BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
1.
Which of the following securities are considered risky investments:
[I]
Treasury Bills
[II]
A diversified portfolio of Corporate Bonds
[III]
An index fund that tracks the Straits Times Index
A.
B.
C.
D.
E.
2.
Which of the following statements are FALSE of a standard Treasury Bill:
[I]
Is safe because it has the same payout/payment in economic recessions and expansions
[II]
Is safe because it has negligible default risk
[III]
Is safe because it protects against inflation
A.
B.
C.
D.
E.
3.
I only
I and II only
I, II, and III
III only
None of the statements are true
If an investor places a _________ order the stock will be bought if its price falls to the stipulated level. If an
investor places a __________ order the stock will be sold if its price rises above the stipulated level.
A.
B.
C.
D.
E.
4.
I only
I and II only
I, II, and III
II and III only
None of the statements are true
stop-buy; stop-loss
market; limit
stop-loss; stop-buy
limit; market
limit buy; limit sell
Cheryl wants to have the greater sensitivity to changes in large market capitalization stocks than changes in
small market capitalization stocks. She should invest in a _____________index.
A. Value-weighted
B. Price-weighted
C. Equally-weighted
D. There is no common index construction that satisfies Cheryl.
5.
Which of the following are FALSE statements regarding short-sale?
[I]
[II]
[III]
Losses are limited.
Dividend payments constitute a cash inflow for the short-seller.
The broker does not require any form of collateral from the short-seller.
A. I only
BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
B.
C.
D.
E.
6.
Which of the following statements are TRUE about buying securities using a margin account?
[I]
[II]
[III]
A.
B.
C.
D.
E.
7.
I only
I and II only
I and III only
II and III only
I, II and III
$500
$2000
$50,000
$100,000
Unlimited
On January 1, you sold short 2500 shares of OCBC at $8 per share and pledged 50% initial margin. On March 1,
a dividend of $1.50 per share was paid. On June 1, you closed your position buying 2500 shares at $10 per share.
What is your rate of return?
A.
B.
C.
D.
E.
9.
Buying on margin magnifies both gains and losses.
Investors buy on margin when they are bearish about the market.
Losses are limited.
You short-sell 200 shares of Tuckerton Trading Co., now selling for $500 per share. What is your maximum
possible gain ignoring transactions cost?
A.
B.
C.
D.
E.
8.
I and II
I, II and III
III only
II and III
16.7%.
29.2%.
-29.2%.
-87.5%
None of the above
On Jan 1, you sold short 600 shares of GE at $8 per share. You post $2500 to the margin account. On April 1,
you received a margin call on this trade. Assume the minimum margin requirement is 40%, what is the price of
the stock that triggered the margin call?
A.
B.
C.
D.
E.
$5.71
$8.13
$9.29
$32.50
None of the above
10. On Jan 1, you sold short 600 shares of GE at $8 per share. You post $2500 to the margin account. On April 1,
you received a margin call on this trade. Assume the minimum margin requirement is 40% and you receive a
margin call. What amount must you top-up to restore to a 50% margin?
BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
A.
B.
C.
D.
E.
$142.86
$178.57
$464.29
$1678.57
None of the above
11. You purchased 350 shares of common stock for $8 per share on margin. The initial margin is 55%, and the
stock pays no dividend. Your rate of return would be __________ if you sell the stock at $10 per share. Ignore
interest on margin. (Please round to the nearest %.)
A.
B.
C.
D.
E.
45%
63%
78%
95%
None of the above
12. You sell short 400 shares of Google that are currently selling at $100 per share. You post the 50% margin
required on the short sale, and the maintenance margin requirement is 25%. At what price would you receive a
margin call (assume the margin call happens immediately).
A.
B.
C.
D.
E.
$112.94
$120
$137.14
$147.69
None of the above
13. You short-sell 100 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. To limit your loss to
approximately $4,920, you should place a stop-buy order at ____. (Assume the market is liquid.)
A.
B.
C.
D.
E.
