BF2201/2219, Fall 2022 – Homework 1

Due September 3, 2022

1. Money market securities are characterized by:

[I] Short term debt investments
[II] High Liquidity
[III] Low rates of return

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

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

[I] Negligible risk of default
[II] Pays regular coupons
[III] Has a maturity longer than a year

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

3. Which of the following orders will be triggered by an increase in price:

[I] Stop-buy
[II] Stop-sell
[III] Limit-buy
[IV] Limit-sell

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

4. Which of the following indexes does NOT require rebalancing?

[I] Value-weighted index

[II] Price-weighted index
[III] Equally-weighted

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

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

[I] Losses are unlimited.

BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

[II] The investor earns any dividend pay-out during the holding period.
[III] The investor needs not put up cash upfront.

A. I only
B. II only
C. I and II
D. III only
E. None of the above

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

[I] Losses are unlimited.

[II] The investor may incur a net loss even when the price of the underlying security decreases.
[III] Short selling is banned on the SGX.

A. I only
B. II only
C. I and II
D. III only
E. None of the above

7. You short-sell 10 shares of Amazon.com, Inc today. The stock price is $2,000 per share. What is your
maximum possible gain of this trade when you cover your position in the future (ignoring transactions costs)?

A. $2,000
B. $10,000
C. $20,000
D. $100,000
E. Unlimited

8. On January 1, you sold short 200 shares of Walt Disney Co at $150 per share and pledged 50% initial margin.
On March 1, a dividend of $10 per share was paid. On June 1, you closed your position buying 200 shares at
$170 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 400 shares of AT&T at $35 per share. You post $7000 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. $29.17
B. $37.5
C. $39.25
D. $43.75
BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

E. None of the above

10. On Jan 1, you sold short 400 shares of Microsoft at $30 per share. You post $7200 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 60% margin?

A. $1880
B. $2400
C. $3360
D. $3840
E. None of the above

11. You purchased 500 shares of common stock at $5 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 $8 per share. Ignore interest
on margin. (Please round to the nearest %.)

A. 50%
B. 60%
C. 80%
D. 120%
E. None of the above

12. You sell short 400 shares of Apple that are currently selling at $200 per share. You post the 60% 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. $240
B. $248
C. $256
D. $260
E. None of the above

13. You short-sell 150 shares of Lake Bled Fishing Co., now selling for $45 per share. To limit your loss to
approximately $3,000, you should place a stop-buy order at ____. (Assume the market is liquid.)

A. $55.00
B. $60.00
C. $65.00
D. $70.00
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 $12. 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%
BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

B. 2%
C. 6%
D. 12%
E. None of the above

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 $51.25. Assume no dividends are paid. Calculate your rate of return and the
final margin %.

A. rate of return=0%, final margin=48.8%

B. rate of return=0%, final margin=50%
C. rate of return=-5%, final margin=48.8%
D. rate of return=-5%, final margin=50%
E. None of the above

16. An investor invests 60% of her wealth in the market portfolio with an expected rate of return of 12% and a
variance of 0.01, and she puts the rest in Treasury bills that pay 2% per year. 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

China 0.21 0.45

Europe 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 -12% 0.15

BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

Normal 6% 0.60

Expansion 20% 0.25

A. 4.7%
B. 6.8%
C. 8.4%
D. 10.4%
E. None of the above

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 -12% 0.15

Normal 6% 0.60

Expansion 20% 0.25

A. 6.9%
B. 8.9%
C. 9.8%
D. 14.4%
E. None of the above

20. Investors with different degree of risk aversion will have different ______.

[I] Expected return

[II] Standard deviation of portfolio return
[III] Optimal Risky portfolio

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

21. Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor
_______.

[I] Is normally risk neutral

[II] Requires a risk premium to take on risk
[III] Will not lose money
BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

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

22. You are an investment advisor for Alan and Jimmy. You've helped 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 has lower expected returns than Jimmy’s

[II] Alan is less risk-averse than Jimmy
[III] Alan must hold a positive position in the risky asset

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

23. Amy has a risk-aversion A=2. The risk-free rate is 5%. The risky portfolio has an expected return =20% and
standard deviation=30%. What % of her complete portfolio should she invest in the risky portfolio?

A. 14.7 %
B. 25.0 %
C. 50.0 %
D. 83.3 %
E. None of the above

24. 40% of Emily’s complete portfolio is invested in the risk-free asset, while 60% is invested in the risky portfolio.
The risk-free rate is 5%. The risky portfolio has a risk premium = 10% and standard deviation=40%. What is
Emily’s risk aversion A=?

A. 0.42
B. 0.63
C. 1.04
D. 1.56
E. None of the above
BF2201/2219, Fall 2022 – Homework 1
Due September 3, 2022

Answers:

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