Midterm

1. [5 points] Asset allocation

A) May involve the decision as to the allocation between a risk-free asset and a risky asset.
B) May involve the decision as to the allocation among different risky assets.
C) May involve considerable security analysis.
D) A and B.
E) A and C.
2. [5 points] Firms that specialize in helping companies raise capital by selling securities are called
___________.
A) Commercial banks
B) Investment banks
C) Saving banks
D) Credit unions
E) All of the above

Use the following to answer questions 3-4:

Consider the following three scenarios:

Scenario Price Time period, days

1 24 7
2 27 15
3 21 8

3. [5 points] What is weighted average price for this 30 days period?

A) 41.67
B) 24.0
24∗7+27∗15+21∗8
C) 24.7 =24.7
7+15+8
D) 42.0

4. [5 points] What is arithmetic average price for this 30 days period?

A) 41.67
24+27+ 21
B) 24.0 =24
3
C) 24.7
D) 42.0

5. [5 points] Market makers in OTC market have given following bid quotations on ABC bonds:
1031:31; 1030:04; 1031:25. Which of them is priority price to shareholder-sellers?
A) 1031:31
B) 1030:04
C) 1031:25
D) All of them
Use the following to answer questions 6-11:

Months A Stock B Stock

prices prices
4 25 24
8 22 30
12

6. [5 points] What is weighted average price for stock A during this 1 year period?
25∗4+22∗8
A) 23 =23
12
B) 33
C) 28
D) 31.5

7. [5 points] What is arithmetic average price for stock A during this 1 year period?
25+22
A) 23 =23.5
2
B) 33
C) 28
D) 31.5

8. [5 points] What is weighted average price for stock B during this 1 year period?
A) 24
24∗4 +30∗8
B) 28 =28
12
C) 27
D) 30

9. [10 points] What kind of correlation are between stocks? What is covariance?
A) 1.333333
B) 2.666667
C) -4.0
D) 4.0

10. [10 points] What is HPR for stock A and B during this 1 year period?
A) 25% and 25%
B) 12.5% and 25%
C) -12.5% and 25.0%
D) Cannot be determined
 11. [10 points] if you invest 40% of your money in A and 60% in B, what would be your portfolio’s
expected rate of return?
A) 24%
B) 25%
C) 26%
D) Cannot be determined
12. [10 points] With regard to a future contract, the short position is held by
A) The trader who bought the contract at the largest discount.
B) The trader who has to travel the farthest distance to deliver the commodity.
C) The trader who plans to hold the contract open for the lengthiest time period.
D) The trader who commits to purchasing the commodity on the delivery date.
E) The trader who commits to delivering the commodity on the delivery date.

13. [15 points] An investor invests 30 percent of his wealth in a risky asset with an expected rate of
return of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His
portfolio’s expected return and standard deviation are ____________ and _____________
respectively.
A) 0.114; 0.12
B) 0.087; 0.06
C) 0.295; 0.12
D) 0.087; 0.12
E) None of the above

0.3*0.15+0.7*0.06=0.045+0.042=0.027

0.3*√ 0.04=0.06

14. [15 points] Treasury bills are commonly viewed as risk-free assets because
A) Their short-term nature makes their values insensitive to interest rate fluctuations.
B) The inflation uncertainty over their time to maturity is negligible.
C) Their term to maturity is identical to most investors’ desired holding periods.
D) Both A and B are true
E) Both B and C are true

15. [15 points] For a tow-stock portfolio, what would be the preferred correlation coefficient
between the two stocks?
A) +1.00.
B) +0.50.
C) 0.00.
D) -1.00
E) None of the above

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

5 5 5 5 5 5 5 5 10 10 10 10 15 15 15
8*5+4*10+3*15=125 points
16a. [10 points] On February 1, you bought 3000 shares of a stock for $60 a share and a year
later you sold it for $70 a share. During the year, you received a cash dividend of $2,0 a share.
Compute your HPR.
70−60+2
HPR= 60 = 0.2=20%
16b. [10 points] If you borrow 50% of investment value from broker what is HPR of your deal in
this case?
70−60+2
HPR= =0.4=40 %
30
16c. [10 points] If your expenses before deal (broker’s commission and etc.) was $0,8 per share,
what is your HPR (see16b)?
70−60+2−0.8
HPR= ≈ 0.364=36.4 %
30+ 0.8
16d. [15 points] If you had expenses 8% annually from borrowing amount, what is your final HPR
in this case?
70−60+2−0.8−2.4
HPR= ≈ 0.265=26.5 %
30+ 0.8+2.4
16e. [15 points] What is your net profit, if you pay fees about 15% of profit?
Profit - 3000*(70-60-0.8)=27’600
Net Profit – 27’600 – 15%=23’460
17a. [5 points] You buy 100 shares of Google common stock. If you pay $75 per share, what is
the most money you could lose over the year?
100*75=75’000
1. The investor purchased 5500 shares at a price of $ 8.75. at what price it
should sell these stocks after one year to provide an annual yield of 12%?
A. 6.73
B. 14.86
C. 9.94
D. Cannot be determined
2. Firms that specifize in helping companies raise capital by selling securities
are called
A. Commercial Banks
B. Investment Banks
C. Credit Union
D. All of above

