PAST EXAM QUESTIONS – TEST 1 INVESTMENT

NOVEMBER 2015
1. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of
earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this
investment?

A) 12.8%
B) 11%
C) 8.9%
D) 8.9%
E) 9.2%

2. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return
of 35%, while stock B has a standard deviation of return of 15%. The correlation
coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio,
while stock B comprises 60% of the portfolio. The standard deviation of the return on this
portfolio is _________.

A) 23%
B) 19.76%
C) 18.45%
D) 17.67%
E) none of the above

3. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%.
This portfolio had a Sharpe ratio of ____.

A) 0.22
B) 0.60
C) 0.42
D) 0.25
E) 0.36

4. An investor invests 70% of her wealth in a risky asset with an expected rate of return of
15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's
expected rate of return and standard deviation are __________ and __________
respectively.
A) 10%; 6.7%
B) 12%; 22.4%
C) 12%; 15.7%
D) 10%; 35%
E) None of the above
5. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is
8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should
_________.

A) invest $125,000 in the risk-free asset

B) invest $375, 000 in the risk-free asset
C) borrow $125,000
D) borrow $375, 000
E) none of the above

6. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor’s borrowing rate, is 10%. The
standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio
is 25%, the expected return on the complete portfolio is _________.

A) 6%
B) 8.75%
C) 10%
D) 16.25%
E) 7.35%

7. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. To form a complete portfolio with an expected rate of return of 11%, you
should invest __________ of your complete portfolio in Treasury bills.

A) 19%
B) 25%
C) 36%
D) 50%
E) 60%

8. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky
securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has
an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar
values of your positions in X, Y, and Treasury bills would be _________, __________, and
__________, respectively, if you decide to hold a complete portfolio that has an expected
return of 8%.

A) $162; $595; $243

B) $243; $162; $595
C) $595; $162; $243
D) $595; $243; $162
E) $243; $595; $16
9. The standard deviation of return on investment A is .10, while the standard deviation of
return on investment B is .04. If the correlation coefficient between the returns on A and B is
-.50, the covariance of returns on A and B is _________.

A) -0.0447
B) -0.0020
C) 0.0020
D) 0.0447
E)0

10. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation
of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation
coefficient between the returns on A and B is .35. The expected return on stock A is 25%,
while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be
invested in stock B is approximately _________.

A) 45%
B) 67%
C) 85%
D)92%
E) none of the above

11. You write one IBM July 120 call contract for a premium of $4. You hold the option until the
expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the
investment.

A) $300 profit
B) $200 loss
C) $600 loss
D) $200 profit
E) $300 loss

12. The common stock of the Avalon Corporation has been trading in a narrow range around
$40 per share for months, and you believe it is going to stay in that range for the next 3
months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with
the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put
and a call to exploit your conviction about the stock prices future movement?

A) Sell a call.
B) Purchase a put.
C) Sell a straddle.
D) Buy a straddle.
E) Buy a strangle.
13. A call option with several months until expiration has a strike price of $55 when the stock
price is $50. The option has _____ intrinsic value and _____ time value.

A) negative; positive
B) positive; negative
C) zero; zero
D) zero; positive
E) negative; zero

14. The value of a put option increases with all of the following except ___________.

A) stock price
B) time to maturity
C) volatility
D) dividend yield
E) the strike prices

15. The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-
free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire
6 months from now should be __________.

A) 1,274.33
B) 1,286.95
C) 1,268.61
D) 1,291.29
E) 1287.5

16. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-
year risk-free rate is 3%.
Based on the above data, which of the following set of transactions will yield positive riskless
arbitrage profits?

A) Buy gold in the spot with borrowed money and sell the futures contract.
B) Buy the futures contract and sell the gold spot and invest the money earned.
C) Buy gold spot with borrowed money and buy the futures contract.
D) Buy the futures contract and buy the gold spot using borrowed money.
E) Riskless arbitrage profits are not possible in this scenario.

17. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of
19%. The market index return is 12% and has a standard deviation of 16%. What is Jensens alpha of the
portfolio if the risk-free rate is 6%?

A) .017
B) .028
C) .036
D) .078
E) -0.02
 18. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800
million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial
lockout period is 3 years.
How many shares did you purchase?

A) 13,333
B) 25,000
C) 66,000
D) 43,750
E) 50,000

19. You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the
beginning of the year. The fund deducted a front-end commission of 4%. The securities in
the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is
deducted from year-end asset values. What is your rate of return on the fund if you sell your
shares at the end of the year?
A) 5.35%
B) 7.23%
C) 8.19%
D) 10%
E) 12.7%

NOVEMBER 2014
1. The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

A) -6%

B) 4%

C) 14.4%

D) 5.77%

2. Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and

write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of

a share of Texas Instruments stock is $79, your profit would be _________.

