lOMoARcPSD|9498593 Practise exam 2, May 2021 (with answers) Investments and Portfolio Management (University of Sydney) Studocu is not sponsored or endorsed by any college or university Downloaded by Ovuvuevuevue Enyetue Ugbemugbem Osas (chowvincent13@gmail.com) lOMoARcPSD|9498593 211p2 (paper code) Semester 1, 2021 Page 1 of 4 The University of Sydney Business School FINC3017 Investments and Portfolio Management PRACTISE EXAM 2 (WITH ANSWERS) EXAM CONDITIONS: This is a CLOSED book examination. No written, printed or electronic reference materials are permitted. No electronic aids are permitted e.g. smartphones, smart speakers. MATERIALS PERMITTED: A dictionary and a non-programmable calculator are permitted. A blank sheet of paper and pens, pencils and erasers for workings are permitted. No other materials are permitted. MATERIALS TO BE PROVIDED TO STUDENTS: A formula sheet is provided with this exam. Please open the formula sheet in a new tab. INSTRUCTIONS TO STUDENTS: This exam consists of 10 multiple choice questions worth 1 mark each. Please read each question carefully. Select the best answer for each question. The time allowed is 18 minutes plus 2 minutes reading time. Good luck. STUDENT NUMBER___________________________________ Downloaded by Ovuvuevuevue Enyetue Ugbemugbem Osas (chowvincent13@gmail.com) lOMoARcPSD|9498593 211p2 (paper code) Semester 1, 2021 Page 2 of 4 1. The difference between balanced funds and asset allocation funds is that _____. A. balanced funds invest in bonds while asset allocation funds do not B. asset allocation funds invest in bonds while balanced funds do not C. balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds D. balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions 2. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y and Treasury bills would be _________, __________ and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A. B. C. D. $162; $595; $243 $243; $162; $595 $595; $162; $243 $595; $243; $162 3. If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A. B. C. D. stock’s standard deviation variance of the market stock’s beta covariance with the market index 4. Security T has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security T is ________. A. B. C. D. fairly priced overpriced underpriced none of these answers Downloaded by Ovuvuevuevue Enyetue Ugbemugbem Osas (chowvincent13@gmail.com) lOMoARcPSD|9498593 211p2 (paper code) Semester 1, 2021 Page 3 of 4 5. There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model? Portfolio A B A. B. C. D. Beta on M1 1.5 1.0 Beta on M2 1.75 0.65 E[rp] 35% 20% E(rP) = 5 + 1.12βP1 + 11.86βP2 E(rP) = 5 + 4.96βP1 + 13.26βP2 E(rP) = 5 + 3.23βP1 + 8.46βP2 E(rP) = 5 + 8.71βP1 + 9.68βP2 6. If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately ________. A. B. C. D. 0.0% 0.1% 1% 10% 7. The following data are available relating to the performance of Jones Fund and the market portfolio: Average return Standard deviations of returns Beta Residual standard deviation Jones 35% 42% 1.2 18% Market Portfolio 28% 30% 1.0 0% The risk-free return during the sample period was 6%. Calculate the M2 measure for the Jones Fund. A. B. C. D. -1.3% 13.7% 18.0% 69.0% Downloaded by Ovuvuevuevue Enyetue Ugbemugbem Osas (chowvincent13@gmail.com) lOMoARcPSD|9498593 211p2 (paper code) Semester 1, 2021 Page 4 of 4 8. You manage a $45 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 3,600. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 futures contracts. The contract multiplier is $250. What is the expected quarterly return on the hedged portfolio? A. B. C. D. 0% 2% 3% 4% 9. Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________. A. B. C. D. shrunk; shrunk; far less moderate shrunk; shrunk; far more moderate grossed up; grossed up; far less moderate grossed up; grossed up; far more moderate 10. An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is re-evaluating the fund’s total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments? A. B. C. D. 87.4% 88.5% 90% 91.6% Downloaded by Ovuvuevuevue Enyetue Ugbemugbem Osas (chowvincent13@gmail.com)
