Investment Principal Midterm Sevara Djabborova
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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
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