Questions and Answers of Investment Analysis Portfolio

Which of the following index weighting methods is most likely subject to a value tilt?A. Equal weighting.B. Fundamental weighting.C. Market-capitalization weighting.
Rebalancing an index is the process of periodically adjusting the constituent:A. Securities’ weights to optimize investment performance.B. Securities to maintain consistency with the target
Which of the following index weighting methods requires the most frequent rebalancing?A. Price weighting.B. Equal weighting.C. Market-capitalization weighting.
Reconstitution of a security market index reduces:A. Portfolio turnover.B. The need for rebalancing.C. The likelihood that the index includes securities that are not representative of the target
Security market indices are used as:A. Measures of investment returns.B. Proxies to measure unsystematic risk.C. Proxies for specific asset classes in asset allocation models.
Uses of market indices do not include serving as a:A. Measure of systematic risk.B. Basis for new investment products.C. Benchmark for evaluating portfolio performance.
Which of the following statements regarding sector indices is most accurate? Sector indices:A. Track different economic sectors and cannot be aggregated to represent the equivalent of a broad market
Which of the following is an example of a style index? An index based on:A. Geography.B. Economic sector.C. Market capitalization.
Which of the following statements regarding fixed-income indices is most accurate?A. Liquidity issues make it difficult for investors to easily replicate fixed-income indices.B. Rebalancing and
An aggregate fixed-income index:A. Is comprised of corporate and asset-backed securities.B. Represents the market of government-issued securities.C. Can be subdivided by market or economic sector to
Fixed-income indices are least likely constructed on the basis of:A. Maturity.B. Type of issuer.C. Coupon frequency.
Commodity index values are based on:A. Futures contract prices.B. The market price of the specific commodity.C. The average market price of a basket of similar commodities.
Which of the following statements is most accurate?A. Commodity indices all share similar weighting methods.B. Commodity indices containing the same underlying commodities offer similar returns.C.
Which of the following is not a real estate index category?A. Appraisal index.B. Initial sales index.C. Repeat sales index.
A unique feature of hedge fund indices is that they:A. Are frequently equal weighted.B. Are determined by the constituents of the index.C. Reflect the value of private rather than public investments.
The returns of hedge fund indices are most likely:A. Biased upward.B. Biased downward.C. Similar across different index providers.
In comparison to equity indices, the constituent securities of fixed-income indices are:A. More liquid.B. Easier to price.C. Drawn from a larger investment universe.
a. The spot price of the U.S. dollar is currently C $ 1.35/US $. If the risk-free interest rate on 1-year government bonds is 4% in Canada and 6% in the United States, what must be the forward price
A bond with an annual coupon rate of 4.8% sells for $970. What is the bond's current yield?
A put on XYZ stock with a strike price of $40 is priced a t $2.00 per share, while a call with a strike price of $40 is priced at $3 .50. What is the maximum per-share loss to the writer of the
Suppose the U.S. yield curve is flat at 4% and the euro yield curve is flat at 3%. The current exchange rate is US $1.50 per euro. What will be the swap rate on an agreement to exchange currency over
Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 12% and 16%, respectively. The beta of A is .7, while that of Bis 1.4. The T-bill
John Irish, C F A, is an independent in vestment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Techno logy Corp oration, to establish a new pension fund .
Suppose a hedge fund follows the excel following strategy. Each month it holds $100 million of an S&P 500 index fund and writes out-of-the-money put options on $100 million of the index with
The difference between a Tax-Free Savings Account (TSFA) and a Registered Retirement Savings Plan (RRSP) is that in a TSFA taxes are paid on the income that is contributed but the withdrawals at
Review Figure 20.1, which lists prices of various CAE options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following June expiration options,
Consider the futures contract written on the S&P/TSX 60 index and maturing in 6 months. The interest rate is 3% per 6-month period, and the future value of dividends expected to be paid over the
Using historical risk premiums from Table 5.4 over the 1926-2016 period as your guide, what would be your estimate of the expected annual HPR on the BigNalue portfolio if the current risk-free
Suppose that you sell short 250 shares of Weston (WN), currently selling for $80 per share, and give your broker $15,000 to establish your margin account.a. If you earn no interest on the funds in
Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 11 %, σp = 15%, rf = 5%.a. Your client wants to invest a proportion of her total
Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of 0% to 100% in increments of 20%.
