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Concordia University *
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Course
385
Subject
Finance
Date
Jan 9, 2024
Type
Pages
11
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PROBLEM
1
(50
MARKS)
NOTE
THAT
PROBLEM
1
CONSISTS
OF
18
SEPARATE
MULTIPLE-CHOICE
QUESTIONS.
1.
(2
MARKS)
LJP,
Inc.
has
the
following
probability
distribution
of
holding
period
returns
on
its
stock.
State
of
Economy
Probability
HPR
Boom
.25
25%
Normal
Growth
45
15%
Recession
.30
5%
The
expected
return
on
LJP's stock
is
A)
12.4%.
)
16.5%.
)
14.5%.
)
)
2.
(2
MARKS)
According
to
the
Capital
Asset
Pricing
Model
(CAPM),
fairly
priced
securities
A)
have
positive
betas.
B)
have
zero
alphas.
)
have
negative
betas.
)
have
positive
alphas.
)
none
of
the
above.
3.
(2
MARKS)
Your
personal
opinion
is
that
security
X
has
an
expected
rate
of
return
of
0.11.
It
has
a
beta
of
1.5.
The
risk-free
rate
is
0.05
and
the
market
expected
rate
of
return
is
0.09.
According
to
the
Capital
Asset
Pricing
Model,
this
security
IS
A)
underpriced.
B)
overpriced.
C)
fairly
priced.
D)
cannot
be
determined
from
data
provided.
E)
none
of
the
above.
PROBLEM
1
CONTINUED
4.
(2
MARKS)
The
security
market
line
depicts
A)
A
security’s
expected
return
as
a
function
of
its
systematic
risk
B)
The
market
portfolio
as
the
optimal
portfolio
of
risky
securities
C)
The
relationship
between
a
security’s
return
and
the
return
on an
index
D)
The
complete
portfolio
as
a
combination
of
the
market
portfolio
and
the
risk-
free
asset
E)
Investment
opportunity
set,
that
is
the
combination
of
available
expected
returns
and
corresponding
standard
deviations
of
security’s
return
5.
(3
MARKS)
Which
statement
is
not
true
regarding
the
market
portfolio?
A)
ltincludes
all
publicly
traded
financial
assets.
B)
It
lies
on
the
efficient
frontier.
C)
All
securities
in
the
market
portfolio
are
held
in
proportion
to
their
market
values.
D)
It
is
the
tangency
point
between
the
capital
market
line
and
the
indifference
curve.
E)
all
of
the
above
are
true.
6.
(3
MARKS)
If
a
T-bill
pays
5
percent,
which
of
the
following
investments
would
not
be
chosen
by
a
risk-averse
investor?
A)
An
asset
that
pays
10
percent
with
a
probability
of
0.60
or
2
percent
with
a
probability
of
0.40.
B)
An
asset
that
pays
10
percent
with
a
probability
of
0.40
or
2
percent
with
a
probability
of
0.60.
C)
An
asset
that
pays
10
percent
with
a
probability
of
0.20
or
3.75
percent
with
a
probability
of
0.80.
D)
An
asset
that
pays
10
percent
with
a
probability
of
0.30
or
3.75
percent
with
a
probability
of
0.70.
E)
neither
a
nor
b
would
be
chosen.
7.
(3
MARKS)
Assume
that
the
return
of
a
risk-free
asset
is
3%,
while
the
expected
return
and
standard
deviation
of
the
risky
asset
are
12%
and
20%,
respectively.
What
percentages
of
your
money
must
be
invested
in
the
risk-free
asset
and
the
risky
asset,
respectively,
to
form
a
portfolio
with
a
standard
deviation
of
0.067
A)
30%
and
70%
B)
50%
and
50%
C)
60%
and
40%
D)
70%
and
30%
E)
cannot
be
determined
PROBLEM
1
CONTINUED
8.
10.
11.
(3
MARKS)
Which
of
the
following
assumptions
are
not
used
in
CAPM?
A)
Each
investor
in
the
market
is
a
price-taker
Investments
are
limited
to
publicly
traded
financial
assets
(stocks
and
bonds)
No
taxes
and
transaction
costs
Investors
are
rational
mean-variance
optimizers
B
C
D
E)
Investors
may
have
different
beliefs
about
future
returns.
)
)
)
)
(83
MARKS)
Which
of
the
following
statements
regarding
risk-averse
investors
is
true?
