Practice 1st Midterm Exam - ff23F1MPE
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Foundations of Finance Practice 1
st
Midterm
Foundations of Finance COR1-GB.2311 Practice 1
st
Midterm Exam
Prof. Anthony Lynch
First Name: _________________
Last Name: ____________________________
Student ID: _________________________
Stern Honor Code : “I pledge my honor that I have not violated the Stern Honor Code in the
completion of this examination.”
Signature: __________________________________________________
Instructions
: 80 minutes. Open Book, but you are only allowed access to one electronic device
during the exam (not a cell phone) for only two purposes: •
using Excel, or •
to access files already on the electronic device or on the course Brightspace page. You are only allowed access to a cell phone in addition to the one allowed electronic device if it
has an inbuilt calculator that you want to use for calculations. You must leave it in airplane mode
for the entire exam. I will check that the phone is in airplane mode at random times during the
exam. While taking the exam, you cannot communicate with anyone registered for the course,
or anyone else, via phone or electronically (which includes email, text message, Twitter, and
Facebook). You are permitted the use of Excel and a financial or scientific calculator. Starting on page 2, you will find 15 multiple choice questions which will be graded on a
correct/incorrect basis. Answer all
questions. Enter your final answer for all
questions in the
answer sheet on the last page of this exam which is page 17. We will only look at the
last
page
for answers. Use capital
letters for your answers: A, B, C, D or E. Each question is worth 1
point so the maximum number of points you can earn is 15. If you get stuck on a question,
guess, move on, and come back at the end if you have time. You must only write on the pages of the exam during the exam. You will fail the exam if you
are found to have written on anything other than exam. Use the backs of pages for calculations
if you need to. Do
not
detach any pages. Any
detached pages will result in a 5 point penalty. Write your name
and ID number on the first
page and the last
page (answer sheet) of the exam. Failure to do so
will result in a 5 point penalty. You must hand in all
pages. Failure to hand in all
pages will
result in failure of the exam.
Good luck!
1
Foundations of Finance Practice 1
st
Midterm
1.
Tom borrows $10000 from the bank at a 6% APR with monthly compounding and agrees
to make monthly payments at the end of each month for the next 5 years. What will be
his monthly repayment?
A
$196
B
$2,374
C
$619
D
$143
E
$193
2
Foundations of Finance Practice 1
st
Midterm
2.
Your local S&L provides you with the following information concerning a possible 1-
year single repayment loan. You pay 2 “points” (1 point = 1%) up front of the amount
borrowed, and the effective interest rate you are charged is 10%. If you borrow $4,000
for one year on these terms, at what effective rate are you actually borrowing.
A
10.59%
B
11.04%
C
11.20%
D
12.24%
E
12.48%
3
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Foundations of Finance Practice 1
st
Midterm
3.
The company Mr. Z works for will deposit $600 at the end of each month into his
retirement fund. Interest is compounded monthly. Mr. Z plans to retire 15 years from
now and estimates that he will need $2,000 per month out of the account for the next 20
years (after retirement) each payment to be received at the end of each month. If the
account pays 8.0% APR compounded monthly, how much does Mr. Z need to put into
the account in addition to his company deposit in order to meet his objective?
A
$0.00
B
$57.59
C
$90.99
D
$95.88
E
$104.49
4
Foundations of Finance Practice 1
st
Midterm
4.
If you deposit $2,500 at the end of each six months into an account which offers an APR
of 5.5% interest compounded quarterly, how much will be in the account in 5 years?
A
$13,953
B
$16,931
C
$26,605
D
$28,357
E
$32,188
5
Foundations of Finance Practice 1
st
Midterm
5.
When you were born, your dear old Aunt Minnie promised to deposit $1,000 into a
savings account, bearing a 5% effective annual rate, on each birthday, beginning with
your first. You have just turned 22 and want the dough. However, it turns out that dear
old (forgetful) aunt Minnie made no deposits on your fifth and eleventh birthdays. How
much is in the account right now?
A
$31,976
B
$34,503
C
$43,888
D
$47,983
E
$51,889 6
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Foundations of Finance Practice 1
st
Midterm
6.
The order book for PQR stock is given by the following table:
PQR Price
Limit Buy
Limit Sell
100.80
100 sh
100.75
100 sh
100.70
100.65
100sh
100.60
100 sh
100.55
100 sh
A market buy order or a market sell order, each for 100 shares, may come in. Then,
A
a market buy will be executed at 100.80 and a market sell at 100.55
B
a market buy will be executed at 100.55 and a market sell at 100.80
C
a market buy will be executed at 100.75 and a market sell at 100.65
D
a market buy will be executed at 100.65 and a market sell at 100.75
E
a market buy will be executed at 100.70 and a market sell at 100.70
7
Foundations of Finance Practice 1
st
Midterm
7.
Exactly one year ago XYZ stock had just run up from $12 per share to $25 per share.