$25.00
$62.50
$75.00
$99.20
None of the above
14. Investor X puts up $10,000 but borrows an equal amount of money from her broker to double the amount invested
to $20,000. The broker charges 8% interest on the loan. The stock was originally purchased at $10 per share and
in one year, Investor X sells the stock for $11. Investor Y does not believe in borrowing to buy shares and invests
$20,000 of his own money in the same stock. The investor with a higher return managed to achieve ________
rate of return on the investment.
A.
B.
C.
D.
E.
17%
20%
12%
13%
None of the above
BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
15. You borrow $30,000 and buy 1000 shares of Facebook at $60 per share on margin. The interest on the loan is
6%. One year from now the price is still $60. Assume no dividends are paid. Calculate your rate of return and
the final margin %.
A.
B.
C.
D.
E.
rate of return=0%, final margin=50%
rate of return=0%, final margin=47.5%
rate of return=-5%, final margin=50%
rate of return=-5%, final margin=47.5%
None of the above
16. An investor invests 60% of her wealth in the market portfolio with an expected rate of return of 15% and a
variance of 8%, and she puts the rest in Treasury bills that pay 5%. What is the standard deviation of the portfolio?
(Please round to the nearest %.)
A.
B.
C.
D.
E.
4%
14%
17%
28%
None of the above
17. Your Uncle has 1,000,000 SGD to invest in one fund. If he wants to minimize downside losses, which fund
does he invest in? Assume that he cares about a 95 percent confidence interval.
Return
St. Dev
Hong Kong
0.21
0.45
Italy
0.10
0.36
United States
0.09
0.17
A.
B.
C.
D.
Hong Kong
Italy
United States
Either Hong Kong or Italy, but not the United States
18. The table presents forecasts of the returns of stock market and probability of each state of the economy for next
year. Calculate the expected return.
State of Economy
Recession
Normal
Expansion
A.
B.
C.
D.
E.
Return
-5%
8%
25%
Prob. Of State
0.50
0.25
0.25
5.75%
10.25%
10.70%
11.50%
None of the above
19. The table presents forecasts of the returns of stock market and probability of each state of the economy for next
year. Calculate the standard deviation.
BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
State of Economy
Recession
Normal
Expansion
A.
B.
C.
D.
E.
Return
-5%
8%
25%
Prob. Of State
0.50
0.25
0.25
1.5%
7.8%
10.4%
23.3%
None of the above
20. An investor's degree of risk aversion will determine his or her ______.
A.
B.
C.
D.
E.
risky portfolio
optimal mix of assets in the risky portfolio
allocation of wealth between the risky portfolio and the risk-free asset
A, B and C are all correct
None of the above
21. Andy is more risk-averse than Cindy. Neither can buy on margin. Using the Capital Allocation Line, which
statements MUST BE FALSE?
[I]
[II]
[III]
A.
B.
C.
D.
E.
Cindy may have a negative position in the risk-free asset.
Cindy will invest more in the risk-free asset compared to Andy
Both will hold positive positions in the risky portfolio and risk-free asset.
I & III
I & II
II only
I only
None of the statements must be true.
22. Amy has a risk-aversion A=2. The risk-free rate is 5%. The risky portfolio has an expected return = 13% and
variance=18%. What % of her complete portfolio should she invest in the risky portfolio?
A.
B.
C.
D.
E.
1.39 %
10.6 %
12.5 %
25.0 %
None of the above
23. 40% of Emily’s complete portfolio is invested in the risk-free asset, while 60% is invested in the risky portfolio.
The risk-free rate is 6%. The risky portfolio has a risk premium = 14% and standard deviation=40%. What is
Emily’s risk aversion A=?
A. 1.46
BF2201, Fall 2017 – Homework 1
Due Friday September 8, 2017
B.
C.
D.
E.
1.56
2.34
3.52
None of the above
Answers:
1. D
2. D
3. E
4. A
5. C
6. C
7. D
8. D
9. E
10. E
11. A
12. B
13. D
14. C
15. E
16. C
17. C
18. A
19. E
20. C
21. B
22. E
23. A