A)
They
only
care
about
the
rate
of
return.
B)
They
accept
investments
that
are
fair
games.
C)
They
only
accept
risky
investments
that
offer
risk
premiums
over
the
risk-free
rate.
D)
They
are
willing
to
accept
lower
returns
and
high
risk.
E)
aandb.
(83
MARKS)
Elias
is
a
risk-averse
investor.
David
is
a
less
risk-averse
investor
than
Elias.
Therefore,
A)
for
the
same
risk,
David
requires
a
higher
rate
of
return
than
Elias.
B)
for
the
same
return,
Elias
tolerates
higher
risk
than
David.
C)
for
the
same
risk,
Elias
requires
a
lower
rate
of
return
than
David.
D)
for
the
same
return,
David
tolerates
higher
risk
than
Elias.
E)
cannot
be
determined.
(3
MARKS)
Assume
that
short
selling
is
allowed.
Which
of
the
following
statements
is
(are)
true
regarding
the
variance
of
a
portfolio
of
two
risky
securities?
A)
The
higher
the
coefficient
of
correlation
between
securities,
the
greater
the
reduction
in
the
portfolio
variance.
B)
Itis
impossible
to
create
risk-free
portfolio
if
securities
have
perfect
negative
correlation
C)
An investor
can
make
a
risk-free
portfolio
from
two
risky
securities
even
if
they
are
perfectly
positively
correlated
D)
aandc.
E)
None
of
the
above
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PROBLEM
1
CONTINUED
12.
(3
MARKS)
Which
statement
is
not
true
regarding
the
Capital
Market
Line
(CML)?
A)
The
CML
is
the
line
from
the
risk-free
rate
through
the
market
portfolio.
B)
The
CML
is
the
best
attainable
capital
allocation
line.
C)
The
CML
is
also
called
the
security
market
line.
D)
The
CML
always
has
a
positive
slope.
E)
All
of
the
above
statements
are
true.
13.
(3
MARKS)
Assume
that
an
investor
can
trade
many
risky
securities
and
a
risk-
free
asset.
Assume
also
that
an
investor
has
found
her
efficiency
frontier
and
tries
to
find
her
optimal
risky
portfolio
comprised
with
only
risky
assets.
What
she
will
have
to
do?
A)
Find
point
of
tangency
of
her
indifference
curve
and
the
efficiency
frontier
)
Use
formula
for
y*
C)
Find
CAL
with
the
highest
possible
slope
D)
She
cannot
know
because
more
information
is
required
E)
Find
an
input
list
14.
(3
MARKS)
When
wealth
is
shifted
from
the
risky
portfolio
to
the
risk-free
asset,
what
happens
to
the
relative
proportions
of
the
various
risky
assets
within
the
risky
portfolio?
A)
They
all
decrease.
B)
Some
increase
and
some
decrease.
C)
They
all
increase.
D)
They
are
not
changed.
E)
The
answer
depends
on
the
specific
circumstances.
15.
(3
MARKS)
Efficient
portfolios
of
N
risky
securities
are
portfolios
that
A)
are
formed
with
the
securities
that
have
the
highest
rates
of
return
regardless
of
their
standard
deviations.
B)
have
the
highest
rates
of
return
for
a
given
level
of
risk.
C)
are
selected
from
those
securities
with
the
lowest
standard
deviations
regardless
of
their
returns.
D)
have
the
highest
risk
and
rates
of
return
and
the
highest
standard
deviations.
E)
have
the
lowest
standard
deviations
and
the
lowest
rates
of
return.
PROBLEM
1
CONTINUED
16.
17.
18.
(3
MARKS)
Assume
that
a
lot
of
investors
become
more
risk
averse
in
the
result
of
the
liquidity
crises.
What
should
happen
with
the
equilibrium
risk
premium
of
the
stock
market
and
why?
A)
The
premium
will
stay
the
same
because
it
is
independent
from
risk
aversions
of
investors
B)
It
will
increase
because
market
will
clear
only
at
a
smaller
price
of
the
stock
market
C)
It
will
increase
because
market
will
clear
only
at
a
higher
price
of
the
stock
market
D)
It
will
decrease
because
market
will
clear
only
at
higher
price
of
the
stock
market
E)
None
of
the
above
(83
MARKS)
Consider
a
portfolio
with
two
risky
assets
such
that
each
asset
has
positive
Sharpe
ratio.
