Name

$q,$ Multiple Choice Questions $[20$ points$]$

Make your selection clear and distinct, otherwise you will not get credit.

In the context of the CAPM, which of the following is true about the market portfolio? $$

A$)$ It has the minimum variance of all portfolios on the efficient frontier.

B$)$ It consists of the equal$-$weighted portfolio of all assets in the economy.

C$)$ It has the highest possible Sharpe ratio of any asset or portfolio.

D$)$ None of the above answers is correct.

According to the binomial option pricing model, which of the following factors would tend to raise the value of a European call option, all else being equal?

I. Increase in the probability of an upward movement in the stock price

II$.$ Increase in the riskless rate of interest

III. Increase in the expected return on the stock

IV$.$ Higher current stock price

A$)$ I, II$,$ and IV only

B$)$ II$,$ III, and IV only

C$)$ II and IV only

D$)$ I and IV only

If you believe that a stock will fall in the short to medium term, which of the following strategies would be most consistent with your views?

A$)$ Bullish calendar spread

B$)$ Box spread

C$)$ Short strangle

D$)$ Writing naked calls

A firm has total free cash flow to the firm $($FCFF$)$ of $$104$ million. The tax rate $35\%,$ and the income statement shows depreciation of $$30$ million. If total capit expenditures are $$30$ million and net working capital decreased by $$20$ million, is the firm's EBIT?

A$)$ $$57$

B$)$ $$160$

C$)$ $$190\mathrm{.}77$

D$)$ None of the above

Name

$q,$

$5.$ The Theory of Normal Backwardation states which of the following?

A$)$ The futures price and the spot price must become equal at the maturity date.

B$)$ The futures basis is negative.

C$)$ In an arbitrage$-$free market, riskless rates of interest in different countries should be equal.

D$)$ None of the above.

$6.$ Assume that the riskless rate of interest is $5\%$ per year. If there are no arbitrage opportunities in the futures markets and Stock XYZ pays dividends, which of the following cannot be a valid pair of spot and $12-$month futures prices for Stock XYZ$?$

A$)$ Spot $=$$$45,$ Futures $=$$$45\mathrm{.}00$

B$)$ Spot $=$$$45,$ Futures $=$$$47\mathrm{.}75$

C$)$ Spot $=$$$45,$ Futures $=$$$44\mathrm{.}75$

D$)$ Spot $=$$$50,$ Futures $=$$$51\mathrm{.}50$

$7.$ Suppose you observe in the Wall Street Journal that the yield curve is flat. The Expectations Hypothesis and the Liquidity Preference Theory may or may not hold. Which of the following must be true?

A$)$ The forward rate in Year $2$ is equal to the expected future short$-$term rate in Year $2.$

B$)$ Under the Liquidity Preference Hypothesis, short$-$term interest rates are expected to stay the same in the future.

C$)$ The forward rate in Year $3$ must be higher than the forward rate in Year $2.$

D$)$ None of the above

$8.$ A coupon bond which pays interest of $4\%$ annually, has a par value of $$1,000,$ matures in $8$ years, and is selling today at $$755\mathrm{.}68.$ The actual yield to maturity on this bond is

A$)5\mathrm{.}7\%$

B$)7\mathrm{.}2\%$

C$)7\mathrm{.}8\%$

D$)8\mathrm{.}3\%$

Name

$q,$

$9.$ All other things equal, which of the following has the longest duration?

$q,$

A$)$ A perpetual bond paying a $12\%$ coupon and yielding $6\%.$

B$)$ A $20$ year bond with a $10\%$ coupon yielding $10\%$

C$)$ A $20$ year bond with a $10\%$ coupon yielding $11\%$

D$)$ A perpetual bond paying a $6\%$ coupon yielding $8\%$

$10.$ Which of the following statements is not true regarding immunization strate

A$)$ They generally require rebalancing of the portfolio over time

B$)$ They balance reinvestment risk against price risk

C$)$ They eliminate changes in the value of liabilities due to interest$-$rate

D$)$ They match the duration of assets with the duration of liabilities