BF2201, Fall 2018 – Homework 1

Due September 8, 2018

1. Which of the following securities are considered NOT a money market instrument:
[I] US Treasury Bills
[II] A diversified portfolio of long-term corporate bonds
[III] SGS T-Bills

A. I only
B. II only
C. I and II only
D. II and III only
E. None of the statements are true

2. Which of the following statements are FALSE of a standard Treasury Bill:

[I] Is safe because it has the same payout/payment in a bull market or a bear market
[II] Pays a fixed amount of coupon payments
[III] Protects against inflation

A. I only
B. I and II only
C. II and III only
D. III only
E. None of the statements are true

3. If an investor places a _________ order the stock will be bought if its price increase to the stipulated level. If an
investor places a __________ order the stock will be sold if its price rises to the stipulated level.

A. stop-buy; limit sell

B. market; limit sell
C. stop-loss; stop-buy
D. limit buy; market
E. limit buy; stop-loss

4. Jonas wants to have the same sensitivity to changes in large market capitalization stocks as changes in small
market capitalization stocks. He should invest in a _____________index.

A. Value-weighted
B. Price-weighted
C. Equally-weighted
D. There is no common index construction that satisfies Jonas.

5. Which of the following are FALSE statements regarding buying securities using margin trading?

[I] Losses are unlimited.

[II] Buying on margin magnifies gains, but not losses.
[III] The broker requires collateral from the margin trader.

A. I only
B. I and II
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

C. I, II and III
D. III only
E. II and III

6. Which of the following statements are TRUE about short selling?

[I] The short-seller must pay out any issued dividends to the party that lent the shares.
[II] The broker does not require any form of collateral from the short-seller.
[III] It has been banned in the U.S. during the Financial Crisis

A. I only
B. I and II only
C. I and III only
D. II and III only
E. I, II and III

7. You short-sell 150 shares of Tuckerton Trading Co. today. The stock price is $200 per share. What is your
maximum possible gain of this trade when you cover your position in the future (ignoring transactions costs)?

A. $10,000
B. $30,000
C. $50,000
D. $100,000
E. Unlimited

8. On January 1, you sold short 2500 shares of OCBC at $10 per share and pledged 50% initial margin. On March
1, a dividend of $1.50 per share was paid. On June 1, you closed your position buying 2500 shares at $12 per
share. What is your rate of return?

A. -30%.
B. -35%.
C. -40%.
D. -70%
E. None of the above

9. On Jan 1, you sold short 500 shares of IBM at $14 per share. You post $4200 to the margin account. On April 1,
you received a margin call on this trade. Assume the minimum margin requirement is 40%, what is the price of
the stock that triggered the margin call?

A. $13.3
B. $15
C. $16
D. $16.6
E. None of the above

10. On Jan 1, you sold short 500 shares of IBM at $20 per share. You post $5000 to the margin account. On April 1,
you received a margin call on this trade. Assume the minimum margin requirement is 25% and you receive a
margin call. What amount must you top-up to restore to a 50% margin?
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

A. $1000
B. $1500
C. $2000
D. $3000
E. None of the above

11. You purchased 400 shares of common stock for $8 per share on margin. The initial margin is 50%, and the
stock pays no dividend. Your rate of return would be __________ if you sell the stock at $12 per share. Ignore
interest on margin. (Please round to the nearest %.)

A. 50%
B. 60%
C. 80%
D. 100%
E. None of the above

12. You sell short 400 shares of Google that are currently selling at $400 per share. You post the 50% margin
required on the short sale, and the maintenance margin requirement is 25%. At what price would you receive a
margin call (assume the margin call happens immediately).

A. $420
B. $450
C. $480
D. $560
E. None of the above

13. You short-sell 200 shares of Lake Tahoe Fishing Co., now selling for $60 per share. To limit your loss to
approximately $4,920, you should place a stop-buy order at ____. (Assume the market is liquid.)

A. $50.50
B. $78.20
C. $84.60
D. $99.20
E. None of the above

14. Investor X puts up $10,000 but borrows an equal amount of money from her broker to double the amount
invested to $20,000. The broker charges 8% interest on the loan. The stock was originally purchased at $10 per
share and in one year, Investor X sells the stock for $11. Investor Y does not believe in borrowing to buy shares
and invests $20,000 of his own money in the same stock. What is the difference in rate of return between
Investor X and Investor Y?

