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Surname: ______________________ Q1
Given names: ___________________ Q2
Student ID number: ______________ Q3
Signature: ______________________ Q4
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2) On Friday, 17 July 2009 the current yield of the 5.25% Aug 2010 CGS is
A. smaller than 3.315%
B. 3.315%
C. larger than 3.315% but smaller than 5.25%
D. 5.25%
E. larger than 5.25%
3) Assuming T+2, on Friday, 17 July 2009 the capital (or adjusted) price of the 5.25% Aug
2010 CGS is _______ than the settlement price by $ _______.
A. less; 0.540
B. less; 0.639
C. less; 1.509
D. less; 2.262
E. None of the above
4) Other things being equal, on the basis of T+2, for the 5.25% Aug 2010 CGS, on which of
the following calendar day will the bond experience a fall in settlement price by an
amount that is close to the amount of coupon interest per six-month period?
A. Tuesday, 4 Aug 2009
B. Wednesday, 5 Aug 2009
C. Thursday, 6 Aug 2009
D. Friday, 7 Aug 2009
E. none of the above
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The following information applies to Questions 5 and 6. On Tuesday, 17 November 2009, the
yield to maturity of the 5.25% Aug 2010 CGS was 4.150%.
5) On the basis of T+2, the settlement price was
A. 99.206
B. 100.289
C. 100.786
D. 102.155
E. none of the above
6) Had you purchased the 5.25% Aug 2010 CGS on Tuesday, 17 November 2009 and sold it
on Friday, 6 August 2010 on the basis of T+2, you would have sold the bond ___ and ___
the coupon interest on 15 August 2010.
A. cum interest ; not received
B. cum interest; received
C. ex interest; not received
D. ex interest; received
E. none of the above
8) Assume annual interest payment. The yields to maturity of a 10% 1-year bond and a
12.5% 2-year bond are 5.10% and 6.25% respectively. This term structure implies that
the spot rate of a two-year bond is
A. 6.259%
B. 6.312%
C. 6.319%
D. 6.418%
E. insufficient information to solve the problem
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The following term structure of interest rates applies to Questions 9 and 10. Assume that
coupon interests are paid annually.
Coupon rate % pa Time to Maturity YTM % pa
10.0 1 year 5.10
12.5 2 years 5.25
8.0 3 years 5.40
10) The term structure implies that f(1,1), the forward rate of a 1-year bond one year from
now is:
A. 5.42%
B. 6.42
C. 6.52
D. 6.74
E. none of the above
11) Assume semi-annual interest payment. You purchased and held a five-year bond for one
and a half years. At the time of purchase and sale, the yield is the same as the coupon rate
of 10%. If you were able to reinvest all the coupon interests received at 12% per annum
compounded semi-annually, what is the holding period return?
A. 10.094%
B. 10.188%
C. 11.889%
D. 13.745%
E. insufficient information
12) The expectations hypothesis asserts that market expectations of future interest rates are
unbiased. This assertion implies that market expectations of future interest rates
A. are always accurate
B. can be above or below actual interest rates
C. are always smaller than actual interest rates by the liquidity premium
D. are always larger than actual interest rates by the liquidity premium
E. none of the above
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13) Which of the following is correct about the liquidity premium hypothesis?
A. Issuers of long-term bond offer investors a higher than expected return to minimise
uncertainty in the costs of refinancing.
B. Household lenders demand a liquidity premium as they prefer to lend for a term that
is longer than the maturity of the bond
C. We add liquidity premium to forward rates to arrive at market expectation of future
interest rates
D. A and C
E. A, B and C
14) According to the liquidity premium hypothesis, which of following has the largest
liquidity premium? f(n,t) denotes the forward rate of a n-period bond in t periods time.
A. f(10,5)
B. f(10,2)
C. f(5,2)
D. f(2,5)
E. insufficient information to tell
16) Suppose you forecast that there will be a downward and parallel shift in the yield curve in
the near future. You are holding an equally weighted portfolio in the following bond
series now:
6.50% May 2013, 6.25% Apr 2015, 6.00% Feb 2017
Should the forecast come true, you would increase the portfolio value the most in the
short-run by liquidating investment in the _____ series and investing the money in the
______ series now.
A. 6.50% May 2013, 6.00% Feb 2017
B. 6.25% Apr 2015, 6.00% Feb 2017
C. 6.00% Feb 2017, 6.50% May 2013
D. 6.00% Feb 2017, 6.25% Apr 2015
E. Insufficient information
17) Which of the following is free from price and income risks?
