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Final Course Test due Mar 22, 2021 20:23 EET

TestInstructions:

Please carefully read through each question and respond as instructed. We have provided the Excel file"Final-Course Quiz.xlsx"to assist in answering the numerical questions. For entering numerical answers (values or percentages), follow the same guidelines used throughout the Assessments. When answering a multiple choice question, choose only one option.

We also have provided you a"Course Summary"that may help you with the FinalTest.

Modules 0-1

Question 1

1 point possible (graded)

Suppose there is no uncertainty. There is an investment plan in which you pay $100 in t and receive $5 in t+1 and $105 in t+2. Which of the following should the yield to maturity, i, satisfy?

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Question 2

1 point possible (graded)

Depending on the market convention, yields can be quoted on a yield (Y) or discount (D) basis. For the same instrument, which of the following is true?

(Hint: if you don't know the answer immediately, think of an example of a simple one-period zero coupon bond)

Y is always greater

D is always greater

Y and D are equal

It depends; sometimes Y can be greater, sometimes D can be greater

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Question 3

1 point possible (graded)

Bond L:2-year zero coupon bond, pays $200 at maturity

Bond M:1-year zero coupon bond, pays $10 at maturity

Bond N:2-year zero coupon bond, pays $10 at maturity

Bond O:2-year, 5% coupon (paid annually) bond, face value = $200

Suppose you combine Bonds L, M, and N to produce a Portfolio LMN, and that the Yield to Maturity is the same for all three bonds and the portfolio considered. Which of the following is true?

Price of LMN > Price of O

Price of LMN = Price of O

Price of LMN < Price of O

Cannot determine if one price is greater than another without further information

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Modules 2-3

Use the Excel File provided to answer Questions 4-7:

Question 4

1 point possible (graded)

What is the price of the following US T-Bond? (Use any method you prefer)

Face value: $100

Maturity: 7 years

Coupon rate 2.5% (paid annually)

Yield = 7.5%

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Question 5

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Suppose you observe that the above bond is trading at $83.00. What is the yield?

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Question 6

0.0/1.0 point (graded)

Calculate the price, duration, and modified duration of this bond when the yield is 9% (Enter all answers with two decimal places).

Price:

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Duration:

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Modified Duration:

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Question 7

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Suppose the yield for the bond from the previous question increases by 1 percentage points. Without re-calculating the price, what is the expected change (in %) in the bond's price? That is, what is the expected percentage change using the Duration approximation? What would be the new price predicted by (modified) duration?

Expected change:

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New price:

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Question 8

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Noting that the price obtained in the previous question is anapproximation, which of the following will be true for the actual (not approximated) price at the new yield?

Actual Price < Approximated Price

Actual Price > Approximated Price

Actual Price = Approximated Price

Actual Price can be greater or less than Approximated Price, depending on other factors.

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Question 9

1 point possible (graded)

I have a portfolio consisting of long positions in each of the three bonds: Bond A (duration = 2), Bond B (duration =3), and Bond C (duration = 5). Which of the statements cannot be true?

All three bonds are zero coupon

All three bonds are coupon bonds

Duration of the portfolio = 5.3

Duration of the portfolio = 2.6

Duration of the portfolio > Duration of bonds A and B

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Question 10

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A certain investor who will hold a bond to maturity and cares only about the return to his investment, must choose among three different 5-year sovereign bonds issued by the Republic of Fredonia: (i) a premium bond, (ii) a discount bond, (iii) a par bond.

Which of the following is true about the investor's preferences?

He will prefer the premium bond over the other two, because it is more valuable

He will prefer the discount bond, because it is cheaper

He will prefer the par bond, because it is appropriately priced

He will be indifferent to all three, because they are equivalent in his analysis

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Question 11

1 point possible (graded)

Yesterday the yield to maturity (YTM) fell by 150 basis points and the price of my bond increased by exactly 3%. If YTM falls today again by 150 basis points, then the price of my bond will...

Remain constant

Fall by 3%

Fall by > 3%

Fall by < 3%

Increase by 3%

Increase by > 3%

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Module 4

Question 12

1 point possible (graded)

Historically in the U.S., which of the following has always been true?

