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MFIN 1151 Final Exam: Fall 2017 Page 1 MFIN1151: Investments Fall 2017 Final Exam Prof. David Solomon INSTRUCTIONS You have two hours to complete this exam. This exam is closed book and closed notes, except for two sheets of 8.5x11 notes (both sides). Calculators are allowed. There are 16 questions
for a total of 330 points
This exam is taken under the Academic Integrity Policy, which stipulates: Cheating is the fraudulent or dishonest presentation of work. Cheating includes but is not limited to: -the use or attempted use of unauthorized aids in examinations or other academic exercises submitted for evaluation; -copying from another student's work; -actions that destroy or alter the work of another student; -unauthorized cooperation in completing assignments or during an examination; -dishonesty in requests for make-up exams, for extensions of deadlines for submitting papers, and in any other matter relating to a course.
Please sign your name below to acknowledge and accept the Academic Integrity Policy. SIGNATURE: (Please sign) NAME: (Please print) STUDENT ID:
MFIN 1151 Final Exam: Fall 2017 Page 2 1.
(20 points) Using the equation for the security market line, and the equation for regressing excess stock returns on excess market returns, explain why the CAPM requires that α equals to zero.
MFIN 1151 Final Exam: Fall 2017 Page 3 2.
(20 points) Suppose that the risk-free rate is 5%, and that investors can purchase risk-
free assets. Is it possible that, in an efficient market, a stock with a volatility of 10% per year has an expected return equal to 5%? If not, please explain why not. If so, please explain why investors might be willing to hold the stock.
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MFIN 1151 Final Exam: Fall 2017 Page 4 3.
(20 points) Your friend asserts the following: “The CAPM is a worthless model. It’s been shown that it doesn’t work in the data. Therefore, schools should stop teaching it, since it’s clear that it’s the incorrect model of expected returns”
. Using the joint hypothesis problem, explain whether you agree with his logic.
MFIN 1151 Final Exam: Fall 2017 Page 5 4.
(10 points)
Which of the following information would provide evidence against the semi-strong form of the efficient market hypothesis? Circle all that apply (no explanation necessary). a)
Mutual fund managers do not on average make superior returns. b)
You can make superior returns by buying stocks after the announcement of an abnormal rise in dividends c)
High P/E stocks tend to have negative abnormal returns. d)
Stocks with high returns in the past month tend to have negative abnormal returns this month. e)
Stock prices in companies rise on average when it is announced that they are the target of a takeover bid.
MFIN 1151 Final Exam: Fall 2017 Page 6 5.
(20 points)
Assume portfolio M is the market portfolio, and refer to the following graph. Assume stock B has a correlation with the market of 0.7. What is stock B’s β? What is its α under the CAPM?
R
F
=0.05
= Stdev(R) E(R) .
B .
A .
C 0.20 0 M .
0.30
E(R
M
)=0.15 E(R
B
)=0.10
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MFIN 1151 Final Exam: Fall 2017 Page 7 6.
(30 points)
You are considering investing in the Chopper fund. Its founder and manager, Mark “Copper” Reid
, has decided to abandon his prior career in organized crime to instead switch to a virtuous life in finance, where his street smarts will help to secure him abnormal returns.
You download the fund’s historical returns ov
er the last 5 years. You run three regressions: one, a CAPM regression where you regress the monthly excess return of the portfolio (i.e. Rp= rp-rf where rf is the risk-free rate) on the excess returns of the market (RM= rM-rf), as well as a three factor regression where the portfolio excess returns are regressed on the excess returns of the market as well as the SMB and HML portfolios from Ken French’s website
, and finally, a four factor regression, which includes excess market returns, SMB, HML and UMD a portfolio of past winners (high returns from 2-12 months ago) minus past losers (low returns from 2-
12 months ago). In all regressions, returns are included as decimals (so a return of 1% is written as 0.01). Results for the three regressions are presented below:
CAPM Regression: Regression Statistics R Square 0.617 Adjusted R Square 0.611 Observations 72 Coefficients Standard Error t Stat Intercept 0.0089 0.0033 2.69 Mktrf 1.0419 0.0982 10.61 Fama French 3 Factor Model Regression Statistics R Square 0.732 Adjusted R Square 0.728 Observations 72 Coefficients Standard Error t Stat Intercept 0.0094 0.0033 2.83 Mktrf 1.0119 0.0972 10.41 SMB 0.0364 0.0913 0.40 HML -0.2274 0.0865 -2.63
MFIN 1151 Final Exam: Fall 2017 Page 8 Carhart 4 Factor Model Regression Statistics R Square 0.782 Adjusted R Square 0.768 Observations 72 Coefficients Standard Error t Stat Intercept 0.0013 0.0033 0.39 Mktrf 1.0219 0.0982 10.61 SMB 0.0516 0.0937 0.55 HML -0.0684 0.0865 -0.79 UMD 0.5910 0.1147 5.15 a)
(10 points) Does the Chopper Fund appear to have skill relative to the CAPM? What about relative to a three factor model? What about a four factor model?