A. Buy and hold a CGS with six months or less to maturity
B. Buy a 6.25% Apr 2015 CGS and the beginning of this session and sell the bond at the
end of this session
C. Buy a 5-year zero coupon bond and hold the bond for 2 years
D. A and C
E. None of the above
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18) Other things being equal, the duration of a zero coupon bond
A. does not change over time
B. is inversely related to the bonds yield to maturity
C. increases as the bond approaches the expiration date
D. is independent of the bonds yield to maturity
E. none of the above
19) Duration is defined as the weighted average time to recover the cost of a bond investment.
The weight allocated to each future cash flow is
A. computed by dividing the cash flow received by the cost of investment.
B. computed by dividing the present value of the cash flow received by the present value
of all future cash flows.
C. the time when the cash flow is received.
D. computed by dividing the time when the cash flow is received by the maturity of the
bond.
E. none of the above
20) You are currently holding a portfolio that consists of (a) $2000 cash and (b) one 10-year
zero coupon bond with a face value of $1000 and 12% yield to maturity. The Macaulay
duration of the portfolio is
A. 1.3866
B. 2.4356
C. 2.7826
D. 3.9171
E. none of the above
21) Which of the following bond is the most price sensitive to interest rate movements?
A. A bond with short term to maturity and high coupon rate
B. A bond with short term to maturity and low coupon rate
C. A bond with long term to maturity and low coupon rate
D. A bond with long term to maturity and high coupon rate
E. None of the above
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23) The Macaulay duration equation can be obtained by differentiating the present value of
the cash flows of a coupon bond with respect to
A. The coupon rate
B. The discount rate
C. The number of periods to maturity
D. Income and price risks
E. The weights of the cash flows
24) According to the mean-variance criterion, which of the following combination dominates
all others?
A. E(R) = 0.15; Variance = 0.20
B. E(R) = 0.10; Variance = 0.20
C. E(R) = 0.10; Variance = 0.25
D. E(R) = 0.15; Variance = 0.25
E. None of the above
26) In the absence of a risk free asset, which of the following ranking rule is needed to locate
the optimal portfolio of risky assets?
A. The portfolio with the largest utility is preferred.
B. The portfolio with the largest reward to variability ratio is preferred.
C. For a given level of expected return, the portfolio with the lowest level of risk is
preferred.
D. For a given level of risk, the portfolio with the largest expected return is preferred..
E. None of the above
27) The standard deviation of return on ABC and XYZ are 0.1 and 0.4 respectively. The
correlation coefficient between the two assets is 0.6. The standard deviation of return of
an equally weighted portfolio of the two assets is
A. 23.35%
B. 28.28%
C. 28.72%
D. 29.15%
E. none of the above
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29) Given the portfolios lying on the capital allocation line, an investor should choose the
portfolio that
A. maximises his/her expected return
B. minimises his/her risk
C. maximises the reward to variability ratio
D. maximises his/her expected utility
E. none of the above
30) In the presence of a risk free asset, which of the following ranking rule is needed to locate
the optimal portfolio of risky assets?
A. For a given level of expected return, the portfolio with the lowest level of risk is
preferred.
B. The portfolio with the largest reward to variability ratio is preferred.
C. The portfolio with the largest utility is preferred.
D. B and C.
E. A, B, and C.
31) If the borrowing rate is higher than the lending rate, which of the following is correct?
A. Portfolios lying on the capital allocation line may have different reward to variability
ratios.
B. Investors with different degrees of risk aversion will always choose the same portfolio
of risky assets.
C. The capital allocation line is a straight line.
D. Two of the above
E. None of the above
32) Calculate the minimum level of return required by the investor if he can tolerate 20% risk.
A. 44%
B. 46%
C. 48%
D. 54%
E. None of the above
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34) The beta of CBA is 0.8. The expected return on the market is 15% and the risk free rate
is 5%. CBA is currently priced at $25. If the market predicts that CBA will pay a
dividend of $0.50 at the end of this year when its price will end up at $30, CBA is lying
A. above the capital market line
B. below the capital market line
C. above the security market line
D. below the security market line
E. none of the above
37) The difference between the actual excess return of a stock and that predicted by the
Single Index Model (SIM) is known as
A. alpha, the intercept.
B. beta, the slope.
C. e, the residual return.
D. the risk premium.
E. none of the above
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38) In the context of the single index model, random and independent firm specific news are
responsible for the observation of
A. a non-zero alpha coefficient.
B. a non-zero beta coefficient.
C. non-zero residual returns.
D. A and C
E. A, B, and C
40) Based on the outputs of the single index model regression, a stock is said to have an
abnormal return if
A. the intercept is significantly different from 0.
B. the slope coefficient is significantly different from 0.
C. the average residual return is significantly different from 0.
D. A and C
E. A, B and C
41) Which of the following is correct about R2, one of the outputs from the Single Index
Model regression?
