MBA-641-Midterm-PRACTICE-Sp-13-KEY

MBA 641: Investments & Portfolio Management
Midterm Examination PRACTICE
January 24, 2013
Name:_______KEY____________
Instruction: Please write legibly. You need to show steps to get full credit.
Part A: Multiple Choice (2 points each, total 40 points). Please circle the right answer.
1.55. The efficient markets hypothesis suggests that _______.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction of the market
D. a bottom up approach is the most appropriate investment strategy
Difficulty: Easy
2.46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
Difficulty: Medium
3. 53. Ownership of a call option entitles the owner to the __________ to __________
a specific stock, on or before a specific date, at a specific price.
A. right, buy
B. right, sell
C. obligation, buy
D. obligation, sell
Difficulty: Easy
4. 73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an ______.
A. value weighted index
B. equal weighted index
C. price weighted index
D. bond price index
Difficulty: Hard
5. 74. In a ___________ index changes in the value of the stock with the greatest market value will move the index value the most everything else equal.
A. value weighted index
B. equal weighted index
C. price weighted index
D. bond price index
Difficulty: Medium
6. 12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
A. 10%
B. 20%
C. 30%
D. 40%
Difficulty: Medium
7. 23. If an investor places a _________ order the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order the stock will be bought if its price rises above the stipulated level.
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market
Difficulty: Easy
8. 36. The __________ system enables exchange members to send orders directly to a specialist over computer lines.
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT
Difficulty: Easy
9. 42. The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the _________.
A. market spread
B. bid-ask spread
C. bid-ask gap
D. market variation
Difficulty: Easy
10. 54. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
A. $50
B. $150
C. $10,000
D. unlimited
There is no upper limit to the price of a share of stock; therefore no upper limit the price you will have to pay to replace the 200 shares of Tuckerton.
Difficulty: Easy
11. 20. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.
A. Net Asset Value
B. Average Asset Value
C. Gross Asset Value
D. Total Asset Value
Difficulty: Easy
12. 30. Investors who wish to liquidate their holdings in a unit investment trust may ___________________.
A. sell their shares back to the trustee at a discount
B. sell their shares back to the trustee at net asset value
C. sell their shares on the open market
D. sell their shares at a premium to net asset value
Difficulty: Easy
13. 44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.
A. income funds
B. balanced funds
C. asset allocation funds
D. index funds
Difficulty: Easy
14. 3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the __________.
A. geometric average return
B. arithmetic average return
C. dollar weighted return
D. index return
Difficulty: Medium
15. 26. The reward/variability ratio is given by _________.
A. the slope of the capital allocation line
B. the second derivative of the capital allocation line
C. the point at which the second derivative of the investor's indifference curve reaches zero
D. portfolio excess return
Difficulty: Easy
16. 22. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares?
A. $12.00
B. $9.00
C. $10.00
D. $1.00
Difficulty: Easy
17. 48. A bond issued by the State of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of _________.
A. 4.50%
B. 7.25%
C. 8.68%
D. none of the above
Difficulty: Medium Feedback: 8.68% = 6.25%/(1 - 0.28)
18. 70. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million and $150 million respectively. If you were to construct a price-weighted index of the three stocks what would be the index value?
A. 300
B. 39
C. 43
D. 30
Index = (12 + 75 + 30)/3 = 39
Difficulty: Medium
19. 74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?
A. $14.57
B. $15.95
C. $17.55
D. $16.49
Difficulty: Medium
20. 38. If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?
A. 5.48%
B. 8.74%
C. 9.00%
D. 12.00%
Difficulty: Medium
Part B: Problems (total 60 points total)
I.Pricing T-Bill (10 points)
26. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value an investor could buy this bill for
A. $10,000.00
B. $9,878.50
C. $9,877.00
D. $9,880.16
Difficulty: Hard
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II.Return Calculation: Margin Purchase and Short Sell (20 points)
Please do two of the following problems
57. You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends and ignore interest on the margin loan.)
A. $26.55
B. $35.71
C. $28.95
D. $30.77
Difficulty: Hard
79. An investor puts up $5,000 but borrows an equal amount of money from their broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share and in one year the investor sells the stock for $28. The investor's rate of return was ____.
A. 17%
B. 12%
C. 14%
D. 19%
Difficulty: Hard
86. You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends)
A. 10.00%
B. 20.00%
C. 6.67%
D. 15%
Difficulty: Hard
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III. Risk and Return of a portfolio (10 points)
52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5% and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and
__________ respectively.
A. 10.0%, 6.7%
B. 12.0%, 22.4%
C. 12.0%, 15.7%
D. 10.0%, 35.0%
Difficulty: Medium
IV. Asset Allocation (20 points)
You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a treasury bill with a rate of return of 6%.
57. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.
A. 100%
B. 90%
C. 45%
D. 10%
Difficulty: Easy
58. A portfolio that has an expected value in one year of $1,100 could be formed if you _________.
A. Place 40% of your money in the risky portfolio and the rest in the risk free asset
B. Place 55% of your money in the risky portfolio and the rest in the risk free asset
C. Place 60% of your money in the risky portfolio and the rest in the risk free asset
D. Place 75% of your money in the risky portfolio and the rest in the risk free asset
$1100 = x(1000)(1.16) + (1 - x)1000(1.06)
Difficulty: Hard
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