Yield on a 2-year corporate bond > yield on a 2-year Treasury bond.

Yield on a 3-year corporate bond > yield on a 2-year corporate bond.

Yield on a 3-year Treasury bond > yield on a 2-year Treasury bond

Yield on a 3-year corporate bond > yield on a 5-year Treasury bond.

All of the above.

Statements (a) and (c)

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Question 13

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The yield curve is commonly constructed from benchmark (risk-free) zero coupon yields at different maturities, or yi's, where the subscript i refers to the maturity. Once a yield curve is constructed, a "forward" curve can also be constructed, consisting of short (for example 1-year) rates fi's.

Zeros (yi's) are arithmetic averages over forward rates (fi's)

Each yi is the sum of fi's at shorter maturities

yi's are geometric averages over fi's

yi's are always greater than or equal to the corresponding fi

None of the above

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Use the Excel File provided to answer Question 14:

Question 14

0.0/1.0 point (graded)

Zero coupon yields for maturities of 1-3 are y1 = 5%, y2 = 6.75%, y3 = 6%. Find the one-year forward rates f1 (the one-year rate from year 1 to year 2) and f2 (the one-year rate from year 2 to year 3).

f1:

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f2:

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Question 15

1 point possible (graded)

Based on your answers to Question 14 and, assuming that the pure expectations hypothesis holds, which of the following is true about market expectations on one-year yields:

They will remain constant

They will rise continuously

The will fall continuously

They will rise, then fall

They will fall, then rise

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Use the Excel File provided to answer Questions 16-17:

Question 16

1 point possible (graded)

Recall that the par yield is the coupon rate that ensures that a bond sells at par. Using the zero coupon yields given in Question 14, find the par yield for a maturity of 3 years. (Hint: use Goal Seek)

Par yield:

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Module 5

Question 17

0.0/1.0 point (graded)

Today is January 1st, 2016. Fabregas, Inc. is projecting earnings per share (EPS) of $4.50 for January 1st, 2017. It plans to pay out 35% of its earnings in dividends, and management is confident that its ROE of 9.0% on new investments can be maintained over a reasonably long horizon.

The expected market return is 6.5%, Fabregas, Inc. has a Beta of 1.2, and the risk-free rate is 0.5%. For Fabregas, Inc. calculate the market capitalization rate, the growth rate of earnings, and today's price and P-E ratio (calculated as the ratio of today's price to expected earnings on January 1st, 2017).

(Enter all answers with two decimal places).

Market capitalization rate:

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Growth rate of earnings:

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Price:

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P-E:

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Question 18

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If Fabregas management decides to postpone dividend payouts until January 1st, 2020, and will distribute them thereafter at 25% of earnings, the P-E ratio calculated in the previous question will...

(No calculations needed)

Increase

Decrease

Remain constant

Cannot be determined without further information

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Question 19

1 point possible (graded)

The price-earnings ratio (PE) is often used as a gauge of "how high" valuations are for individual companies and markets. Suppose you are looking at stock market indices for two emerging countries, Macronia and Fiscalia. You notice that PE in Macronia is higher than in Fiscalia.

Assuming that PE is reflecting fundamentals in each of the countries, what could explain this difference?

The market in Macronia is riskier than the one in Fiscalia.

Corporate earnings are higher in Fiscalia.

The projected growth rate of earnings is higher in Fiscalia.

On average, listed firms in Macronia pay out a greater portion of earnings in dividends than do listed firms in Fiscalia.

Productive investments are more profitable in Macronia.

None of the above

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Module 6

Question 20

1 point possible (graded)

I am interested in constructing the best possible portfolio from a set of securities, S1, S2, and S3, each of which has an expected return E(r) and volatility or risk . Below I see their risk-return characteristics:

Which of the following is true?

I will choose S3 only, since it has the highest expected return.

I will always choose a portfolio that contains some amount of all three securities.

I will discard S2, because it has lower return and higher risk than S1.

I will choose S1 only, because it has high return with low risk.

I cannot discard any of the above securities without more information.