Then, (one year ago) with a net worth of $20,000, you bought $40,000 worth of XYZ
stock on margin at $25 per share. The rate at which your broker would lend to you was
8.5% (EAR). XYZ did not pay any dividends over the last year. The stock is presently
trading at $27 per share. Commissions are $0.50 per share (each way, i.e., when buying
and when selling a share), but paid when you close the position. If you close out your
position today, what is your total profit or loss on the entire transaction?
A
Profit of $1500
B
Profit of $1400
C
Profit of $ 43,200
D
Loss of $100
E
Loss of $1600
8
Foundations of Finance Practice 1
st
Midterm
8.
What is the expected return on a two asset portfolio of assets A and B, where you borrow
50% of the portfolio’s value by selling short B, which has an expected return of 6%, and
you use the proceeds from the short plus all the portfolio’s value to buy A, which has an
expected return of 10%?
A
8%
B
18%
C
120%
D
12%
E
None of the above
9
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Foundations of Finance Practice 1
st
Midterm
9.
Which of the following statements about short selling a risk-free security is true:
A
It is impossible to short sell risk-free securities
B
Even combined with other securities, the short sale makes no sense
C
This transaction is in principle equivalent to borrowing money
D
This transaction is in principle equivalent to lending money
E
There are not any margin requirements associated with shorting a risk-free
security.
10
Foundations of Finance Practice 1
st
Midterm
10.
Mr. X, who has mean-variance preferences, considers the following two funds:
Sure-thing fund: Expected Return = 16%, Standard Deviation of Return = 15%
Sure-bet fund:
Expected Return = 12%, Standard Deviation of Return = 8%
The correlation between the funds’ returns is 0.7, and T-bill rate is 8%. Mr. X forms
portfolio Y using the two funds, and then combines Y with T-bills. The weights of the
two funds in the portfolio Y are 43.56% in Sure-thing fund and 56.44% in Sure-bet fund.
The standard deviation of portfolio Y’s return is:
A
11.50%
B
11.16%
C
10.69%
D
10.43%
E
10.22%
11
Foundations of Finance Practice 1
st
Midterm
11.
Suppose Kim and Susan care only about the mean and standard deviation of their
portfolio return. Kim is less risk averse than Susan. They agree on the opportunity set
available. Suppose that Susan’s total portfolio is the tangency portfolio. Which of these
portfolios (if any) is Kim’s total portfolio?
A
The riskfree asset
B
The tangency portfolio
C
Buy the tangency portfolio on margin
D
A portfolio with positive weights in the riskfree asset and the tangency portfolio
E
None of the above
12
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Foundations of Finance Practice 1
st
Midterm
12.
Mrs. R is using a model of returns for next year with three possible states at the end of
the year, Boom Recovery and Recession. Recovery is the most likely state with a 60%
chance of occurring. Boom had a 10% of occurring and Recession has a 30% chance. The model indicates the following 1-year returns on assets A, B and C:
State
A
B
C
Boom
30%
90%
42%
Recovery
10%
5%
8%
Recession
-20%
-30%
-10%
Last year, A’s return was 30% and B’s return was 90%. The current1-year riskless rate is
5%. The expected returns on A and B satisfy:
A
A is expected to have a higher return than B
B
B is expected to have a higher return than A
C
A and B are expected to have returns above 5%
D
A and B are expected to have the same return
E
Both B and C
13
Foundations of Finance Practice 1
st
Midterm
13.
Ms. V is using a probability model of annual returns for the next year that implies an
expected annual return on stock A of 2% and an expected annual return on stock C of
7%. The 1-year riskless rate available today is 4%. Ms. V is risk averse and realizes that
she has mean-variance preferences. She also has an investment horizon of one year and
wants to construct a portfolio from either (i) a 1-year riskless asset and stock A only, or
(ii) a 1-year riskless asset and stock C only. Ms. V has already told you that she will not
be 100% in the 1-year riskless asset irrespective of whether she combines the 1-year
riskless asset with stock A only or with stock C only.
A
For (i), she will short A; for (ii), she will short C
B
For (i), she will buy A using her own funds or on margin; for (ii), she will short C
C
For (i), she will short A; for (ii), she will buy C using her own funds or on margin
D
For (i), she will buy A using her own funds or on margin; for (ii), she will buy C
using her own funds or on margin
E
Need to know more about Mrs. R’s preferences and to know the standard
deviation of A and C to be able to describe Mrs. R’s portfolio strategy.
14
Foundations of Finance Practice 1
st
Midterm
14.
Consider the following W, X, Y, Z portfolios, formed from N risky assets. Which one of
these 4 portfolios (if any) cannot lie on the efficient frontier for the N assets given what
you know about the 4 portfolios?
A
portfolio W with expected return 15%, standard deviation 36%
B
portfolio X with expected return 12%, standard deviation 15%
C
portfolio Z with expected return 5%, standard deviation 7%
D
portfolio Y with expected return 9%, standard deviation 21%
E
all the portfolios above can possibly lie on the efficient frontier
15
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Foundations of Finance Practice 1
st
Midterm
15.
