Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 06  Risk Aversion and Capital Allocation to Risky Assets
CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS 1. 2. (e) (b) A higher borrowing is a consequence of the risk of the borrowers default. In perfect markets
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 04  Mutual Funds and Other Investment Companies
CHAPTER 4: MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES
PROBLEM SETS 1. The unit investment trust should have lower operating expenses. Because the investment trust portfolio is fixed once the
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 03  How Securities are Traded
CHAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS 1. 2. Answers to this problem will vary. The SuperDot system expedites the flow of orders from exchange members to the specialists. It allows members to send co
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 02  Asset Classes and Financial Instruments
CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS
PROBLEM SETS 1. Preferred stock is like longterm debt in that it typically promises a fixed payment each year. In this way, it is a perpetuity.
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 01  The Investment Environment
CHAPTER 1: THE INVESTMENT ENVIRONMENT
PROBLEM SETS 1. Ultimately, it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering c
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 11  The Efficient Market Hypothesis
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
PROBLEM SETS 1. The correlation coefficient between stock returns for two nonoverlapping periods should be zero. If not, one could use returns from one period
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 10  Arbitrage Pricing Theory and Multifactor Models of Risk and Return
CHAPTER 10: ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN
PROBLEM SETS 1. The revised estimate of the expected rate of return on the stock would be
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 09  The Capital Asset Pricing Model
CHAPTER 9: THE CAPITAL ASSET PRICING MODEL
PROBLEM SETS 1. E(rP) = rf + P [E(rM ) rf ] 18 = 6 + P(14 6) P = 12/8 = 1.5 2. If the securitys correlation coefficient with the market portfolio doubles (
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 08  Index Models
CHAPTER 8: INDEX MODELS
PROBLEM SETS 1. The advantage of the index model, compared to the Markowitz procedure, is the vastly reduced number of estimates required. In addition, the large number of estimates required for the
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 07  Optimal Risky Portfolios
CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
PROBLEM SETS 1. 2. (a) and (e). (a) and (c). After real estate is added to the portfolio, there are four asset classes in the portfolio: stocks, bonds, cash and real estate. P
Korea Advanced Institute of Science and Technology
Invest
FIN FIN508

Spring 2009
Chapter 05  Learning About Return and Risk from the Historical Record
CHAPTER 5: LEARNING ABOUT RETURN AND RISK FROM THE HISTORICAL RECORD
PROBLEM SETS 1. The Fisher equation predicts that the nominal rate will equal the equilibrium real rate plus