FIN 4504 Quiz 1: Efficient Markets and Investment Portfolio Management - Prof. Jason J. Ka, Quizzes of Finance

Download FIN 4504 Quiz 1: Efficient Markets and Investment Portfolio Management - Prof. Jason J. Ka and more Quizzes Finance in PDF only on Docsity! Name _____Answer key_________________________ Quiz #1 FIN 4504 Please answer all questions. Each part of question 1 is worth 2 points, question 2 is worth 2 points, and question 3 is worth 4 points (for a total of 10 points). 1. Core concepts question (a) What is the definition of an efficient market? A market where prices immediately reflect all relevant information about firms. (b) What is the historical daily standard deviation of the U.S. stock market? 1% 2. Suppose you have $1,000,000 in your investment portfolio, half of which is in a tax-deferred IRA and half of which is in a normal taxable account. You wish to have half of your wealth invested in stocks and half invested in bonds. How much of your IRA money should you invest in bonds? (a) 0% (b) 50% (c) 100% (d) It doesn’t matter—anywhere between 0% and 100%. Reason: you are taxed on capital gains, dividends, and interest income. You can defer capital gains taxes by not selling the stock. Interest income is usually larger than dividends, so taxes will take a bigger bite out of bonds than stocks. So to save on taxes, put your bonds in a tax deferred account and keep the stocks in your taxable account. 3. Jessie has $15,000 to invest and purchases the maximum number of shares of Yahoo! common stock that she is permitted to buy without violating margin requirements. The initial margin requirement is 60% and the maintenance margin is 40%. How much does the stock price have to fall in percentage terms to trigger a margin call? Initially, the T-account looks like Let X be the percentage amount that the share price falls After the stock falls by X, the T-account looks like A=$25,000 D = $10,000 E = $15,000 A = 25000(1-X) D = 10,000 E = 25000(1-X)-10000 15000 0.6 25000 E A A A = = ⇒ = 25000 25000 10000 0.4 25000 25000 25000 15000 10000 10000 15000 5000 33.3% E X A X X X X X − − = = − − = − = =