Scenario Price Time period in Days

1 $38 4 (5.03.2015-9.03.2015
2 $42 11 (9.03.2015-20.03.2015)

3 $45 33 (20.03.2015-22.04.2015)
3. What is weighted average price for period 05.03.2015- 22.04.2015?
A. 41.67
B. 42.96
C. 43.73
D. 42.0
4. What is arithmetical average price for period 05.03.2015-22.04.2015?
A. 41.67
B. 42.96
C. 38.0
D. 42.0
5. Market makers in OTC market have given following bid quotations on ABC
bonds: 1031:31 : 1032:04 ; 1031:25. Which of them is priority price to
shareholder-sellers?
A. 1031:31
B. 1032:04
C. 1031:25
D. All of them
 Months A stock price B stock price
3 30 24
7 33 30
2 34 32
12

6. What is weighted average price for stock A during this 1 year period?
A. 32.333
B. 33.245
C. 32.5
D. 32.417
7. What is arithmetical average price for stocks A&B during this 1 year period?
A. 32.333&28.667
B. 33.245 & 24.0
C. 32 & 28.7
D. 31.5&30.23
8. What is weighted average price for stock B during this 1 year period?
A. 24.0
B. 28.667
C. 28.833
D. 32.333
E. None of the above
State Probability Return of Asset A Return of Asset B
1 0.1 14% 7%
2 0.2 13% 9%
3 0.2 15% 6%
4 0.3 10% 8%
5 0.2 12% 8%
1

1. The expected rate of return of stock A and B are _____ and ____
A. 13.2% 9%
B. 12.4% 7.7%
C. 13.2% 7.7%
D. 13.2% 13.2%
E. None of above
2. The standart deviation of stocks A and B are _______ and ______
A. 1.5% 1.9%
B. 2.5% 1.1%
C. 1.9% 1.0%
D. 1.5% 1.1%
E. None of the above
3. Covariance between A and B are _____ and _______
A. 0.47
B. 0.76
C. 0.0076
D. 0.48
E. None of the above
4. The coeficient of correlation between stocks A and B are ___ and ____
A. 0.47
B. 0.26
C. 0.58
D. 1.20
E. None of above
5. If you invest 30% of your money in A and 70% in B, what would ne your portfolios expected rate
of return and standat deviation?
A. 9.9% 3%
B. 9.9% 1.1%
C. 9.11% 1.0%
D. 9.11% 3%
E. None of the above
You are evaluating two investment alternative. One is a passive market portfolio with an expected
return of 10% and a standatd deviation of 16%. The other is a fund that is actively managed by your
broker. This fund has an expected return of 15% and a standard deviation of 20%. The risk-free-rate is
currently 7%. Answer the question below based on this information.

7a. What is the slope of the Capital Market Line?

A. 7/15
B. 0.245
C. 15%
D. 0.1875

7b. What is the slope of the capital allocation line offered by your brokers fund?

A. 0.42%
B. 0.4
C. 4.25%
D. 0.1875

7c. What is the maximum fee your broker could change and still leave you as well off as if you had
investment in the passive market fund? Assume that the fee would be a percentage of the investment in
the brokers fund, and would be deducated at the end of the year.

E. 0.42%
F. 0.4
G. 4.25%
H. 0.1875

7d. How would it affect the graph if the broker were to charge the full amount of the fee?

A. Will be same
B. Will be different
C. None of the above

State Probability Return on stock A Return on stock B

1 0.1 10% 8%
2 0.2 13% 7
3 0.2 12% 6
4 0.3 14% 9
5 0.2 15% 8
8. the expected rates of the return of stock A adn B are____ and _____

A. 13.2% 9%
B. 14$ 10%
C. 13.2% 7.7%
D. 7.7% 13.2%
E. None of the above
9. the standard deviation of stock A and B
A. 1.5% 1.9%
B. 2.5% 1.1%
C. 3.2% 2.0%
D. 1.47% 1.17%
E. None of the above
10. The coefficient of correlation netween A and B is
A. 0.47
B. 0.60
C. 0.58
D. 1.20
E. None of the above