MFIN 1151 Final Exam: Fall 2017 Page 9 b)
(10 points) What do these results tell you about where Chopper
’s apparent skill (if any) seems to come from?
c)
(10 points) Your boss gives you $1 million, and tells you to generate a replica fund from factor portfolios which is to have the same exposure to the Carhart Factors (the market, SMB, HML and UMD). How would you invest your money?
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MFIN 1151 Final Exam: Fall 2017 Page 10 7.
(30 points)
Solomon Alpha-tastic Investments (SAI) has a reputation as the most talented fund managers in town. They invest in a combination of stocks and bonds. Over the past year, they had a weight of 65% in stocks, and 35% in bonds. The return on their stock portfolio was 15%, and the return on their bond portfolio was 6%. You compare them with a benchmark portfolio that is 70% stocks, and 30% bonds. The benchmark equity portfolio earned 13%, and the benchmark bond portfolio earned 5%.
a) (10 points) What is the total abnormal performance of SAI relative to the benchmark?
MFIN 1151 Final Exam: Fall 2017 Page 11 b) (10 points) Out of the total superior performance, how much was due to asset allocation ? c) (10 points) Out of the total superior performance, how much was due to security selection?
MFIN 1151 Final Exam: Fall 2017 Page 12 8.
(20 points total) Consider the closed-end fund anomaly –
a closed-end fund that is a claim to $100 of underlying assets will frequently trade for prices per share different to $100. a) (10 points) Assuming that this is mispricing, how could you take advantage if the fund is trading at a premium (e.g. A closed-end fund holding $100 per share of underlying assets in Taiwanese securities is selling at a fund price of $200 per share).
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MFIN 1151 Final Exam: Fall 2017 Page 13 b)
(10 points) Assuming that this is mispricing, how could you take advantage if the fund is trading at a discount (e.g. A closed-end fund holding $100 per share of underlying assets in Brazilian securities is selling at a fund price of $60 per share).
MFIN 1151 Final Exam: Fall 2017 Page 14 9.
(30 Points)
If CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently. Hint: recall that the CAPM has implications for expected returns, correlations, covariances and variances. a)
(10 points) Portfolio Expected Return Standard Deviation Risk-free 3 0 Market 16 24 A 11 17
MFIN 1151 Final Exam: Fall 2017 Page 15 b)
(20 points) Portfolio Expected Return Corr(Portfolio, Market) Std Dev Risk-free 4 0 0 Market 14 1 15 A 10 0.6 20
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MFIN 1151 Final Exam: Fall 2017 Page 16 10.
(10 points) Consider the following (hypothetical) graph of abnormal returns relative to a 3 Factor Model for the average stock that announces an increase in dividends. Assuming the only public announcement of the dividend occurs on date t=0, which of the following statements about market efficiency with respect to the 3-factor model are true? Circle all that apply (no explanation necessary). i)
Markets are semi-strong form efficient.
ii)
Markets are semi-strong form inefficient.
iii)
Some inside information is incorporated into the price before the announcement.
iv)
Markets are strong form efficient.
v)
Markets are weak-form efficient
Abnormal Returns Time t=0 (Announcement) t=+1 week t=-1 week
MFIN 1151 Final Exam: Fall 2017 Page 17 11.