Stocks A, B, and C have the same expected returns and standard deviations. The
following table shows the correlations between the returns on these stocks:
Stock A
Stock B
Stock C
Stock A
1.0
Stock B
0.9
1.0
Stock C
0.1
-0.4
1.0
Given these correlations, which of the following portfolios have the lowest standard
deviation?
A
Equally invested in stocks A and B
B
Equally invested in stocks A and C
C
Equally invested in stocks B and C
D
Totally invested in stock C
E
All of the above have same total risk
16
Foundations of Finance Practice 1
st
Midterm
Answers
1.
________
Name:__________________________________
2.
________
Student ID: _________________________
3.
________
4.
________
5.
________
6.
________
7.
________
8.
________
9.
________
10.
________
11.
________
12.
________
13.
________
14.
________
15.
________
17
Foundations of Finance Practice 1
st
Midterm
Foundations of Finance Practice Midterm Exam Solution
1.
Tom borrows $10000 from the bank at a 6% APR with monthly compounding and agrees to make monthly
payments at the end of each month for the next 5 years. What will be his monthly repayment?
A
$196
B
$2,374
C
$619
D
$143
E
$193
E. Definition of nominal rate or APR:
]
_
8
a
8
APR with m compound
periods in 1year
# compound
periods in 1 year
effective rate for 1
compound period
APR = 6% compounded monthly
m = 12
effective monthly rate = 0.06/12 = 0.005 annuity with monthly payments |
r = effective monthly rate = 0.005 N = 60
0 1 2 59 60
.))))))))))))2))))))))))))2) ...
))2))))))))))))- V
0
C C C C
= 10000
|
C = 193
18
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Foundations of Finance Practice 1
st
Midterm
2.
Your local S&L provides you with the following information concerning a possible 1-year single repayment
loan. You pay 2 “points” (1 point = 1%) up front of the amount borrowed, and the effective interest rate you
are charged is 10%. If you borrow $4,000 for one year on these terms, at what effective rate are you actually
borrowing.
A
10.59%
B
11.04%
C
11.20%
D
12.24%
E
12.48%
D.
Proceeds received today = 4000 × (1 - 0.02) = 3920.
Payment in 1 year = 4000 × (1 + 0.1) = 4400.
0 1
.))))))))))))))))))))))- 3920 4400
effective annual rate = EAR = r
Use Future Value Interest formula: 3920 × (1 + r) = 4400 |
r = 0.1224.
19
Foundations of Finance Practice 1
st
Midterm
3.
The company Mr. Z works for will deposit $600 at the end of each month into his retirement fund. Interest is
compounded monthly. Mr. Z plans to retire 15 years from now and estimates that he will need $2,000 per
month out of the account for the next 20 years (after retirement) each payment to be received at the end of
each month. If the account pays 8.0% APR compounded monthly, how much does Mr. Z need to put into the
account in addition to his company deposit in order to meet his objective?
A
$0.00
B
$57.59
C
$90.99
D
$95.88
E
$104.49
C.
Definition of nominal rate or APR:
]
_
8
a
8
APR with m compound
periods in 1year
# compound
periods in 1 year
effective rate for 1
compound period
APR = 8% compounded monthly
m = 12
effective monthly rate = 0.08/12 annuity with monthly payments |
r = effective monthly rate = 0.08/12
0 1 2 179 180 181 419 420
N = 240
.))))))))))))2))))))))))))2) ...
)))2))))))))))))2))))))))))))2) ...
))2))))))))))))- 2000 2000 2000
V
180
V
180
= C × = 2000 × = 239108.58.
annuity with monthly payments |
r = effective monthly rate = 0.08/12
0 1 2 179 180 181 419 420
N = 180
.))))))))))))2))))))))))))2) ...
)))2))))))))))))2))))))))))))2) ...
))2))))))))))))- C C C C V
180
= 239108.58 V
180
= 239108.58 = C × = C × |
C = 690.99 and Mr. Z must pay 690.99 – 600 = 90.99 more.
20
Foundations of Finance Practice 1
st
Midterm
4.
If you deposit $2,500 at the end of each six months into an account which offers an APR of 5.5% interest
compounded quarterly, how much will be in the account in 5 years?
A
$13,953
B
$16,931
C
$26,605
D
$28,357
E
$32,188
D.
Definition of nominal rate or APR:
]
_
8
a
8
APR with m compound
periods in 1year
# compound
periods in 1 year
effective rate for 1
compound period
APR = 5.5% compounded quarterly
m = 4
effective quarterly rate = 5.5%/4 = 1.375%
Discrete Compounding
n-period Interest Rate
r
n
= (1+r)
n
- 1
n = 2
effective semiannual rate = (1 + 0.01375)
2
– 1 = 0.0277 annuity with semi-annual payments |
r = effective semi-annual rate = 0.0277
0 1 2 9 10
N = 10
.))))))))))))2))))))))))))2) ...