Is
it
possible
that
an
investor
will
short
one
of
these
two
assets
in
this
portfolio
to
take
a
leveraged
position
in
the
other?
Why?
A)
No
it
is
not
possible
because
y*
is
positive
if
the
Sharpe
ratio
of
an
asset
is
positive
B)
No
it
is
not
possible
because
an
investor
cannot
short
an
asset
in
the
market
C)
No
it
is
not
possible
because
an
investor
will
not
short
an
asset
which
price
is
likely
to
increase
in
the
future
D)
Yes
itis
possible
because
the
price
of
the
shorted
asset
is
likely
to
fall
in
the
future
E)
Yes
it
is
possible
if
correlation
between
two
assets
is
significant
since
shorting
will
improve
the
portfolio
return-to-risk
characteristics
(3
MARKS)
Consider
a
risky
portfolio,
A,
with
an
expected
rate
of
return
of
0.15
and
a
standard
deviation
of
0.20,
that
lies
on
a
given
indifference
curve.
Which
one
of
the
following
portfolios
might
lie
on
the
same
indifference
curve?
A)
E(r)
=
0.15;
Standard
deviation
=
0.25
B)
E(r)
=
0.15;
Standard
deviation
=
0.10
C)
E(r)
=
0.10;
Standard
deviation
=
0.10
D)
E(r)
=
0.20;
Standard
deviation
=
0.15
E)
E(r)
=
0.10;
Standard
deviation
=
0.20
PROBLEM
2
(15
MARKS)
Consider
a
market
with
a
risk-free
security
and
a
risky
asset.
Assume
that
investor
is
not
a
price-taker
so
that
her
trading
moves
the
expected
return
of
a
risky
security
P
as
following:
E(rp)
=.12-.10y,
where
y
is
a
fraction
of
her
complete
portfolio
(in
decimals)
invested
in
the
risky
security.
(It
follows
that
if
an
investor
buys
more
of
the
risky
security,
its
price
increases
and
the
expected
return
decreases.)
Assume
that
risk-free
rate,
rf,
is
3%,
Gp
is
20%
and
does
not
change
when
an
investor
trades,
and
the
coefficient
of
risk
aversion
of
an
investor
is
2.
a.
(8
MARKS)
Find
the
optimal
fraction
of
the
complete
portfolio
allocated
to
the
risky
asset
P
by
an
investor,
y,
the
expected
return
and
standard
deviation
of
the
complete
portfolio.
Also
find
the
maximal
utility
of
an
investor.
Hint
1:
you
can
follow
the
steps
we
did
in
the
class
in
deriving
y*.
Hint
2:
If
you
cannot
find
y,
then
you
can
assume
that
it
is
equal
to
some
number
and
then
find
expected
return
and
standard
deviation.
y=.32
Unax=0.
044
b.
(4
MARKS)
Now
assume
that
an
investor
is
a
price
taker
so that
the
expected
return
of
a
risky
security
P
is
fixed
for
her
and
E(rp)
=.12,
op=.20.
Assume
that
risk-free
rate,
rf,
is
3%
and
coefficient
of
the
risk
aversion
of
an
investor
is
2.
Find
the
optimal
fraction
of
the
complete
portfolio
allocated
to
the
risky
asset
by
an
investor,
the
expected
return
and
standard
deviation
of
the
complete
portfolio.
Also
find
the
maximal
utility
of
an
investor.
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ionsaandb
in
quest
c.
(3
MARKS)
Explain
the
economical
intuition
behind
the
difference
between
the
results
PROBLEM
3
(15
MARKS)
Investors
can
design
a
risky
portfolio
based
on
two
stocks,
K
and
L.
Stock
K
has
an
expected
rate
of
return
of
18%
and
a
standard
deviation
of
return
of
30%.
Stock
L
has
an
expected
rate
of
return
of
10%
and
a
standard
deviation
of
return
of
12%.
The
correlation
coefficient
between
the
two
stocks
is
0.5.
The
risk-free
rate
is
3%.
a.
(4
MARKS)
What
is
the
weight
of
stock
K
in
the
optimal
risky
portfolio?
What
are
the
expected
return
and
the
standard
deviation
of
return
on
this
portfolio?
W,=0.2,
W.=0.8
E(r)=11.6%
6=13.63%
b.