(20 points)
A friend of yours who thinks he knows a lot about finance is offering you stock tips. He makes the following statement: ‘“Green” energy stocks are currently undervalued, because Congress is likely to pass a cap-and-trade Bill that will force companies to adopt low carbon emission technologies. When that happens, earnings in green energy companies will massively increase, and I’ll make a ton of money.’ a)
(10 points)
What facts need to be true in order for this to be a good reason to purchase green energy stocks?
b)
(10 points)
What is the overall evidence about the ability of individuals to generate abnormal stock returns? Given this, do you think the above conditions are likely to be true or not?
MFIN 1151 Final Exam: Fall 2017 Page 18 12.
(10 points)
Suppose that a stock has fallen in price on a given day. Which of the following
would be an example of a discount rate explanation for the observed price movement? Circle all that apply (no explanation necessary). i) Investors perceive the stock to have less exposure to macroeconomic shocks ii) Investors react to a low quality new product launch by anticipating lower future dividends for the stock iii) A change in sentiment causes investors to irrationally push down the price of the stock iv) The CAPM beta of the stock has increased 13.
(10 points) Suppose that stock in Snap is estimated to have the following returns
R
SN –
R
F
= 0.0089 + 1.20 * [ R
M - R
F ] + ε
t If you wanted to have a $1million exposure to the stock’s alpha, but didn’t want to have any exposure to the market, how might you set up a portfolio to achieve this?
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MFIN 1151 Final Exam: Fall 2017 Page 19 14.
(20 points) Explain why investing in only one stock instead of five stocks is generally suboptimal, but investing in one equity index fund instead of five equity index funds may be optimal.
MFIN 1151 Final Exam: Fall 2017 Page 20 15.
(40 points total) Suppose that you have the following information about two stocks –
Abercrombie has an expected return of 15% and a standard deviation of 35%, while Tiffanies has an expected return of 8% and a standard deviation of 30%. The correlation between Abercrombie and Tiffanies is 0.9, and the risk-free rate is 2%. a) (20 points) Suppose that you currently only hold Abercrombie, and you are trying to decide whether to add Tiffanies stock to your portfolio in order to increase your Sharpe Ratio. Should you add it? Explain your reasoning.
MFIN 1151 Final Exam: Fall 2017 Page 21 b) (10 points) Your friend Percival argues as follows: ‘Tiffanies has a Sharpe Ratio that is less than Abercrombie’s Sharpe Ratio. As a result, an investor who was trying to increase his Sharpe Ratio wouldn’t care if he had access to Tiffanies stock or not, since he
’d never invest in it anyway’. Do you agree? Explain your reasoning.
c) (10 points) What determines whether an investor will always choose the tangency portfolio over other possible portfolios of risky assets? Please explain your reasoning.
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MFIN 1151 Final Exam: Fall 2017 Page 22 16.
(20 points) Explain why a sophisticated investor who is evaluating two assets with the same expected returns will care more about each asset’s covariance with his current portfolio than each asset’s variance.
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US Weygandt, Accounting Principles, 13th Edition, Custom WileyPLUS Course for Bronx Community College
Help | System Announcements
Exercise 9-12 a-b (Part Levei SubmiSSion)
CES
CALCULATOR
PRINTER VERSION
4 ВАCK
Oriole Supply Co. has the following transactions related to notes receivable during the last 2 months of 2020. The company does not make entries to accrue interest excer
ES-
December 31.
Nov. 1 Loaned $23,500 cash to Manny Lopez on a 12-month, 12% note.
t
Sold goods to Ralph Kremer, Inc., receiving a $61,200, 90-day, 10% note.
Dec. 11
16
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31
Accrued interest revenue on all notes receivable.
(a)
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Learning Objective 2
S9-3 Applying the direct write-off method to account for uncollectibles
S
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off methoin
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At April 30, 2018, Valley's accounts receivable totaled $19,000. During May, she eama
revenue of $22,000 on account and collected $15,000 on account. She also wrote off
uncollectible receivables of $1,100 on May 31, 2018.
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receivables.