))2))))))))))))- 2500 2500 2500 2500 V
10
= ? V
10
= C ×
= 2500 × = 28357
21
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Foundations of Finance Practice 1
st
Midterm
5.
When you were born, your dear old Aunt Minnie promised to deposit $1,000 into a savings account, bearing a
5% effective annual rate, on each birthday, beginning with your first. You have just turned 22 and want the
dough. However, it turns out that dear old (forgetful) aunt Minnie made no deposits on your fifth and eleventh
birthdays. How much is in the account right now?
A
$31,976
B
$34,503
C
$43,888
D
$47,983
E
$51,889 B.
annuity with annual payments |
r = effective annual rate = 0.05
N = 22
0 1 2 4 5 6 10 11 12 21 22
.)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
))2)))))))))))- 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
V
22
= ?
V
22
= C × = 1000 × = 38505.
0 1 2 4 5 6 10 11 12 21 22
.)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
))2)))))))))))- 1000 V
22
=1000 × 1.05
17
n=17
0 1 2 4 5 6 10 11 12 21 22
.)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
)))2)))))))))))2)))))))))))2) ...
))2)))))))))))- 1000
V
22
=1000 × 1.05
11
n = 11
Account Balance on 22
nd
Birthday = 38505 – 1000 × 1.05
17 – 1000 × 1.05
11 = 34503
22
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Foundations of Finance Practice 1
st
Midterm
6.
The order book for PQR stock is given by the following table:
PQR Price
Limit Buy
Limit Sell
100.80
100 sh
100.75
100 sh
100.70
100.65
100sh
100.60
100 sh
100.55
100 sh
A market buy order or a market sell order, each for 100 shares, may come in. Then,
A
a market buy will be executed at 100.80 and a market sell at 100.55
B
a market buy will be executed at 100.55 and a market sell at 100.80
C
a market buy will be executed at 100.75 and a market sell at 100.65
D
a market buy will be executed at 100.65 and a market sell at 100.75
E
a market buy will be executed at 100.70 and a market sell at 100.70
C.
A market buy for 100 shares will be executed at 100.75 , the lowest limit sell.
A market sell for 100 shares will be executed at 100.65, the highest limit buy.
23
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Foundations of Finance Practice 1
st
Midterm
7.
Exactly one year ago XYZ stock had just run up from $12 per share to $25 per share. Then, (one year ago)
with a net worth of $20,000, you bought $40,000 worth of XYZ stock on margin at $25 per share. The rate at
which your broker would lend to you was 8.5% (EAR). XYZ did not pay any dividends over the last year. The stock is presently trading at $27 per share. Commissions are $0.50 per share (each way, i.e., when buying
and when selling a share), but paid when you close the position. If you close out your position today, what is
your total profit or loss on the entire transaction?
A
Profit of $1500
B
Profit of $1400
C
Profit of $ 43,200
D
Loss of $100
E
Loss of $1600
D.
Price run-up prior to purchase is irrelevant. R
f
= 8.5%
w
XYZ,p
= 40000/20000 = 2
w
f,p
= 1 - w
XYZ,p
= -1
R
p
(last year) = w
XYZ,p
× R
XYZ
(last year) + w
f,p
× R
f
= 2 × 4% + -1 × 8.5% = -0.5%.
Total Profit = 20000 × -0.005 = -100.
24
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Foundations of Finance Practice 1
st
Midterm
8.
What is the expected return on a two asset portfolio of assets A and B, where you borrow 50% of the
portfolio’s value by selling short B, which has an expected return of 6%, and you use the proceeds from the
short plus all the portfolio’s value to buy A, which has an expected return of 10%?
A
8%
B
18%
C
120%
D
12%
E
None of the above
D.
E[R
p
] =
w
A,p
× E[R
A
] + w
B,p
× E[R
B
] = 1.5 × 10% + (-0.5) × 6% = 12% 25
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Foundations of Finance Practice 1
st
Midterm
9.
Which of the following statements about short selling a risk-free security is true:
A
It is impossible to short sell risk-free securities
B
Even combined with other securities, the short sale makes no sense
C
This transaction is in principle equivalent to borrowing money
D
This transaction is in principle equivalent to lending money
E
There are not any margin requirements associated with shorting a risk-free security.
C.
It is possible to short sell risk-free securities so A is false.
Short selling the riskless asset can make sense for an investor whose risk aversion is sufficiently low, so B is false.
There are margin requirements associated with shorting a risk-free security so E is false.
Short selling the riskless asset is in principle equivalent to borrowing money, so D is false and C is true.
26
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Foundations of Finance Practice 1
st
Midterm
10.
