
1. Find E[ rA ], E[ rI ], Cov (rI , rA ), A , I
E[rA]=.57*16+.43*(-17)=1.81
E[rI]=.53*6+.47*(-2)=2.24
Cov(rI,rA)=
.5*(16-1.81)*(6-2.24)+.03*(-17
SECURITY MARKETS
3.1-3.3
Market Types
Direct Search Market
Dealer Market
Brokered Market
Auction Market
Secondary Markets
3
Secondary Markets
The market in which securities already issued
are traded
Buyers and sellers are both investors
Order Types
4
Mark
BM 410 HW #12
For problems 1-4 below:
A) Calculate the correlation.
B) Is the return on stock A independent from the return on the index fund? If yes, verify
that joint probabilities are the product of the unconditional probabilities. If no, just
answer n
BM 410 HW #13
Use the joint PDF below for the return on stock A and an index fund to answer questions 1-8.
2
2
1. Find E[ rA ], E[ rI ], Cov (rI , rA ), A , I
2. Use stat rule #3 and your answers to (1) to find the variance of a portfolio that is 30% in s
BM 410 HW #15
Free Response
1) Assume there are two risky stocks available, stock A and stock B.
Stock A: E[r] = 17%, =0.16
Stock B: E[r] = 25%, =0.26
=0.20
A) Fill in the following table:
wA
(1-wA)
E[rp]
Var[rp]
Stdev[rp]
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.
BM 410 HW#17
Multiple Choice
1) Holding all else constant, a higher price implies a _ risk premium.
A) lower
B) higher
C) more accurate
D) none of the above
2) The aggregation assumption of the CAPM (assumption 1) allows us to
A) Conclude that the R-inves
Ratio Analysis and
Quantitative Analysis
Ratio Analysis
Pick your favorite accounting ratio.
Compare accounting ratios for two similar firms.
If they are different, think hard about why the two firms
maybe should have different accounting ratios.
If you c
BM410 HW #21
1. As of end of year 2011: YTM 1t 3%, YTM 2 t 3%, E[YTM 1t 1 ] 3%
Face value of all bonds: 1000
All bonds for this problem pay zero coupon.
Strategy 1: Buy 1 year bond, roll over to another 1 year bond.
Strategy 2: Buy 2 year bond (matures at
BusM 410 HW #19
1. If your objective is to maximize the Sharpe ratio of your portfolio, then tilting
towards value stocks makes sense only if
A) Value portfolios earn higher average returns than the market portfolio
B) Value portfolios have lower standard
BM 410: HW 20
1) BKM, chapter 7 # 30 (page 226)
A) Both the CAPM and APT require a mean-variance efficient market
portfolio. This statement is incorrect. The CAPM requires the meanvariance efficient portfolio, but APT does not.
B) The CAPM assumes that on
BM 410 HW#18
Multiple Choice
1. If your estimate of the PV of cash flows for a given stock is less that the current price,
then you necessarily believe that the stock is
A) Positive alpha
B) Negative alpha
C) Positive beta
D) Negative beta
2. Which of the
BusM 410 HW #19
1. If your objective is to maximize the Sharpe ratio of your portfolio, then tilting
towards value stocks makes sense only if
A) Value portfolios earn higher average returns than the market portfolio
B) Value portfolios have lower standard
BM 410 HW#18
Multiple Choice
1. If your estimate of the PV of cash flows for a given stock is less that the current price,
then you necessarily believe that the stock is
A) Positive alpha
B) Negative alpha
C) Positive beta
D) Negative beta
2. Which of the
BM 410 HW #16
Free Response
1. Use the following table to answer the following questions.
A) Suppose you create a portfolio with 80% in A and 20% in B. What would have
been the portfolio return for each month?
B) Using the portfolio returns from part A, e
BM 410 HW #12
For problems 1-4 below:
A) Calculate the correlation.
B) Is the return on stock A independent from the return on the index fund? If yes, verify
that joint probabilities are the product of the unconditional probabilities. If no, just
answer n
BM HW #11
Multiple Choice
1. An open-end fund has a net asset value of $15.00 per share. It is sold with a front-end
load of 4%. What is its offering price per share?
A) 14.67
B) 15.63
C) 16.54
D) 17.87
2. All of the following are characteristic of hedge
BM 410 HW #5
Multiple Choice
1. Which of the following is true?
A) If a stock return is generated by a constant+white noise process, the
historical average return is the best predictor of the future return.
B) If a random variable has a continuous PDF the
BM 410 HW #6
1. A stock has an expected return of 2.3% per month with a standard deviation of 0.025. A
risk-free bond pays 0.15% per month. Given the weights below, fill in the table. Use stat
rules #1 and #2.
weight in weight in
portfolio
5%
s
stock
bond