1、Midterm for Principles of Finance, Spring 2014March 29, 2:15-4:15; Xi Jie.Instructor: Meixin GuoPart I Multiple Choice Questions (total 40 points)1. Financial intermediaries exist because small investors cannot efficiently _. A. diversify their portfolios; B. gather informationC. monitor their portf
2、olios; D. all of the answers provide reasons why2. An example of a financial asset is _.I. a college education; II. customer goodwill; III. a patent A. I only; B. II only; C. I, II and III only; D. None3. The _ price is the price at which a dealer is willing to sell a security. A. bid; B. ask; C. cl
3、earing; D. settlement4. The Dow Jones Industrial Average is _. A. a price weighted average; B. a value weight and averageC. an equally weighted average; D. an unweighted average5. Which one of the following is not an example of a brokered market? A. Residential real estate market; B. Market for larg
4、e block security transactionsC. Primary market for securities; D. NASDAQ6. On a given day a stock dealer maintains a bid price of $1000.50 for a bond and an ask price of $1001.50. The dealer made 10 trades which totaled 500 bonds traded that day. What was the dealers gross trading profit for this se
5、curity? A. $1,375; B. $500; C. $275; D. $1,4507. You short-sell 200 shares of Rock Creek Fly Fishing Co. with IMM 50%, now selling for $43.75 per share. If you wish to limit your loss to $2,500, you should place a stop-buy order at _. A. $37.50; B. $62.50; C. $56.25; D. $59.758. You put up $100 at t
6、he beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was _. A. 4.00%; B. 3.50%; C. 7.50%; D. 11.00%9. Rank the following from highest average historical return to lowest average historical return from 1926-2008. I. Small stocks;
7、II. Long term bonds; III. Large stocks; IV. T-bills A. I, II, III, IV; B. III, IV, II, I; C. I, III, II, IV; D. III, I, II, IV10. You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. If you desire to forecast performance for
8、 next year, the best forecast will be given by the _. A. holding period index return; B. geometric average return; C. dollar weighted return; D. arithmetic average return 11. An investment earns 10% the first year, 15% the second year and loses 10% the third year. Your total compound return over the
9、 three years was _. A. 41.68%; B. 11.32%; C. 3.64%; D. 13.85%12. During the 1985 to 2008 period the return rate was least for which of the following asset classes? A. Small U.S. stocks; B. Large Canadian stocks; C. Long-Term U.S. Treasury Bonds; D. Equity world portfolio in U.S. dollars13. Among the
10、 factors explaining the return on a stock, _ factors are generally most important while _ factors are generally least important. A. domestic; industrial; B. domestic; currency; C. world; industrial; D. currency; domestic14. Consider the single factor APT. Portfolio M has a beta of 0.2 and an expecte
11、d return of 13%. Portfolio N has a beta of 0.3 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _ and a long position in portfolio _. A. M, M; B. M, N; C. N, M; D. M,M15. Fam
12、a and French claim that after controlling for firm size and the ratio of firms book value to market value, beta on the market portfolio is _.I. highly significant in predicting future stock returns; II. a bad predictor of firms specific risk.III. relatively useless in predicting future stock returns
13、 A. I only; B. II only; C. III only; D. II and III only; E. I and II only16. A U.S. insurance firm must pay 75,000 in 6 months. The spot exchange rate is $1.32 per euro and in 6 months the exchange rate is expected to be $1.35. The 6 month forward rate is currently $1.36 per euro. If the insurers go
14、al is to limit its risk should the insurer hedge this transaction? If so how? A. The insurer need not hedge because the expected exchange rate move will be favorable.B. The insurer should hedge by buying euro forward even though this will cost more than the expected cost of not hedging.C. The insure
15、r should hedge by selling euro forward because this will cost less than the expected cost of not hedging.D. The insurer should hedge by short selling euros now even though this will cost less than the expected cost of not hedging.17. Two assets have the following expected returns and s.d. when the r
16、isk-free rate is 5.5%:An investor with a risk aversion of A = 2.5 would find that _ on a risk return basis. (note )25.0pfprEA. only Asset A is acceptable; C. neither Asset A nor Asset B is acceptable; B. only Asset B is acceptable; D. both Asset A and Asset B are acceptable18. Real U.S. interest rat