A. It shows the proportion of unsystematic risk of the stock relative to its total risk.
B. The square root of R2 is the correlation coefficient between the excess returns of the
stock and the market.
C. R2 is the square of excess return.
D. A and B
E. A, B, and C
43) Which of the following strategy is shown to produce positive abnormal returns?
A. Invest in stocks at the top end of the return scale (where return is measured over the
past year) for a period of 3 to 6 months
B. Invest in spinoffs and their parents for a period of 3 years
C. Invest in initial public or seasoned equity offerings for a period of 5 years
D. A and B
E. A, B and C
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45) Researchers have found that most of the small firm effect occurs
A. randomly
B. in January
C. in December
D. during the spring months
E. during the summer months
46) Which form of market efficiency do the chartists not believe in?
A. weak form
B. semi-strong form
C. strong form
D. all of the above
E. none of the above
49) Which of the following would provide evidence against the semi-strong form of the
efficient market hypothesis?
A. Observing a post-announcement drift in cumulated average residuals
B. Past losers, stocks with the worst 3- to 5-year past return, turn out to be future winners
C. Low price earnings ratio stocks tend to have positive abnormal returns
D. A and C
E. A, B and C
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50) Which of the following is used to explain the underperformance of actively managed
funds relative to the index funds?
A. Brokerage cost
B. Bid-ask spread
C. Market impact cost
D. A and B
E. A, B and C
Consider the following portfolios for Questions 51 and 52. All values are annualised and the
risk-free rate is 10%.
Portfolio Average Standard deviation Residual standard Beta
return of returns deviation
A 20% 30% 4.00% 0.8
B 18% 10% 1.25% 1.0
C 23% 20% 1.20% 1.2
All Ords 20% 16% 1
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Consider the following portfolios for Questions 53 and 54. All values are annualised and
investors can borrow and lend at a risk-free rate of 5%.
53) Which of the above portfolios has the highest abnormal return?
A. Fund A
B. Fund B
C. Fund C
D. All Ordinaries index
E. The abnormal returns for all of the funds is zero
54) An investor plans to invest all the spare money in a managed fund. The investor does not
have any other investment. Which fund should the investor choose?
A. Fund A
B. Fund B
C. Fund C
D. Indifferent between A and C
E. Indifferent between B and C
55) If a stocks price is S0 at time zero and S1 one period later, then the continuously
compounded return on the stock, r, is given by
A. 1 + r = ln(S1/S0)
B. r = ln(S1/S0)
S1 S 0
C. r =
S0
D. 1 + r = e S1 / S 0
E. none of the above
56) Tracy won $10,000 from the Channel 7 game show Deal or No Deal. She already has a
$50,000 investment in an index fund. Tracy wishes to invest the windfall in an active
portfolio managed by either Macquarie Bank or Platinum Asset Management, the most
appropriate performance index to evaluate the two active portfolios is the
A. Jensen alpha
B. Sharpe index
C. Treynor index
D. appraisal ratio
E. diversification index
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57) When a superannuation fund is large and has many managers, the ___________ is
typically used in practice to evaluate individual managers.
A. diversification index
B. Sharpe index
C. Treynor index
D. appraisal ratio
E. none of the above
58) Suppose two portfolios have the same average return, the same beta, but portfolio A has a
higher standard deviation of returns than portfolio B. According to the Treynor index, the
performance of portfolio A __________.
A. is better than the performance of portfolio B
B. is the same as the performance of portfolio B
C. is poorer than the performance of portfolio B
D. cannot be measured as there is no data on the alpha of the portfolio
E. none of the above
59) Traders may use options alone or together with the underlying stock to benefit from
A. no or immaterial change in the value of the underlying stock
B. persistent upward or downward movements in the value of the underlying stock
C. volatility movements in the underlying stock
D. B and C
E. A, B and C
60) Which of the following scenario violates the assumptions of the Black Scholes model?
A. Stock returns have fat tails
B. Stock movements follow a jump-diffusion process
C. Time-varying volatility
D. A and C
E. A, B and C
61) If you write a put option written on a stock, which of the following is true?
A. You may close off the position by buying another put option written on a different
stock
B. The final payoff is unlimited.
C. You gain the right to sell the underlying shares on or before the expiration date at the
predetermined exercise price.