Mr. X, who has mean-variance preferences, considers the following two funds:
Sure-thing fund: Expected Return = 16%, Standard Deviation of Return = 15%
Sure-bet fund:
Expected Return = 12%, Standard Deviation of Return = 8%
The correlation between the funds’ returns is 0.7, and T-bill rate is 8%. Mr. X forms portfolio Y using the
two funds, and then combines Y with T-bills. The weights of the two funds in the portfolio Y are 43.56% in
Sure-thing fund and 56.44% in Sure-bet fund. The standard deviation of portfolio Y’s return is:
A
11.50%
B
11.16%
C
10.69%
D
10.43%
E
10.22%
E.
One formula for the variance of return on a portfolio containing 2 risky assets: where
σ
2
[R
i
] is the variance of return on asset I;
σ[R
1
, R
2
] is covariance of risky asset 1’s return and risky asset 2’s return;
1 = ST
2 = SB
.
= 0.4356
2
× 15
2
+ 0.5644
2
× 8
2
+ 2 × 0.4356 × 0.5644 × 0.7 × 15 × 8 = 104.383. σ[R
Y
] = = 10.2168.
27
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Foundations of Finance Practice 1
st
Midterm
11.
Suppose Kim and Susan care only about the mean and standard deviation of their portfolio return. Kim is less
risk averse than Susan. They agree on the opportunity set available. Suppose that Susan’s total portfolio is the
tangency portfolio. Which of these portfolios (if any) is Kim’s total portfolio?
A
The riskfree asset
B
The tangency portfolio
C
Buy the tangency portfolio on margin
D
A portfolio with positive weights in the riskfree asset and the tangency portfolio
E
None of the above
C.
Kim and Susan care only about expected portfolio return and standard deviation of portfolio return and so both hold
portfolios which are combinations of the tangency portfolio and the riskless asset, because that gives them access to
the steepest sloped Capital Allocation Line possible. Kim is less risk averse than Susan so Kim must hold more of the
tangency portfolio in her total portfolio than Susan does. Since Susan's portfolio is the tangency portfolio T, Kim
must be buying the tangency portfolio T on margin.
28
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Foundations of Finance Practice 1
st
Midterm
12.
Mrs. R is using a model of returns for next year with three possible states at the end of the year, Boom Recovery and Recession. Recovery is the most likely state with a 60% chance of occurring. Boom had a 10%
of occurring and Recession has a 30% chance. The model indicates the following 1-year returns on assets A,
B and C:
State
A
B
C
Boom
30%
90%
42%
Recovery
10%
5%
8%
Recession
-20%
-30%
-10%
Last year, A’s return was 30% and B’s return was 90%. The current 1-year riskless rate is 5%. The expected
returns on A and B satisfy:
A
A is expected to have a higher return than B
B
B is expected to have a higher return than A
C
A and B are expected to have returns above 5%
D
A and B are expected to have the same return
E
Both B and C
D.
E[R
Asset
]
= Expected Return on the Asset = prob(s1) x R
Asset
(s1) + prob(s2) x R
Asset
(s2) + ... + prob(sK) x R
Asset
(sK)
where R
Asset
(s) is the return on the Asset in state s; and
prob(s) is the probability of state s.
E[R
A
] = 0.1 × 30% + 0.6 × 10% + 0.3 × -20% = 3%
E[R
B
] = 0.1 × 90% + 0.6 × 5% + 0.3 × -30% = 3%
29
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Foundations of Finance Practice 1
st
Midterm
13.
Ms. V is using a probability model of annual returns for the next year that implies an expected annual return
on stock A of 2% and an expected annual return on stock C of 7%. The 1-year riskless rate available today is
4%. Ms. V is risk averse and realizes that she has mean-variance preferences. She also has an investment
horizon of one year and wants to construct a portfolio from either (i) a 1-year riskless asset and stock A only,
or (ii) a 1-year riskless asset and stock C only. Ms. V has already told you that she will not be 100% in the 1-
year riskless asset irrespective of whether she combines the 1-year riskless asset with stock A only or with
stock C only.
A
For (i), she will short A; for (ii), she will short C
B
For (i), she will buy A using her own funds or on margin; for (ii), she will short C
C
For (i), she will short A; for (ii), she will buy C using her own funds or on margin
D
For (i), she will buy A using her own funds or on margin; for (ii), she will buy C using her own funds
or on margin
E
Need to know more about Mrs. R’s preferences and to know the standard deviation of A and C to be
able to describe Mrs. R’s portfolio strategy.
C.
R
f
= 4%. E[R
A
] = 2%
E[R
C
] = 7%. Regardless of her degree of risk aversion: Mrs. R wants to choose a portfolio that lies on the positive-sloped portion
of the portfolio possibility curve. E[R
A
] < R
f
: Mrs R will short sell
A in case (i).
E[R
C
] > R
f
: Mrs R will buy C
using own funds or buy C on
margin in case (ii)
30
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Foundations of Finance Practice 1
st
Midterm
14.
Consider the following W, X, Y, Z portfolios, formed from N risky assets. Which one of these 4 portfolios (if
any) cannot lie on the efficient frontier for the N assets given what you know about the 4 portfolios?