Use the following data to solve this problem.a. What are cash flows from operating activities?b. What are cash flows from investing activities?c. What are cash flows from financing activities? Cash
Consider the two (excess re turn) index model regression result s for A and B:RA = 1% + l.2RMR-square = .576Residual standard deviation = 10.3%Rn = - 2 % + .8 RMR-square = .436Residual
On Connect, access the Excel tern- exceI plates for Chapter 12. There you will find five years of weekly returns for the S&P 500 and Fidelity's Select Banking Fund (ticker FSRBX).a. Set up a
Use the Black- Scholes formula to find the value of a call option on the following stock: Time to expiration Standard deviation Exercise price Stock price Interest rate 6 months 50% per
a. Look at the Mini-S&P 500 contract in Figure 22.1. If the margin requirement is 10% of the futures price times the contract multiplier of $50, how much must you deposit with your broker to
Long-term Treasury bonds currently are selling at yields to maturity of nearly 6%. You expect interest rates to fall. The rest of the market thinks that they will remain unchanged over the coming
Find the duration of a bond with a set- exceItlement date of May 27, 2020, and maturity date November 15, 2031. The coupon rate of the bond is 7%, and the bond pays coupons semi-annually. The bond is
A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm's shares is $35.00, what is the required return based on the
In reviewing the financial statements of the Graceland Rock Company, you note that net income increased whilecash flow from operations decreased from 2017 to 2018.a. Explain how net income could
If the stock price falls and the call price rises, what has happened to the call option's implied volatility?
Suppose the value of the S&P/TSX 60 stock index is currently 955. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P/TSX 60 index is 3%, what should the 1-year
The TMX has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in 1 year. The
Suppose the S&P/TSX 60 portfolio pays a dividend yield of 1 % annually. Its current value is 1,000. ~he T-bill rate is 4%. Suppose the S&P/TSX futures pnce for delivery in 1 year is 1,025.
The Excel Application box in the chapter (available on Connect or through your course instructor) shows how to use the spot-futures parity relationship to find a term structure of futures prices,
A Canadian exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers
Return to Figure 23.7. Suppose the CDOR rate when the second listed BAX contract matures in September is 2.5%. What will be the profit or loss to each side of the CDOR contract?
You believe that the spread between Canadian short term interest rates and Canadian government bond yields is going to narrow in the coming month. How can you profit from such a change using the BAX
Suppose that the value of the S&P 500 stock index is 1,600.a. If each futures contract costs $25 to trade with a discount broker, how much is the transaction cost per dollar of stock controlled
A manager is holding a $1 million stock portfolio with a beta of 1.25. She would like to hedge the risk of the portfolio using the S&P/TSX 60 stock index futures contract. How many dollars' worth
Suppose that the spot price of the euro in U.S. dollars is currently $1.30. The 1-year futures price is $1.35. Is the interest rate higher in the United States or the eurozone?
If the spot price of gold is $1,500 per troy ounce, the risk-free interest rate is 2%, and storage and insurance costs are zero, what should be the forward price of gold for delivery in 1 year? Use
Suppose that the price of corn is risky, with a beta of .5. The monthly storage cost is $.03, and the current spot price is $5 .50, with an expected spot price in 3 months of $5.88. If the expected
Firm ABC enters a 5-year swap with firm XYZ to pay COOR in return for a fixed 6% rate on notional principal of $10 million. Two years from now, the market rate on 3-year swaps is COOR for 5%; at this
A portfolio of stocks generates a -9% return in 2016, a 23% return in 2017, and a 17% return in 2018. What is the annualized return (geometric mean) for the entire period?
Go to Kenneth French's data library site at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Select two industry portfolios of your choice and download 36 months of data.
Do you agree with the following claim? "Canadian companies with global operations can give Canadian investors international diversification." Think about both business risk and foreign exchange risk.
Turn to Figure 2.11 and find the options for Canadian Natural Resources. Suppose you buy a September 22 call option with exercise price of $39, and the stock price at the expiration is $41.a. Will
Turn to Figure 2.7 and find the li sting for Aecon Group.a. What was the closing price for Aecon?b. How many shares could you buy for $5 ,000?c. What would be your annual dividend income from those
The bond equivalent yield of a 91-day T-bill is 5%. What is the price of the bill for a $10,000 face value?
Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 25 percent tax bracket.
Turn to Figure 2.12 and find the S&P 60 futures.a. Suppose you buy one contract for December delivery. If the contract closes in December at a price of 900, what will your profit be?b. How many
Compare call options and stop- buy orders.You have placed a stop-loss order to sell at $38. What are you telling your broker? Given market prices, will your order be executed?