(4
MARKS)
Investor
Peter
wants
to
have
a
complete
portfolio
(portfolio
that
includes
T-bills
and
risky
securities)
with
an
expected
return
of
15%.
What
are
the
weights
of
each
security
in
the
complete
portfolio?
What
is
the
standard
deviation
of
return
on
this
portfolio?
Y101=-0.395,
Yk=0.279,
Y.
=1.116
6=19.01%
PROBLEM
3
CONTINUED
C.
(4
MARKS)
Investor
Julien
has
a
coefficient
of
risk
aversion
of
5.
What
are
the
weights
of
each
security
in
her
optimal
complete
portfolio?
What
are
the
expected
return
and
the
standard
deviation
of
return
on
this
portfolio?
Y10i1=0.074,
Y=0.185,
Y
=0.741
E(r)=10.96%
6=12.62%
d.
(3
MARKS)
Sketch
the
portfolio
opportunity
set
for
Julien.
Show
her
risky
portfolio
and
her
complete
portfolio.
See
your
class
notes
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PROBLEM
4
(15
MARKS)
Assume
that
there
are
only
two
stocks
in
an
economy
and
no
T-bills:
Security
Expected
Standard
Return
deviation
of
return
X
.05
15
Y
12
.20
The
correlation
coefficient
between
the
returns
of
the
two
stocks
is
p=-1.
a.
(3
MARKS)
Sketch
the
graph
of
the
portfolio
opportunity
set
for
an
investor
See
you
class
notes
10
PROBLEM
4
CONTINUED
b.
(6
MARKS)
Find
the
weights
of
the
two
securities
in
the
risk-free
portfolio
in
this
market.
What
is
a
return
of
this
portfolio?
Wx=0.571,
W
=0.429
R=8.01%
C.
(6
MARKS)
Consider
an
investor
who
has
a
coefficient
of
risk
aversion
equal
to
2.
What
is
the
weight
of
the
risk-free
portfolio
found
in
question
b
in
his/her
optimal
portfolio
in
this
economy?
What
is
an
expected
return
and
standard
deviation
of
return
of
this
portfolio?
Yr=0.501,
E(r)=10.00%
6=9.98%
11
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Question 2
(30 Marks)
(a) You want to estimate the daily value at risk (VaR) for the stock returns of a public firm
currently valued at $800 million. Using its stock returns data for the past 2 years (ordered
in decreasing order, from highest daily return to lowest daily return), you have the daily
stock returns as follows:
24.73%, 19.25% 17.83%, 15.87%, 14.56%, 13.73%, 12.25 % 11.83 %, 10.87%, 8.56%,
7.79% -9.41%, -10.43%, -11.91 %, -12.41 %, -13.43%, -14.28%, -15.76 %, -16.67%,
-17.28%, -18.76%, -20.67%.
Estimate the daily VaR and expected shortfall (ES) of the firm's stock return at the
98% confidence level using the historical simulation method. Assume we have 2 years'
trading data for the bank and there are 250 trading days in a year (i.e., 500 trading days in
total). Which one should be preferred to use by a risk manager? Why?
(15 Marks)
(b) Imagine you are a risk manager for the video-sharing mobile application TikTok. You
have identified 9 risks within the company which are…
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Given answer general accounting question
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3.
Financial analysts forecast Safeco Corp.s (SAF) growth rate for the future to be 12 percent Safeco's recent dividend was $1.60.
What is the value of Safeco stock when the required return is 14 percent? (Round your answer to 2 declmal places.)
Value of stock
here to search
0 0 0 O
F4
F5
F7
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Quick answer of this accounting questions
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(Common stock valuation) Wayne, Inc.'s outstanding common stock is currently selling in the market for
$27.
Dividends of
$3.38
per share were paid last year, return on equity is
22
percent, and its retention rate is
27
percent.
a. What is the value of the stock to you, given a required rate of return of
18
percent?
b. Should you purchase this stock?
Question content area bottom
Part 1
a.
Given
a required rate of return of
18
percent, the value of the stock to you is
$enter your response here.
(Round to the nearest cent.)
Part 2
b. Should you purchase this stock? (Select from the drop-down menus.)
You
▼
should
should not
purchase the stock because your expected value of the stock is
greater
than the current market price, indicating that the stock would be currently
▼
underpriced
overpriced
in the market.
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