Investment Principal Midterm Sevara Djabborova

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Jomo Kenyatta University of Agriculture and Technology, Nairobi *

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Nov 24, 2024

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Touro College, School of Career and Applied Studies Investment Principles GBFN 210 Fall 2023 Midterm Exam Sevara djabborova Angelo DeCandia DO NOT SHARE THIS EXAM WITH ANY OTHER STUDENT!!! Please read the following directions carefully. Make a copy for yourself labeled Inv Prin Mid <your name> Use this file to answer the questions. (no pen or pencil) TYPE THE ANSWERS. Multiple choice should be entered on the line below each numbered question. Part II problems should be TYPED. (Yes I know it’s a pain, but we have no choice.) When you are finished, email the completed exam to Angelo.decandia@touro.edu and put Inv Prin Mid on the Subject line. THIS LAST PART IS KEY! I am going to sort the exam in name and subject order. If I don’t see your exam, it will NOT BE GRADED. Part I - For each question choose the best answer. (3 points each) 1. Stock investors in a falling stock market should do which of the following? a. Sell stocks with Beta less than 1.0 a. Buy stocks with Beta less than 1.0 b. Buy stocks with Beta higher than 1.0 c. Answers a and c d. Answers b and c Answer _ a. Sell stocks with Beta less than 1.0____ 2. Which of the following best describes R squared? a. A measure of risk b. The slope of Beta c. Explanatory power on the meaningfulness of Beta d. The relationship of Beta to a stock’s return e. None of the above Answer _ c. Explanatory power on the meaningfulness of Beta ____
3. Stock investors in a rising stock market should do which of the following? a. Sell stocks with Beta less than 1.0 b. Buy stocks with Beta less than 1.0 c. Buy bonds with Beta higher than 1.0 d. Answers a and c e. Answers b and c Answer _ b. Buy stocks with Beta less than 1.0____ 4. Which of the following is used to measure Alpha? a. Return on the Market b Expected Return c Actual Return d. Answers a and b e. Answers a, b and c Answer _ b. Expected Return ____ 5. Which of the following is used to measure Alpha? a. Risk Free Rate b Beta c Standard Deviation d. Answers a and b e. Answers a, b and c Answer __ e. Answers a, b and c ___ 6. Which of the following best describes Investment Volatility? a. The risk that next period’s return will not equal the average return b The risk that next period’s return will not be higher than the average return f. The risk that next period’s return will be lower than the average return d. The risk that next period’s return will be insufficient to meet investor expectations e. None of the above Answer _ f. The risk that next period’s return will be lower than the average return ____ 7. Which of the following is used to measure Investment Volatility? a. Average b Mean c Standard Deviation g. Variance h. None of the above Answer ___ c. Standard Deviation
__ 8. Which of the following is a risk for Bond investors? a. Default Risk b Interest Rate Risk c Dividend Risk d. Answers a and b e. Answers a, b and c Answer __ d. Answers a and b ___ 9. Which of the following describes the use of Duration to counter? a. Default Risk b Interest Rate Risk c Dividend Risk d. Answers a and b e. Answers a, b and c Answer __ b. Interest Rate Risk ___ 10. Which of the following describes the use of Bond ratings to counter? a. Default Risk b Interest Rate Risk c Dividend Risk d. Answers a and b e. Answers a, b and c Answer ___ a. Default Risk __ 11. Which of the following ratings would be considered Investment Grade bonds? a. AA b A+ c BB d. Answers a and b e. Answers b and c Answer __ e. Answers b and c ___ 12. Which of the following ratings would be considered Investment Grade bonds? a. AA b A+ c BB d. Answers a and b e. Answers b and c
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Answer ____ d. Answers a and b _ 13. Which of the following ratings would be considered High-Yield bonds? a. AA b A+ c BB d. Answers a and b e. Answers b and c Answer ___ e. Answers b and c __ 14. Which of the following explains the difference between growth stocks and value stocks? a. growth stocks have their best years ahead of them b value stocks have their best years ahead of them c investors should buy growth stocks only when the price is low d. Answers a and b e. Answers b and c Answer ____ a. growth stocks have their best years ahead of them_ 15. Which of the following would be a “blend” portfolio? a. a portfolio with a mix of growth and value stocks b a portfolio with a mix of value stocks and dividend stocks c a portfolio with a mix of stocks and bonds d. Answers a and b e. Answers b and c Answer ___ a. a portfolio with a mix of growth and value stocks __ 16. Which of the following best describes the Sharpe Ratio? a. A measure of how much risk an investment has b. A measure of how much return an investment has c. A measure of how much profit an investment has d. Answers a and b e. Answers b and c Answer __ b. A measure of how much return an investment has___ Part II Use the following information to answer all questions (10 points EACH) 1. Use the information below to calculate Sharpe ratio:
Rs = 8.27% Std Dev = 10.13 Rf = 1.34 Sharpe Ratio = (Rs - Rf) / Std Dev Sharpe Ratio = (8.27% - 1.34%) / 10.13% Sharpe Ratio = (0.0827 - 0.0134) / 0.1013 Sharpe Ratio = 0.0693 / 0.1013 Sharpe Ratio = 0.684 2. Use the information below to calculate the “expected return” or Capital Asset Pricing Model (CAPM): value R M = 8.27% Beta = 1.13 Rf = 1.34 Expected Return (Rs) =(Rf) + Beta * (RM) - (Rf)) RM = 8.27% Beta (β) = 1.13 Rf = 1.34% Expected Return (Rs) = 1.34% + 1.13 * (8.27% - 1.34%) Expected Return (Rs) = 1.34% + 1.13 * 6.93% Expected Return (Rs) = 1.34% + 7.84% Expected Return (Rs) = 9.18% 3. Use the information below to calculate the alpha value of a portfolio. (7 points) R M = 8.27% R s = 12.57% Beta = 1.13 Rf = 1.34 Alpha= (Rs) - [ (Rf) + Beta * (RM) - (Rf))] (Rs) = 12.57% RM (Market Return) = 8.27% Beta (β) = 1.13 Rf = 1.34% :
Alpha (α) = 12.57% - [1.34% + 1.13 * (8.27% - 1.34%)] Alpha = 12.57% - [1.34% + 1.13 * 6.93%] Alpha = 12.57% - [1.34% + 7.83%] Alpha = 12.57% - 9.17% Alpha = 3.40% Part III – Send your Asset Allocation EXCEL file with your NAME. (12 points) Part IV – Attach a 1 page only essay here explaining your choices in the file above. Feel free to use some of the variables which we have studied this semester to justify and explain you choices. (see below) (10 points) a. Asset allocation b. Net Asset Value (NAV) c. Alpha d. Beta e. R squared f. Standard Deviation g. Sharpe Ratio h. Effective Duration i. Average bond rating. Asset Allocation is a fundamental concept in portfolio management. In my asset allocation file, I have diversified investments across various asset classes. Diversification is essential for spreading risk and managing the trade-off between risk and return. By allocating different percentages to U.S. Equities, International Equities, Fixed Income, Real Estate, and Cash Equivalents, I aim to balance the portfolio's risk and return based on the investor's objectives. Standard Deviation plays a vital role in asset allocation. It measures the historical volatility or risk associated with each asset class. In my example, I might have considered the standard deviation of each asset class to assess how much they fluctuate in value. By allocating a lower percentage to Cash Equivalents and a higher percentage to U.S. Equities, I've aimed to balance the portfolio's overall risk. Sharpe Ratio is a key metric to evaluate the risk-adjusted return of a portfolio. The asset allocation choices aim to maximize the Sharpe Ratio, indicating that I seek to achieve the best return for a given level of risk. This means optimizing the portfolio's allocation to potentially increase returns without taking on excessive risk. Alpha and Beta are concepts related to the performance of individual assets or the portfolio compared to the market. While not explicitly mentioned in the asset allocation file, these metrics could have been used to assess the expected returns and risk associated
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with each asset class. By incorporating assets with varying betas, one can fine-tune the portfolio's sensitivity to market movements. R squared is another statistic that could have been considered in assessing how well an asset class correlates with the market. An asset class with a high R squared is more influenced by market movements. In contrast, an asset class with a low R squared might offer diversification benefits. For instance, I might have allocated a smaller percentage to Real Estate with the aim of lowering the portfolio's correlation with the broader market. Effective Duration is especially relevant when allocating investments in Fixed Income. It represents the sensitivity of bonds to interest rate changes. Depending on the investor's outlook on interest rates, I could have adjusted the allocation to Fixed Income to meet their goals. Average Bond Rating is crucial when allocating investments within the Fixed Income category. Higher-rated bonds are less risky but offer lower yields, while lower-rated bonds can provide higher yields but come with more risk. By considering the average bond rating, I could make informed decisions about the allocation within the Fixed Income category to balance risk and return. In conclusion, asset allocation is a complex process that combines various financial concepts to construct a portfolio tailored to an investor's objectives. The allocation choices in the file aim to create a diversified and risk-adjusted portfolio, aligning with the principles of modern portfolio theory and financial metrics such as the Sharpe Ratio, Standard Deviation, Alpha, Beta, R squared, Effective Duration, and Average Bond Rating. COPY AND PASTE YOUR ESSAY INTO THE BODY OF THIS EXAM HERE. DO NOT SEND 2 doc FILES