Chapter 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return
Multiple Choice Questions 1. _ a relationship between expected return and risk. A) APT stipulates B) CAPM stipulates C) Both CAPM and APT stipulate D) Neither CAPM nor APT stipu
CHAPTER 4: 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 trust is
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 with
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. Portfol
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 (with all oth
Chapter 11 - The Efficient Market Hypothesis
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
PROBLEM SETS 1. The correlation coefficient between stock returns for two non-overlapping periods should be zero. If not, one could use returns from one period to pre
Chapter 14 - Bond Prices and Yields
CHAPTER 14: BOND PRICES AND YIELDS
PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield to maturity should be higher. Zero c
Chapter 15 - The Term Structure of Interest Rates
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS. 1. In general, the forward rate can be viewed as the sum of the markets expectation of the future short rate plus a potential risk (or liquidi
Chapter 16 - Managing Bond Portfolios
CHAPTER 16: MANAGING BOND PORTFOLIOS
PROBLEM SETS 1. While it is true that short-term rates are more volatile than long-term rates, the longer duration of the longer-term bonds makes their prices and their rates of re
Chapter 20 - Options Markets: Introduction
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION
PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk is invest
Chapter 21 - Option Valuation
CHAPTER 21: OPTION VALUATION
PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the put-call parity theorem as follows: P = C S0 + PV(X) + PV(Dividends) Given a value f
Chapter 22 - Futures Markets
CHAPTER 22: FUTURES MARKETS
PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support the futures market
Chapter 23 - Futures, Swaps, and Risk Management
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
PROBLEM SETS 1. In formulating a hedge position, a stocks beta and a bonds duration are used similarly to determine the expected percentage gain or loss in th
CHAPTER 13: BOND PRICES AND YIELDS
1.
a.
Effective annual rate on 3-month T-bill:
100,000
( 97,645 )4 1 = 1.024124 1 = .10 or 10%
b.
Effective annual interest rate on coupon bond paying 5% semiannually:
(1.05)2 1 = .1025 or 10.25%
2.
The effective annual
Finance for Strategic Managers Assignment
Submission deadlines: 24th Jan / Apr / Jul / Oct
Scenario
You are a longstanding manager in a family firm which is a small but growing organisation. Your
particular responsibility is finance. A new member of the f
FIN 435 (Faculty: SfR)
CHAPTER 3
HOW SECURITIES ARE TRADED
Suggested Problems: 4, 5*, 6*,9,10,11,17
* Will be done in class
Problem 4: (a) In principle, potential losses are unbounded, growing directly with increases in
the price of IBM.
(b) If the stop-b
Chapter 15 - The Term Structure of Interest Rates
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS. 1. In general, the forward rate can be viewed as the sum of the market's expectation of the future short rate plus a potential risk (or `liqui
CHAPTER 14: BOND PRICES AND YIELDS
1.
a.
Effective annual rate for 3-month T-bill:
4
100,000
1 = 1.02412 4 1 = 0.100 = 10.0%
97,645
b.
Effective annual interest rate for coupon bond paying 5% semiannually:
(1.05)2 1 = 0.1025 or 10.25%
Therefore the co
Chapter 1 The Investment Environment
Multiple Choice Questions 1. In 2005, _ was the most significant real asset of U. S. nonfinancial businesses in terms of total value. A) equipment and software B) inventory C) real estate D) trade credit E) marketable
Chapter 2 Asset Classes and Financial Investments
Multiple Choice Questions 1. Which of the following is not a characteristic of a money market instrument? A) liquidity B) marketability C) long maturity D) liquidity premium E) C and D Answer: E Difficulty
Chapter 02 - Asset Classes and Financial Instruments
CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS
PROBLEM SETS
1.
Preferred stock is like long-term debt in that it typically promises a fixed payment each year. In this way, it is a perpetuity. Prefer
Chapter 3 How Securities Are Traded
Multiple Choice Questions 1. A purchase of a new issue of stock takes place A) in the secondary market. B) in the primary market. C) usually with the assistance of an investment banker. D) A and B. E) B and C. Answer: E
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 computer
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 trust
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 the ex
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 with
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. Portfol
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 Markow
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 security's correlation coefficient with the market portfolio doubles (with all ot
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 the ol