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Question 21

1 point possible (graded)

Suppose the risk-free rate is 0.65%. Rank the three securities from lowest to highest according to the slope of their Capital Allocation Line, that is, their Sharpe ratio:

S1, S2, S3

S3, S2, S1

S2, S3, S1

S3, S1, S2

S2, S1, S3

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Use the Excel File provided to answer Questions 22-24:

Question 22

0.0/1.0 point (graded)

Note the (incomplete) variance-covariance matrix S shown in the spreadsheet. If the correlation between S1 and S2 is 0.45, that between S2 and S3 is 0.02, and that between S1 and S3 is 0.5, fill in the remaining elements of the variance-covariance matrix. Enter your answer withfive decimal places.

3rd row, 2nd column (Covariance between S2 and S3):

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3rd row, 3rd column (Variance of S3):

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Question 23

0.0/1.0 point (graded)

Now that you have filled the S matrix, follow the matrix solution procedure discussed in Module 6 to obtain the optimal portfolio P*. Enter the weights obtained for each of the securities, withthree decimal places.

Weight for S1:

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Weight for S2:

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Weight for S3:

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Question 24

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Enter the Sharpe ratio for P*, with two decimal places. Hint: recall that Expected return of a portfolio is the weighted average of the expected returns, and variance of a portfolio = wTSw, where w is the (column) vector of portfolio weights and wT is its transpose.

Sharpe ratio:

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Question 25

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Which of the following statements is true regarding benefits from diversification?

I will always achieve risk reduction by including additional assets to my portfolio

I will only achieve benefits from diversification if I include additional assets that are negative correlated with those already in my portfolio

If I have a portfolio composed of relatively low-risk assets, I gain nothing in terms of risk reduction by including riskier assets

If n > m, then a portfolio composed of n assets will always outperform a portfolio composed of m assets

None of the above

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Module 7

Question 26

1 point possible (graded)

I hold a portfolio of international stocks and bonds which is worth $1 million today. I just calculated its Value at Risk at the 99% level for a horizon of 10 days: it is equal to $75,000. This means that...

Over the next 10 days, I have a 99% probability of losing exactly $75,000.

Over the next 10 days, I have a 1% probability of losing exactly $75,000.

Over the next 10 days, I have a 99% probability of losing at least $75,000.

Over the next 10 days, I have a 1% probability of losing at least $75,000.

Over the next 100 days, on one day I will make a profit of exactly $75,000.

None of the above.

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Use the Excel File provided to answer Questions 27- 30:

Question 27

0.0/1.0 point (graded)

Note the 100 observations of monthly stock returns for the countries of Fiscalia and Monetaria between October 2005 and January 2014. Assuming an investment of $500,000 in each of these markets, calculate Value at Risk at the 95% level for each market, using the actual distribution of returns, that is, the historical approach. (Enter your answers aspositive lossesin $, with no decimal places)

VaR Fiscalia Stock Market:

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VaR Monetaria Stock Market:

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Question 28

0.0/1.0 point (graded)

Now calculate the average return and standard deviation in each market, then use the Normal Approximation to calculate the 95% Value at Risk. (As in the previous question, enter your answers as positive losses in $, withno decimal places).

VaR Fiscalia Stock Market:

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VaR Monetaria Stock Market:

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Question 29

1 point possible (graded)

Calculate the correlation between the two markets. Suppose you combine $500,000 invested in each market to construct a portfolio MF of $1 million invested equally in the two markets. Based on your calculations, which of the following is true?

VaR(MF) = VaR(Monetaria) + VaR(Fiscalia)

VaR(MF) < VaR(Monetaria) + VaR(Fiscalia)

VaR(MF) > VaR(Monetaria) + VaR(Fiscalia)

Depending on market conditions, VaR(MF) can be =, > or < the sum of the individual VaRs.

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Question 30

0.0/1.0 point (graded)

Calculate the 95% Expected Shortfall in each market. Hint: note that columns H and I identify the exceptions in each market, the observations with greater losses than VaR.

Expected Shortfall Fiscalia (percentage):

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Expected Shortfall Monetaria (percentage):

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Final Course Test

Topic:Week 7 / Topic-Level Student-Visible Label

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• discussion
• Q 8
• I think the answer shall be adjusted, since the convexity will affect both way, either positive convexity (most not embedded option bond), partially negative convexity (callable bond), and negative convexity (MBS)
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