17、es move blow Japanese interest rates. If you believe that Japanese interest rates wont move and you believe that interest rate parity will hold then _. A. the yen per dollar exchange rate should riseB. the dollar per yen exchange rate should riseC. the exchange rate should stay the same if parity ho
18、ldsD. one cant predict the exchange rate change from the information given19. Among the four indices, which one has the highest return rate from the date From 2014/3/5 to 2014/3/26,A. S B. Nasdaq Composite; C. Light Crude oil future; D. Hang Seng index; 20. From 2014/3/5 to 2014/3/26, I. return of Y
19、uebao is always lower than Weechat licaitong; II. Renminbi depreciated against dollar exchange rate in a row. III. Shanghai Composite Index reached the lowest close value on March 20th.Which one is right?A. None; B. I and II only; C. III only; D. I and III onlyPart II Short Answer Questions (total 6
20、0 points)1. Margins and short (16 points)Suppose you buy stocks 100 shares at $65 per share and IMR 50% (borrow at a 7% APR interest cost if use margin, use full amount of margin). Assume APRs is calculated based on 365 day year.a). If the price of the shares fell down to $63 per share (remains afte
21、rwards and sell it in 95 days) or go up to $67 per share (remains afterwards and sell it in 95 days), what are your current margin and return rate? Please fill the blanks below and show your calculations with 2 dismals (8 points).Buy at $65 Sell at $67 in 95 days Sell at $63 in 95 days Return rate %
22、 (No Margin) ? ?Return rate % (IMM 50%) ? ?Leverage Factor ? ?Current margin ? ?b). If the MMR is 35%, How far can the stock price fall before a margin call? If the price now is $60 per share and you want to restore the IMR, how much cash you must put up in your account? (4 points)c). The price of t
23、he stock decrease to 55$ and you expect the price will decrease later. So you sell out your own 100 share and sell short another 300 shares. You must pledge 50% IMM. How much do you have in your margin account now with an IMM 50%? With MMR 35%, whats the price for a margin call? (4 points)2. Portfol
24、io Theory (22 points) Given a risk-free and two risky assets, rf = 5%; r1 = 14%, 1 = 25%; r2 = 9%, 2= 16%; 12 = 0.4.a). Use rf and r1 to obtain the mean and standard deviation of a combined portfolio A assuming the share in r1 is y1. (4 points)b). Use rf and r2 to obtain the mean and standard deviat
25、ion of a combined portfolio B assuming the share in r2 is y2. (4 points)c). Draw the two capital allocation lines for portfolio A and B (LA, LB) in the same graph and find their slopes. (4 points)d). Now use r1 and r2 to construct a new risky portfolio C. Given , 12,122121,111 WrErrEEWffff calculate
26、 the optimal weight for each risky assets, and find the mean rc and standard deviation of the portfolio C based on the optimal weight. (4 points)e). Use rf and rc to get CAL (LC). Draw the line in the same diagram as in (c). Compare the slopes of the three lines (LA-LC) (6 points)3. CAPM (22 points)
27、 The stock returns for firms X and Y, and the return for passive market portfolio are listed below during year 2008-2011. The risk free rate is 3%. Year Return for firm X, Rx, % Return for firm Y, Ry, % Rm, % 2008 -25 -10 -182009 1 3 -22010 22 19 202011 35 15 22a). Find the means and standard deviat
28、ions of the returns for stock X and the passive market portfolio, and their covariance to get the beta for stock X using CAPM (6 points, note: . The MiiRVarCov,covariance is defined as ).1,1NyxyxCovNiib). if using the stata software to estimate the CAPM on stock Y, we get the following result:Ry-Rf
29、Coef. Std.Err. t P|t|Rm-Rf 0.525 0.115 4.58 0.045_cons 1.75 1.549 1.13 0.376Find the alpha and beta. Is the stock Y underpriced or overpriced? Why? (4 points) c) There is another stock Z, the CAPM result is given below:Ry-Rf Coef. Std.Err. tRm-Rf 0.800 0.400 2.00_cons 1.500 0.500 3.00What an active
30、investors want to do with the stock Z given =4.85% and the passive market )(eZportfolio M? Why? (3 points; note: with )(1WiOi*i MiR2iiO/(ed) Given the risk free rate, two returns of stocks X, Y, and the passive market portfolio, please draw the SML and show the points for rf, passive market portfoli
31、o M, and stocks X and Y based on (a) and (b). (For the stock Y, use the regression result from (b) directly.) (5 points).e) Based on (b), firm Y has debt 40 mil. and market value for his stock 60 mil. (3 mil. Shares, price 20 each). Now the firm wants to issue new debt with a 9% rate of interest. The corporate tax is 35%. Whats the firms weighted average of cost of equity and cost of debt (RWACC)? (4 points)