A) $400

B) $600

C) -$150

D) $1850

E) $150
3. An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current

stock price is $35.10, what is the break-even point for the investor?

A) $32.50

B) $35

C) $37.50

D) $37.60

E) None of the above

4. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6

months. You are considering using either puts or calls to hedge this position. Given this,

which of the following statements is (are) correct?

I. One way to hedge your position would be to buy puts.

II. One way to hedge your position would be to write calls.

III. If major stock price declines are likely, hedging with puts is probably better than hedging

with short calls.

A) I only

B) II only

C) I and III only

D) II and II only

E) I, II, and III

5. If a stock price increases, the price of a put option on the stock will __________ and the price

of a call option on the stock will __________.

A) Decrease; decrease

B) Decrease; increase

C) Increase; decrease

D) Increase; increase

E) None of the above

6. The current stock price of Johnson & Johnson is $64, and the stock does not pay dividends.

The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation of

J&J’S stock is 20%. You want to purchase a call option on this stock with an exercise price of

$55 and an expiration date 73 days from now. (Assuming there are 365 days in a year)

Using the Black-Scholes OPM, the call option should be worth __________ today.

A) $0.01

B) $0.08

C) $9.26

D) $9.62

E) $6.92

7. stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an

exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost

$1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe

the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced

puts, you should _________

A) Buy the call and sell the put

B) Write the call and buy the put

C) Write the call and buy the put and buy the stock and borrow the present value of the

exercise price

D) Buy the call and buy the put and short the stock and lend the present value of the

exercise price

E) None of the above

8. The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis

Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of $40

and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp.

stock with an exercise price of $40 and an expiration date 6 months from now should be

worth __________ today.

A) $0.05

B) $0.14

C) $2.00

D) $3.95

E) $4.36

9. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55

at contract expiration. The farmer harvested 12,500 bushels of corn. The farmer sold futures

contracts on 10,000 bushels of corn. The remaining bushels were sold in the market at the

same date as the futures contracts expire. At expiration, what is the farmer's proceeds from

the sale of corn?

A) $27 500

B) $31 875

C) $33875

D) $35 950

E) None of the above

10. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset

with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill

with a rate of return of 6%. __________ of your complete portfolio should be invested in the

risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

A) 100%

B) 90%

C) 45%

D) 10%
11. You put half of your money in a stock portfolio that has an expected return of 14% and a

standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an

expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a

correlation of 0.55. The standard deviation of the resulting portfolio will be

A) more than 18% but less than 24%

B) equal to 18%

C) more than 12% but less than 18%

D) equal to 18%

12. Consider two perfectly negatively correlated risky securities, A and B. Security A has an

expected rate of return of 16% and a standard deviation of return of 20%. B has an expected

rate of return of 10% and a standard deviation of return of 30%. The weight of security B in

the minimum-variance portfolio is _________.

A) 10%

B) 20%

C) 40%

D) 60%

13. A stock has a correlation with the market of 0.45. The standard deviation of the market is

21%, and the standard deviation of the stock is 35%. What is the stocks beta?

A) 1

B) 0.75

C) 0.6

D) 0.55
14. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected

return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25.

Within the context of the capital asset pricing model, _________.

A) SDA Corp stock is under-priced

B) SDA Corp stock is fairly priced

C) SDA Corp stocks alpha is -0.75%

D) SDA Corp stocks alpha is 0.75%

15. An investor has a long-time horizon and desires to earn the market rate of return. However,

the investor will need to withdraw funds each year from her investment portfolio. The biggest

constraint a planner would face with this client is a ___________ constraint.

A) tax

B) risk tolerance

C) liquidity

D) social

16. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to

A) calculate two covariances and one tri-variance.

B) calculate only two covariances

C) calculate three covariances

D) average the variances of the individual stocks

17. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%,

while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A
and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the

portfolio. The standard deviation of the return on this portfolio is _________.

A) 23%

B) 19.76%

C) 18.45%

D) 17.67%
TEST 2 – 2016 (MAKE-UP)
1. The price of a two-month AppleToffee put option with an exercise price of R45 is R7. The current price of
Apple&Toffee stock is R40 per share. The put holder exercises the put at expiration when the price of
Apple&Toffee stock is R35. What is the profit per share to the put holder?

A. R3
B. R2
C. R12
D. R10
E. None of the above.

2. Which of the following is correct concerning Put-Call Parity, assuming the underlying stock does not pay
dividends?

A. Call price must be less than put price.

B. Call price must be greater than put price.
C. C + P = S0 + Xe -rT
D. C - S0 = P - Xe -rT
E. None of the above.

3. The spot price of saffron is R800 per ounce. The risk-free rate is 3% per month. The price of
the saffron futures contract that expires in 6 months should be _______.
A. R752.18
B. R824.00
C. R955.24
D. R800
E. None of the above.