A
portfolio W with expected return 15%, standard deviation 36%
B
portfolio X with expected return 12%, standard deviation 15%
C
portfolio Z with expected return 5%, standard deviation 7%
D
portfolio Y with expected return 9%, standard deviation 21%
E
all the portfolios above can possibly lie on the efficient frontier
D.
Efficient frontier for N risky assets is a positive-sloped concave curve in {E[R], σ[R]} space.
Portfolio Y has a lower expected return and a higher standard deviation of return than portfolio X and so can not lie
on the efficient frontier
31
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Foundations of Finance Practice 1
st
Midterm
15.
Stocks A, B, and C have the same expected returns and standard deviations. The following table shows the
correlations between the returns on these stocks:
Stock A
Stock B
Stock C
Stock A
1.0
Stock B
0.9
1.0
Stock C
0.1
-0.4
1.0
Given these correlations, which of the following portfolios have the lowest standard deviation?
A
Equally invested in stocks A and B
B
Equally invested in stocks A and C
C
Equally invested in stocks B and C
D
Totally invested in stock C
E
All of the above have same total risk
C.
Can use the following formula for equal-weighted portfolios with all assets having the same standard deviation and
set N = 2:
It follows that the equally weighted portfolio of the two stocks with the lowest correlation, B and C, has the lowest
standard deviation. 32
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Additional Practice Questions
1.
Security A has a higher equilibrium price volatility than security B. Assuming all else is
equal, the equilibrium bid-ask spread of A would be expected to be:
a
Greater than B
B
Less than B
C
Equal to B
D
It is impossible to tell
E
Depends on the time of day
2.
Security A has a higher trading volume than security B. Assuming all else is equal, the
equilibrium bid-ask spread of A would be expected to be:
A
Greater than B
B
Less than B
C
Equal to B
D
It is impossible to tell
E
Depends on the time of day
3.
A riskfree security pays a dividend of $200 after one year, $400 after two years, $800
after three years, and thereafter it never pays dividends again. The riskfree interest rate is
an effective annual rate of 3%. What is the current price of the security:
A
1203.3
B
1303.3
C
1345.2
D
1400.0
E
1342.4
4.
Which of the following is not possible when two assets A and B are positively correlated:
A
Asset A's mean return is negative while asset B's is positive
B
Asset A's return is sometimes below its mean when asset B's is above its mean
C
Asset A's mean return is negative while asset B's mean return is also negative
D
Asset A has a higher mean return but a lower standard deviation of return than
asset B
E
All are possible
33
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5.
A security can be in one of four states next year:
!
a good state with a return of 35% (this happens with probability = 0.30);
!
a normal state with a return of 15% (this happens with probability = 0.50); and
!
a bad state with a return of 0% (this happens with probability = 0.15).
!
a disaster state with a return of -50% (this happens with probability = 0.05).
What are, respectively, the mean rate of return and the standard deviation of the rate of
return?
A
E[R] = 17.5% ; σ[R] = 16%
B
E[R] = 15.5%; σ[R] = 19%
C
E[R] = 15.5%; σ[R] = 16%
D
E[R] = 17.5%; σ[R] = 15%
E
E[R] = 15.5%; σ[R] = 3.4%
6.
What is the effective annual rate corresponding to an APR of 40% with weekly
compounding?
A
34.23%
B
52.12%
C
42.88%
D
48.95%
E
40.00%
7.
If a Treasury bill pays 5%, which of the following would definitely not be chosen by a risk
averse investor as her total portfolio:
A
An asset paying 10%, with probability 0.6 or 2% with probability 0.4
B
An asset paying 10% with probability 0.4 or 2% with probability 0.6
C
An asset paying 10% with probability 0.2 or 3.75% with probability 0.8
D
An asset paying 10% with probability 0.3 or 3.75% with probability 0.7
E
Any of these could be chosen
34
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8.
Assume σ[R
1
] = 10% and σ[R
2
] = 30%. Under what circumstances will a portfolio allocation
of 25% in asset 1 and 75% in asset 2 produce a σ[R] for the combined portfolio equal to 25%
A
ρ[R
1
, R
2
] = 0
B
ρ[R
1
, R
2
] = 1
C
ρ[R
1
, R
2
] = -1
D
ρ[R
1
, R
2
] = 0.5
E
None of the above.
9.
Assume the variance of IBM is 0.16 and the variance of Microsoft is 0.25. If the variance
of an equally weighted portfolio of these stocks is 0.0525, then the covariance between these
stock is:
A
0.10
B
0.20
C
0.25
D
-0.18
E
-0.10
10.
Which of the following best explains a decline in a dealer's inventory:
A
bid price and asked price are too high
B
bid price is too high and asked price is too low
C
bid price is too low and asked price is too high
D
bid price and asked price are too low
E
the decline has nothing to do with the bid and asked prices
35
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Answers to Additional Practice Questions
1.
A.
