Exam 3 for Investment and Portfolio Management | FNCE 4030, Exams of Finance

Download Exam 3 for Investment and Portfolio Management | FNCE 4030 and more Exams Finance in PDF only on Docsity! Name________________________________ _______ Class Time_______________ Exam 3 11-12-03 Finance 4030 001 & 004 Fall 2003 1. Name and describe the three forms of the Efficient Market Hypothesis. (3) 2. Calculate the price for a bond with a par of $1,000 maturing on 3 years with annual coupons of $60. The effective annual discount rate is 8%. (6) 3. Do we use time-weighted returns or dollar-weighted returns when evaluating the performance of an investment manager and why? (3) 4. Does it make a significant difference if a forward contract is set up with or without a fixed price at expiration and why or why not? (3) 1 of 15 Page 1 5. Using the data below, calculate the overall % out-performance and the portion attributable to the asset allocation decision and the portion attributable to security selection within each asset class. (6) Total % Excess Return____________ Bogey Portfolio Return = 8.50% Due to Asset Allocation___________ Due to Cash Security Selection____________ Due to Bond Security Selection____________ Due to Stock Security Selection____________ 6. Based on the information below, calculate the Sharpe Ratio and the Information Ratio for the portfolio. (6) Annualized Portfolio Return 9.50% Annualized Benchmark Return 8.25% Annualized σ of α Versus Benchmark 2.50% Annualized σ of Portfolio Returns 6.00% β of Portfolio 0.80 Annualized σ of Market Returns 7.50% Risk-Free Rate 3.50% Cash Bonds Stocks Allocation in Bogey Portfolio 10% 40% 50% Allocation in Your Portfolio 5% 25% 70% Index Return 4% 8% 10% Your Return 4% 10% 14% 2 -$12 -$10 -$8 -$6 -$4 -$2 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $80 $82 $84 $86 $88 $90 $92 $94 $96 $98 $100 $102 $104 $106 13.Bayes Rule is a formula depicting: (2) a. Relative asset returns b. Conditional probabilities c. Investors’ tendency to frame investment questions d. The effectiveness of arbitrage 14.What is the most important potential factor limiting the effectiveness of arbitrage activity? (3) a. Limited trading hours b. Noise trading c. Growth of the derivative markets d. Lack of close substitutes 15.Does the EMH rely on an assumption of rational investors and why or why not? (3) 16. In relation to investment decisions, what problem does “framing” cause? (2) 5 Stock Price (Underlying) P or tf ol io P ro fi t A t E xp ir at io n of 5 Page 4 17. What major research methodology did we discuss in relation to securities research testing the EMH? (2) a. Event studies b. Top-down analysis c. Business cycle analysis d. Game theory 18.According to John Maynard Keynes, how can it be that “noise traders” can dominate arbitrageurs in the marketplace, resulting in prices out of equilibrium? Name at least two important elements necessary for this to happen (not necessarily named by Keynes). (2) 19. In behavioral finance, what is “anchoring”? (2) 20. Circle two inefficient tendencies investors in large numbers exhibit according the findings of behavioral finance: (2) a. Investors are naturally more comfortable with value stocks b. Investors tend to over-react to goods news relating to favored stocks and under-react to bad news relating to un-favored stocks c. Investors tend to shun the familiar d. Investors project current trends too far into the future 21.Discuss the major differences between futures contracts and forward contracts. (4) 6 of 14 Page 5 22.What do we mean by the “delivery mechanism” for futures contracts and why is it important? (4) 23. In evaluating a benchmark, what do we mean by “investable”? (2) 24.Explain what “notional amount” means in relation to derivatives. (2) 25. Why are zero-coupon bonds useful for discounting cash flows? (2) 26. Define a derivative. (2) 7 of 14 Page 6