Finance 411 Midterm Section Aa - Question Answers

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STUDENT NAME:        ______________________________________________________         

I.D. NUMBER:                  ______________________________________________________

1. You have 20K of XVN stock bought on margin and presently owe 10K to your broker where the account requires a 30% maintenance margin. How much additional loan may you take to buy XVN if the stock price increases by 5%?

1. Cannot be computed with the information provided
2. $500
3. $1000
4. $6714
5. $15666

1. You own 10,000 shares of AJN stock which traded for $100/share at the market open.  Yesterday you placed a limit sell order at $115 for all the shares which will remain active for a full week.  Today the price of AJN varies from $95 to $105 and ultimately closes at $98.  What is your gain/loss for the day?

1. You have a paper loss of 2% for the day
2. You have a realized loss of 2% for the day
3. You have a paper loss of 5% for the week
4. You have a realized loss of 5% for the week
5. You have a paper gain of 15% for your holding period

1. If you’re attempting to exit a position as quickly as possible and price is not a major factor then you should issue:

1. A market sell order
2. A limit sell order with a much higher price
3. A stop sell order with a much lower price
4. A fill or kill stop sell order with a much higher price
5. Impossible to know which is best

1. Suggestive examples of apparent allocational inefficiency are:

1. Dubai World building islands in the middle of the Ocean
2. The nearly empty city of Ordos on the Mongolian steppes
3. Mortgage rates in Canada below the cost of capital for productive businesses
4. A and B
5. A, B and C 

1. By excluding short-sellers from a market a government may imminently and plausibly:

1. Cause a depression
2. Cause an informational inefficiency
3. Cause a stock market crash
4. Cause underinvestment
5. Cause the end of the world

1. Which investment, assuming that risk is comparable, is a better investment:  An index-tracking ETF that charges 0.25% (25 bps) for funds under management and 0% for any money earned or an actively traded fund that charges 1.5% for funds under management and 5% of any money earned.  You may assume that the ETF tracking error results in the ETF underperforming the market by 0.5% while the active professional manager regularly beats the market by 2%.  The average applicable market return has been 8% for many years.

1. The ETF is a superior investment
2. The active fund is a superior investment
3. The two funds are identically good
4. The active fund is best when the manager greatly underperforms the market
5. The ETF fund is best when the active manager greatly exceeds the market

1. You short-sell $100K of ABC stock when it’s trading at $100/share.  Assuming you close the position when the share price has dropped to $80 and that there was an initial margin of 50% as required by the Federal Reserve Board then:

1. You had to post $50K of margin and your rate of return was 20%
2. You had to post $50K of margin and your rate of return was 40%
3. You had to post $75K of margin and your rate of return was 20%
4. You had to post $75K of margin and your rate of return was 40%
5. You had to post $20K of margin and your rate of return was 100%

Table 1.

1. Use the information in Table 1 to answer this question.  What is the yield on the risk-free security?  Hint:  The risk-free security pays the same dollar amount in every state.

1. Cannot be computed with the information provided
2. 0%
3. 4.16%
4. 6.83%
5. 93.6%

1. Use the information in Table 1 to answer this question.  What price would you pay for stock NBN that gives $10 in the Happy times and $5 in the Sad times?

1. Cannot be computed with the information provided
2. $1.53
3. $6.21
4. $7.05
5. $7.83

1. Use the information in Table 1 to answer this question.  What price would you pay for stock MVM that gives $5 in the Happy times and $10 in the Sad times?

1. Cannot be computed with the information provided
2. $1.53
3. $6.21
4. $7.05
5. $7.83

1. Consider your response to questions 9 and 10.  What are the expected returns for each of the two stocks, NBN and MVM?

1. 8.5% for NBN and 4.6% for MVM
2. 20.6% for NBN and 4.6% for MVM
3. 8.5% for NBN and -15.4% for MVM
4. 8.5% for NBN and -13.3% for MVM
5. 20.6% for NBN and -13.3% for MVM

1. Consider your response to questions 9 and 10.  Why is it that MVM has a much lower rate of return than NBN despite also having a lower expected cash-flow?

1. Because MVMs cash-flows more positively co-vary with the value of the pricing kernel (m)
2. Because NBNs cash-flows more positively co-vary with the value of the pricing kernel (m)
3. Because MVMs cash-flows more negatively co-vary with the value of the pricing kernel (m)
4. Because NBN acts as a form of insurance product
5. Because MVMs large cash-flows are received at times when their marginal utility is very low

1. In an efficient market we would expect:

A) The NAV of a closed end fund to match the market value of the assets in the managed portfolio

B) The NAV of the closed end fund to exceed the value of the assets in the matched portfolio by the value of the MER on the managed funds

C) The NAV of the closed end fund to be less than the assets in the matched portfolio

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