Higher equilibrium price volatility Y
Higher volatility of a given non-zero inventory position Y
Higher spread.
2.
B.
Higher volume Y
Can unwind a given non-zero inventory position quicker Y
Lower spread.
3.
B.
The current price is equal to the value today of the stream of dividends: $200 in 1 year, $400 in 2
years and $800 in three years. Since the dividends are riskless, the appropriate interest rate is the
riskfree interest rate, which is 3% per annum when expressed as an effective annual rate. So the
calculation is:
4.
E.
Assets A and B positively correlated implies that when one asset’s return is above (below) its
expected value then the other asset’s return is also above (below) its expected value on average. So
none of the first 4 answers are ruled out just because asset A and B are positively correlated. Positive correlation says nothing about the expected returns or standard deviations of returns on the
two assets. This is why A, C, and D are possible. B is possible because a positive correlation does
not mean that the deviations of the two returns from their respective expected values are always the
same sign. Rather, a positive correlation only means that the deviations of the two returns from their
respective expected values tend to have the same sign.
5.
B.
Use the following formulas from page 3 of Lecture 3: Portfolio Management-Characterizing the
Return Distribution
.
E[R
Asset
]
= Expected Return on the Asset = prob(s1) x R
Asset
(s1) +prob(s2) x R
Asset
(s2) + ... + prob(sK) x Rasset
(sK)
= 0.30 x 35% + 0.50 x 15% + 0.15 x 0% + 0.05 x -50% = 15.5%
36
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σ
2
[R
Asset
]
= Variance of Return on the Asset = prob(s1) {R
Asset
(s1)-E[R
Asset
]}
2
+ prob(s2) {R
Asset
(s2)-E[R
Asset
]}
2
+ ... + prob(sK) {R
Asset
(sK)-E[R
Asset
]}
2 = 0.30 (35% - 15.5%)
2
+ 0.50 (15% - 15.5%)
2
+ 0.15 (0% - 15.5%)
2
+ 0.05 (-50% - 15.5%)
2
= 364.75
and σ[R
Asset
]
= Standard Deviation of Return on the Asset = =
= 19.
6.
D.
APR with weekly compounding = 40%. So m = 52. Thus:
7.
C.
Need to calculate the expected return on each portfolio. Any risk averse investor will prefer to hold
the riskless asset (Treasury bills) as her total portfolio rather than a risky asset with an expected
return the same or lower than the riskfree rate.
A: E[R
A
] = 0.6 x 10% + 0.4 x 2% = 6.8% > R
f = 5%
B: E[R
B
] = 0.4 x 10% + 0.6 x 2% = 5.2% > R
f
= 5%
C: E[R
C
] = 0.2 x 10% + 0.8 x 3.75% = 5.0 = R
f
= 5%
D: E[R
D
] = 0.3 x 10% + 0.7 x 3.75% = 5.625 > R
f
=5%
So since E[R
C
] = 5% = R
f
, know than C would definitely not be chosen by any risk averse investor
as her total portfolio because any risk averse investor would prefer to hold T-bills as her total
portfolio.
8.
B.
Use the formula for the variance of a portfolio of 2 risky assets 1 and 2 on page 9 of Lecture 4:
37
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Portfolio Management-2 Risky Assets and a Riskless Asset
. 25x25 = (0.25x.25) x (10x10) + (0.75x0.75) x (30x30) + 2 x 0.25 x 0.75 x ρ[R
1
,R
2
] x 10 x 30 which implies ρ[R
1
,R
2
] = 1.
9.
E.
Use the formula for the variance of a portfolio of 2 risky assets 1 and 2 on page 3 of Lecture 4:
Portfolio Management-2 Risky Assets and a Riskless Asset
. 0.0525 = (0.5 x 0.5) x 0.16 + (0.5 x 0.5) x 0.25 + 2 x 0.5 x 0.5 x σ[R
IBM
, R
Msft
]
which implies σ[R
IBM
, R
Msft
] = -0.1.
10.
D.
Inventory low Y
Lots of buying and little selling by counterparties Y
Asked and bid prices are too
low.
38
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Classification
Account Title
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What are the future value and the interest earned if $4000 is invested for 3 years at 8% compounded quarterly? (Round your answers to the nearest cent.)
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A process with no beginning work in process, completed and transferred out 85200 units during a period and had 50100 units in the
ending work in process inventory that were 20% complete. The equivalent units of production for the period for conversion costs were:
O 95220 equivalent units.
O 135300 equivalent units.
O 70200 equivalent units.
O 85200 equivalent units.
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Concord Industries has equivalent units of 7100 for materials and for conversion costs. Total manufacturing costs are $124370. Total
materials costs are $91000. How much is the conversion cost per unit?
O $17.52.
O $4.70.
$12.82.
O $30.33
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OW21 Onlin teachin x
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esource from Cengag...
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Cash
Inventory
Land
Notes Payable
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Xi Lin, Capital
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Journalizing Partner's Original Investment
assumed a $57,000 note payable owed by Lin that was used originally to purchase the land.