In Table 3.1 , what is the leading exchange in terms of value of stocks listed? What is the leading exchange in terms of trading activity? By Market Capitalization (in US$millions) Exchange NYSE
You've borrowed $20,000 on margin to buy shares in Bombardier, which is now selling at $80 per share. Your account starts at the initial margin requirement of 50%. The minimum margin is 35%. Two days
If you place a stop- loss order to sell 100 shares of stock at $55 when the current price is $62, how much will you receive for each share if the price drops to $50?a. $50b. $55c. $54.90d. Cannot be
Suppose your expectations regarding the stock price are as follows:Use Equations 5.11and 5.12 to compute the mean and standard deviation of the HPR on stocks. State of
The variable (A) in the utility formula represents thea. Investor's return requirementb. Investor's aversion to riskc. Certainty equivalent rate of the portfoliod. Preference for one unit of return
Calculate the expected return and variance of portfolios invested in T-bills and the S&P/TSX Composite index with weights as follows:Consider historical data showing that the average annual rate
Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude?Data From Problem 10Calculate the expected return and variance of portfolios invested in
Visit Professor Kenneth French's data library website at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french /data_library.htrnl and download the monthly returns of "6 portfolios formed on size
Look at the data in Table 6.7 on the average excess return of the Canadian equity market and the standard deviation of that excess return. Suppose that the Canadian market is your risky portfolio.a.
Hennessy & Associates manages a $30 million equity portfolio for the multi-manager Wilstead Pension Fund. Jane Jones, financial vice-president of Wilstead, noted that Hennessy had rather
What are the investment proportions in the minimumvariance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return?
Which statement about portfolio diversification is correct?a. Proper diversification can reduce or eliminate systematic risk.b. Diversification reduces the portfolio's expected return because it
Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio.
Input the data from the table into a spreadsheet. Compute the serial correlation in decade returns for each asset class and for inflation. Also find the correlation between the returns of various
Convert the asset returns by decade presented in the table into real rates. Repeat the analysis of Problem 20 for the real rates of return.Data From Problem 20Input the data from the table into a
When the annualied monthly percentage rates of return for a stock market index were regressed against the returns for ABC and XYZ stocks over a 5-year period ending in 2013, using an ordinary least
Consider the following two regression lines for stocks A and B in the following figure.a. Which stock has higher firm -specific risk?b. Which stock has greater systematic (market) risk?c. Which stock
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market:a. What are the betas of the two
If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently. Portfolio Expected Return Standard Deviation A B 30% 40% 35% 25%
Based on current dividend yields and expected growth rates, the expected rates of return on stocks A and B are 11 % and 14 %, respectively. The beta of stock A is .8, while that of stock B is 1.5.
What must be the beta of a portfolio with E(rp) = 18%, if r1 = 6% and E(rM) = 14%?
Within the context of the capital asset pricing model (CAPM), assume the following:• Expected return on the market= 15%• Risk-free rate = 8%• Expected rate of return on XYZ security = 17%•
What is the expected return of a zero-beta security?a. Market rate of returnb. Zero rate of returnc. Negative rate of returnd. Risk-free rate of return
Which of the following statements are true if the efficient market hypothesis holds?a. Future events can be forecast with perfect accuracy.b. Prices reflect all available information.c. Security
Which of the following observations would provide evidence against the semistrong-form version of the efficient market theory? Explain.a. Mutual fund managers do not on average make superior
A successful firm like Magna International Inc. (MG) has consistently generated large profits for years. Is this a violation of the EMH?
Collect data on the DJIA for a period covering a few months. Try to identify primary trends. Can you tell whether the market currently is in an upward or downward trend?
Define the following types of bonds:a. Catastrophe bondb. Eurobondc. Zero-coupon bondd. Samurai bonde. Junk bondf Convertible bondg. Serial bondh. Equipment obligation bondi. Original issue discount
Consider a bond with a 10% coupon and with yield to maturity = 8%. If the bond's yield to maturity remains constant, then in 1 year, will the bond price be higher, lower, or unchanged? Why?
A bond with a coupon rate of 7% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100.125 . What is
You wish to sell short 100 shares of XYZ Corporation stock. If the last two transactions were at $34.10 followed by $34. 15, you only can sell short on the next transaction at a price of a.
You work for a private wealth management firm that follows an "external investment" model, whereby it decides which outside managers it should recommend to clients. One mutual fund that is a
Many investors contend that it is not possible to evaluate a manager's investment performance properly without taking portfolio risk into account in some fashion. Nevertheless, simple (not
Describe the two questions that an investor should consider when evaluating the investment performance of a portfolio manager. What tools are available to help the investor answer these questions and
You are running an arbitrage-based hedge fund focusing on merger transactions. Company XYZ has just received a tender offer for $45 per share from the management of AcquisiCorp. For the past two
Many investors in private equity transactions do so through participation in limited partnership arrangements. Explain how limited partnership structures are organized and illustrate your answer with
As an investigator evaluating how well mutual fund managers select undervalued stocks or forecast market returns, discuss whether net or gross (before fund expenses) returns are more relevant.

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