2. What is Valley's balance of Accounts Receivable at May 31, 2018?
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Paragraph
oftware counterfeiting. Avoid interruption and keep your files safe with genuine ice
The trial balance of VILLAR REALTY for June 30, 2019
VILLAR REALTY
Trial Balance
June 30, 2019
DEBIT
CREDIT
Cash
P 650,000
Accounts Receivable
Prepaid Rent
Prepaid Insurance on Automobile
Supplies on Hand
Office Equipment
Accumulated Depreciation-Office Equipment
Automobile
100,000
108,000
28,800
9,000
90,000
P 21,600
240,000
Accumulated Depreciation- Automobile
Accounts Payable
Notes Payable
Unearned Management Fees
M Villar, Capital
M Villar, drawing
Sales commissions Revenue
60,000
10,800
150,000
46,800
1,337,400
705, 000
900,000
Management Service Revenue
Salaries Expense
Advertising Expense
Automobile Expense
Miscellaneous Expense
72,000
599,400
9,000
53,400
5.0.000
P2,598.600 P 2,598.600
TOTAL
PREPARE a ten - column work sheet for the year ended June 30, 2019 using the following
Data for adjustments:
a. Insurance expense on automobile for the year is P14,400
b. Rent expense for the year…
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+
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Determine the following measures for 2018.
Round ratio values to one decimal place and dollar amounts to the nearest cent. For number of days' sales in receivables and number of
days' sales in inventory, round intermediate calculations to the nearest whole dollar and final amounts to one decimal place. Assume
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1. Working capital
Г
2,790,000
2.
Current ratio
4.1
3. Quick ratio
2.5
4.
Accounts receivable turnover
16
5. Days' sales in receivables
22.8
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Inventory turnover
7. Days sales in inventory
8. Debt ratio
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9. Ratio of liabilities to stockholders' equity
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Ratio of fixed assets to long-term liabilities
11. Times interest earned
times
times
12.
Times preferred dividends earned
Check My Work
8
144
0
P
Previous
Email Instructor
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pri se…
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Answer completely.
You will get up vote for sure.
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Answer completely.
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You are reviewing the account balances on the balance sheet in QBO at the end of January 20x1. The balance on the balance sheet for the checking account seems low to you. You know that you have personally taken all the checks and cash to the bank and deposited them with the bank. Based on the partial balance sheet below, what might be a reason your checking account balance in QBO appears low?
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Required information
[The following information applies to the questions displayed below.]
The December bank statement and cash T-account for Stewart Company follow:
BANK STATEMENT
Date
Checks
Deposits
Other
Balance
December 1
$ 36,000
December 6
$ 7,520
28,480
55,030
December 11
450
$ 27,000
December 17
8,900
46,130
December 23
34,000
80,130
December 26
450
79,680
December 30
12,200
18,000
NSF*
$ 200
85,280
December 31
Interest earned
20
85,300
December 31
Service charge
50
85,250
NSF check from J. Left, a customer.
Cash (A)
Debit
Credit
December 1
Balance
36,000
Checks written during
Deposits
December:
December 11
27,000
7,520
December 23
34,000
450
December 30
18,000
8,900
December 31
11,000
450
50
12,200
5,700
December 31
Balance
90,730
There were no deposits in transit or outstanding checks at November 30.
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ACCT101 FEX_2021_2_Male
A company failed to post a SR50 debit to the cash
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account. The effect of this error will be that:
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a.
The total debits in the trial balance will be larger than the total
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The error will overstate the debits listed in the journal
b.
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The trial balance will not balance
d.
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The cash account balance will be overstated
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At the end of 2021, Morley Co. has accounts receivable of $700,000 and an allowance for doubtful
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1
2
3
4
6.
7 8
>>
Fred Friedman writes a $45 check for groceries, but his account has only $20 in it. If an account becomes overdrawn,
(not enough money to pay for the transaction), his bank charges a $20 overdraft fee. The grocer has not cashed Fred's
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O $20
O $40
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Item 3
M5-9 (Algo) Preparing Journal Entries after a Bank Reconciliation [LO 5-4]
For the following transactions, prepare journal entries needed to adjust the company's books. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Outstanding checks of $12,800.
Bank service charge of $10.
Deposit in transit of $3,100.
Interest earned of $13.
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