Xi Lin contributed land, inventory, and $35,000 cash to a partnership. The land had a book value of $79,000 and a market value of $152,000. The inventory had a book value of $53,100 and a market value of $48,900. The partnership also
Required:
Provide the journal entry for Lin's contribution to the partnership. If an amount box does not require an entry, leave it blank.
35,000
53,100 X
152,000
48,900
X
79,000 X
57,000
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Record the assets at their current values, and record the liability at its current value. Lin's Capital…
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Proceeds from Notes Payable
On January 26, Bella Co. borrowed cash from Conrad Bank by issuing a 30-day note with a face amount of $48,000. Assume a 360-day year.
a. Determine the proceeds of the note, assuming the note carries an interest rate of 6%.
b. Determine the proceeds of the note, assuming the note is discounted at 6%.
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SOUTH EAST-ASIA INSTITUTE OF TRADE AND TECHNOL0GY
LL
LEARNING MODULE FOR 1
SEMESTER
GRADE 12
BUSINESS FINANCE
STUDENT'S NAME:
STRAND & SECTION:
PART 4: ACTIVITY/APPLICATION
Suppose: The following income Statements and Cash Flow Statements of company A, B and C were presented to you.
Which do you think is a more attractive company? Why?
O STAED
rasoplast
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Saved
M. Muncel, Capital
Dated
May 31
PR
Debit
Account Number 301
Credit
Use the May 31 fiscal year-end information from the following ledger accounts (assume that all accounts have normal balances).
General Ledger
Balance
Account Number 622
Credit
Salaries Expense
Date
PR
Debit
Balance
G2
40,000
May 31
G2
20,000
M. Muncel, Withdrawals
Date
PR
Debit
Account Number 302
Credit
Insurance Expense
Balance
Date
PR
Debit
Account Number 637
Credit
May 31
G2
23,000
May 31
G2
Balance
4,400
Services Revenue
Date
PR
Debit
Account Number 403
Credit
Rent Expense
Balance
Date
PR
Debit
Account Number 640
Credit
May 31
G2
Depreciation Expense
Date
PR
Debit
76,000
Account Number 603
Credit
May 31
Income Summary
62
Balance
8,400
May 31
G2…
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Aid X
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Filling Out the FAFSAⓇ Form X
M Question 2-CH3 HW3.1-C X G Arnez Company's annual ac X
My G
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recorded as of that date.
Arnez Company's annual accounting period ends on December 31. The following information concerns the adjusting entries to be
a. The Office Supplies account started the year with a $2,850 balance. During the year, the company purchased supplies for
$11,771, which was added to the Office Supplies account. The inventory of supplies available at December 31 totaled $2,508.
b. The Prepaid Insurance account had a $28,824 debit balance at December 31 before adjusting for the costs of any expired
coverage for the year. An analysis of prepaid insurance shows that $20,769 of unexpired insurance coverage remains at year-
end.
c. The company has 15 employees, who earn a total of $2,000 in salaries each…
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Pears
X
P
W
Chapter: Recording Business TraNSACTIONS
Sep. 1
hed:course:7710589/products/79c3fa4c-a84f-42ba-b87a-e36a400bca00/pages/urn:pe
6
7
Proble X
P-F:2-30A. Journalizing transactions, posting journal entries to T-
accounts, and preparing a trial balance (Learning Objectives 3, 4)
15
G
New
Ann Simpson started her practice as a design consultant on September 1,
2024. During the first month of operations, the business completed the
following transactions:
3. Prepare the trial balance of Vince York, M.D., as of July 31, 2024.
30
Received $48,000 cash and issued common stock to Simpson.
Purchased office supplies, $1,200, and furniture, $1,300, on account.
Performed services for a law firm and received $1,900 cash.
X
Paid $18,000 cash to acquire land to be used in operations.
Performed services for a hotel and received its promise to pay the $1,200
within one week.
Paid for the furniture purchased on September 4 on account.
Paid assistant's semimonthly salary, $1,500.
Received cash on…
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needing answer to B
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Ch. 17 - Financial Statement Anal x
Bb 2193516
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December 31, 2014 and 2013
Dec. 31, 2014
Dec. 31, 2013
Assets
bloe
Current assets:
Cash.
Marketable securities
$ 500,000
$ 400,000
1,000,000
1,010,000
Accounts receivable (net)...
740,000
510,000
Inventories
1,190,000
950,000
000. Prepaid expenses.
250,000
229,000
Total current assets.
$3,690,000
$3,089,000
Long-term investments...
2,350,000
2,300,000
1
Property, plant, and equipment (net)
Total assets
3,740,000
3,366,000
$9,780,000
$8,755,000
Liabilities
Current liabilities
$ 900,000
$ 880,000
Long-term liabilities:
$ 200,000
Mortgage note payable, 8%, due 2019.
Bonds payable, 10%,…
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