A. 0%
B. 2%
C. 4%
D. 20%
E. None of the above
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

15. You borrow $25,000 and buy 1000 shares of Facebook at $50 per share on margin. The interest on the loan is
5%. One year from now the price is still $50. Assume no dividends are paid. Calculate your rate of return and
the final margin %.

A. rate of return=0%, final margin=50%

B. rate of return=0%, final margin=47.5%
C. rate of return=-5%, final margin=50%
D. rate of return=-5%, final margin=47.5%
E. None of the above

16. An investor invests 75% of her wealth in the market portfolio with an expected rate of return of 16% and a
variance of 0.01, and she puts the rest in Treasury bills that pay 4%. What is the standard deviation of the
portfolio?

A. 4%
B. 6%
C. 7.5%
D. 10%
E. None of the above

17. Your Uncle has 100,000 SGD to invest in one fund. If he is infinitely risk-averse, which fund does he invest in?
Return St. Dev
Hong Kong 0.21 0.45
United Kingdom 0.12 0.32
United States 0.09 0.17
Treasury Bill 0.01 0

A. Hong Kong
B. Italy
C. United States
D. Treasury Bill

18. The table presents forecasts of the returns of stock market and probability of each state of the economy for next
year. Calculate the expected return.

State of Economy Return Prob. Of State

Recession -10% 0.20
Normal 6% 0.60
Expansion 25% 0.20

A. 5.2%
B. 6.6%
C. 8.4%
D. 11.2%
E. None of the above
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

19. The table presents forecasts of the returns of stock market and probability of each state of the economy for next
year. Calculate the standard deviation.

State of Economy Return Prob. Of State

Recession -10% 0.20
Normal 6% 0.60
Expansion 25% 0.20

A. 5.6%
B. 8.9%
C. 11.1%
D. 20.2%
E. None of the above

20. If Investor X’s risk aversion is less than Investor Y’s risk aversion, then _______

A. Investor X spends more money than Investor Y

B. Investor X allocates more of her wealth in risky portfolio than Investor Y
C. Investor X does not hold any risk-free asset
D. Investor X holds the same portfolio as Investor Y
E. None of the above

21. Bob is less risk-averse than Doug. Neither can buy on margin. Using the Capital Allocation Line, which
statements MUST BE TRUE?

[I] Bob may not have a positive position in the risk-free asset.
[II] Bob will invest less in the risk-free asset compared to Doug
[III] Both will hold positive positions in the risky portfolio and risk-free asset.

A. I & III
B. I & II
C. II only
D. I only
E. None of the statements must be true.

22. You are an investment advisor for Alan and Jimmy. You've help them optimally allocate their investment
portfolios along the same capital allocation line (CAL). If Alan's portfolio has a higher weight on risk-free asset
than Jimmy's portfolio, then which of the following statements MUST be true:

[I] Alan’s portfolio is located at a lower point on the CAL than Jimmy’s portfolio
[II] Alan is more risk-averse than Jimmy
[III] Alan must hold a negative position in the risky asset.

A. I
B. I and II
C. I and III
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

D. II and III
E. I, II, and III

23. Amy has a risk-aversion A=3. The risk-free rate is 6%. The risky portfolio has an expected return = 18% and
variance=16%. What % of her complete portfolio should she invest in the risky portfolio?

A. 7.5 %
B. 10.0 %
C. 12.5 %
D. 25.0 %
E. None of the above

24. 60% of Emily’s complete portfolio is invested in the risk-free asset, while 40% is invested in the risky portfolio.
The risk-free rate is 6%. The risky portfolio has a risk premium = 15% and standard deviation=40%. What is
Emily’s risk aversion A=?

A. 1.46
B. 1.56
C. 2.34
D. 3.52
E. None of the above
BF2201, Fall 2018 – Homework 1
Due September 8, 2018

Answers:

1. B
2. C
3. A
4. C
5. B
6. C
7. B
8. D
9. C
10. D
11. D
12. C
13. C
14. B
15. D
16. C
17. D
18. B
19. C
20. B
21. B
22. B
23. D
24. C