4. Futures contracts exhibit convergence which means that __________.

A. Investing in futures contracts is a zero-sum game.

B. The profit from long positions and short positions must be equal at maturity.
C. The net position of the futures clearinghouse is zero.
D. The futures price and spot price of an asset must be equal at maturity.
E. None of the above.

5. Which one of the following statements regarding bonds is FALSE?

A. Callable bonds allow bondholder to exchange bond for specified number of common
stock shares.
B. Treasury STRIPS are regular Treasury bonds that have been converted into zero-
coupon bonds.
C. Floating-rate bonds are bonds with coupon rates periodically reset according to a
specified market rate.
D. Puttable bonds allow bondholders to choose to exchange for par value or to extend
for given number of years (if favourable to do so).
E. None of the above.
 6. Suppose you purchase one Texas Instruments August 75 call contract quoted at R8.50 and
write one Texas Instruments August 80 call contract quoted at R6. If, at expiration, the price
of a share of Texas Instruments stock is R79, your profit would be _________.

A. R150
B. R400
C. R600
D. R1,850
E. R870

7. The tax burden of the firm is .4, the interest burden is .65, the return on assets is .045, the
asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

A. 13.33%
B. 5.68%
C. 12.2%
D. 1.58%
E. None of the above.

TEST 2 -2017

1. Eleven invests in Eggos Ltd stock which has a dividend yield 0.5% and a current price of $120.
If the T-bill rate is 3%, what is the futures price if the maturity of the contract is 3 years?

A. $123.60
B. $129.23
C. $131.13
D. $123.00
E. None of the above

2. A South African portfolio manager has a Spanish bond portfolio that matures in 6 months.
What action can she take to reduce foreign exchange rate risk?

A. Buy euro futures.

B. Buy euro call options.
C. Match the portfolio’s duration with the investment horizon.
D. Sell euro futures.
E. None of the above

3. Which of the following would result in an increase in the value of a call option?
A. An increase in the interest rate, r f
B. An increase in the exercise price, X
C. An increase in dividend payouts
D. A decrease in time to expiration, T
E. None of the above
4. The current stock price of Vulcan Trading is R120 and the stock does not pay dividends. The
instantaneous risk-free rate of return is 10%. The instantaneous standard deviation is 30%.
You wish to purchase a call option on this stock with an exercise price of R95, and an
expiration date of 3 months from now.
Using the Black-Scholes OPM, the call option price is closest to:

A. R13.70
B. R53.32
C. R27.61
D. R92.65
E. None of the above

5. Suppose a portfolio is currently valued at R100 million. An at-the-money put option on the
portfolio has a hedge ratio of -0.6.

A. The option’s value swings R0.6 for every rand change in portfolio value.
B. The option’s value swings -R0.6 for every rand change in portfolio value.
C. The option’s value swings R0.4 for every rand change in portfolio value.
D. The option’s value swings -R0.4 for every rand change in portfolio value.
E. None of the above

6. Suppose the current stock price of JuJube Inc is ¥100, the risk-free interest rate is 5%, the
standard deviation is 25%, the time to maturity is 4 months, the strike price is ¥85, and the
price of a call option is ¥25.20. Using the put-call parity relationship, the put option price is
closest to
A. ¥25.20
B. ¥16.40
C. ¥5.20
D. ¥8.80
E. None of the above

7. The price of a two-month Robot&Elliot put option with an exercise price of $39 is $8. The
current price of the stock is $30 per share. The put holder exercises the put at expiration
when the price of the stock is $27. What is the profit (or loss) per share to the put holder?
A. $8
B. $4
C. $1
D. -$12
E. None of the above
8. You just purchased a three-month VB call option (exercise price $85) and a three-month VB
put option (exercise price $85). The call premium is $7 and the put premium is $2. Your
maximum potential loss from this position is _____. (Assume each contract is for 100 shares
of stock.)
A. $200
B. $700
C. $500
D. $900
E. None of the above

9. Suppose an investor believes the stock of Fenty Ltd will move significantly in price but is
uncertain about the direction of the move. What option strategy should she take out so that
she does well regardless of whether Fenty Ltd’s stock makes an extreme upward or
downward movement?
A. Covered Call
B. Protective Put
C. Time Spread
D. Straddle
E. None of the above

10. The yield curve shows at any point in time

11.
A. the relationship between the yield on a bond and the duration of the bond
B. the relationship between the coupon rate on a bond and time to maturity of the bond.
C. the relationship between yield on a bond and the time to maturity on the bond.
D. All of the options
E. None of the above