D. B and C
E. None of the above
62) A European put option with six months to maturity has a strike price of $35. The
underlying stock, which does not pay dividends, now sells for $34. The put premium is
$1.58. The time value of the put option is
A. zero
B. $0.58
C. $1.00
D. $1.58
E. $35.58
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64) If the share price of CBA rises to $24.00 on the expiration date, the position value on the
expiration date is
A. $0.00
B. $0.20
C. $0.25
D. $0.50
E. none of the above
65) If the share price of CBA rises to $24.00 on the expiration date, the profit/loss on the
expiration date is
A. -$0.02
B. $0.02
C. $0.25
D. $0.27
E. None of the above
66) The put-call parity equation for European options is derived by constructing two
portfolios in such a way that their values at the common option expiration date are equal
and the assumption that one can borrow and lend at the same risk free rate, r. One
portfolio, P1, consists of a long stock and a long put (with a strike price of $X and time
remaining to maturity T). The second portfolio, P2, consists of
A. a long call with a strike price of Xe-rT and an investment of Xe-rT in the risk free asset.
B. a long call with a strike price of X and an investment of X in the risk free asset.
C. a long call with a strike price of X and an investment of Xe-rT in the risk free asset.
D. a long call with a strike price of Xe-rT and an investment of X in the risk free asset.
E. none of the above
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68) If ABCs standard deviation of monthly continuously compounded returns is 1.2%. Its
annualised standard deviation of continuously compounded returns is
A. 4.16%
B. 13.15%
C. 14.40%
D. 37.95%
E. None of the above
0 50 60 ST
69) You can achieve the payoff in the above diagram by using the following combination of
options:
A. buy a call with X = 50, sell a call with X = 60.
B. sell a call with X = 50, sell a call with X = 60.
C. sell a put with X = 50, sell a call with X = 60.
D. sell a put with X = 50, buy a call with X = 60.
E. buy a put with X = 50, buy a call with X = 60.
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Surname: ______________________
Given names: ___________________
Student ID number: ______________
ii) Investor should demand (a) more or (b) less liquidity premium than LP(3,5) for investing
in a 6-year bond for 5 years. (1 mark)
My choice is _________________ .
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i) An investor knows that he will neither borrow money to invest nor put all his money in a
portfolio of risky assets. State the underlying linear programming problem that the
investor needs to solve in order to find out the best allocation of his capital. (4 marks)
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ii) Another investor knows that she will neither lend nor borrow money at the above risk free
rates. Compute the range of degree of risk aversion of the investor. Report the answer to 4
decimals. (4 marks)
________________________________________________________________________
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iii) A third investor who has $1,000.00 finds it optimal to borrow an additional $4,000.00 to
invest. Compute the expected return and risk of the consequent allocation. Report the
answer in percentage value and to 2 decimals, e.g., 1.23%. (2 marks)
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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ii) Write down the equation for the intrinsic value of a call option. Apply the equation to
compute the intrinsic value of the call option. (1 mark)
________________________________________________________________________
max (St - X; 0)
________________________________________________________________________
St- X = 34 - 35 = -1
________________________________________________________________________
therefore intrinsic value of call option is 0
________________________________________________________________________
________________________________________________________________________
iii) According to the Black Scholes option pricing model, the theoretical value of the call
option is $2.41. Hence the market has a) overpriced or b) underpriced the option.
(1 mark)
My choice is ___________________________.
overpriced
iv) The probability that the call option will finish in the money is __________. (1 mark)
vi) Given the hedge ratio of the call option and the current mispricing situation, tell us the
transactions that you may execute today to earn a risk-free arbitrage profit. (3 marks)
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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________________________________________________________________________
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vii) Suppose you enter into a covered call position at the current market prices. If the stock
price goes up to $40 on the expiry date of the option and the call is exercised, describe
your obligation on the option maturity date, i.e., the consequent flow of fund and stock
from your point of view. (2 marks)
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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_______________________________________________________________________.
ii) Investors may also apply the CAPM to measure and price risk. What are the two
yardsticks to measure risk? (For example, we may use inch and centimeter to measure
length.) (3 marks)
We may use _________________________________________________________ and
_______________________________________________ to measure risk.
iii) How much return should investors expect for each unit of risk as specified by the answers
in part (ii)? (2 marks)
st
Investors should expect for each unit of risk as specified by the 1 expression in (ii)
______________________________________________________________________.
Investors should expect for each unit of risk as specified by the 2nd expression in (ii)
______________________________________________________________________.
iv) Prof. William Sharpe is a Nobel Prize winner, True or False? (1 mark)
The statement is ___________.
v) Prof. Harry Markowitz is Prof. William Sharpes student, True or False? (1 mark)
The statement is ___________.
The End
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