MBA 641 Midterm PRACTICE Sp 13 KEY.docx

MBA 641MOCK Midterm Examination KEYSpring 2012MBA 641: Investments & Portfolio ManagementMidterm Examination PRACTICEJanuary 24, 2013Name:_KEY_Instruction: Please write legibly. You need to show steps to get full credit.Part A: Multiple Choice (2 points each, total 40 points). Please circle the right answer. 1.55.The efficient markets hypothesis suggests that _.A.active portfolio management strategies are the most appropriate investment strategiesB.passive portfolio management strategies are the most appropriate investment strategiesC.either active or passive strategies may be appropriate, depending on the expected direction of the marketD.a bottom up approach is the most appropriate investment strategyDifficulty: Easy2.46.In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _.A.automaticallyB.by adjusting the divisorC.by adjusting the numeratorD.by adjusting the market value weightsDifficulty: Medium3. 53.Ownership of a call option entitles the owner to the _ to _ a specific stock, on or before a specific date, at a specific price.A.right, buyB.right, sellC.obligation, buyD.obligation, sellDifficulty: Easy4. 73.You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an _.A.value weighted indexB.equal weighted indexC.price weighted indexD.bond price indexDifficulty: Hard5. 74.In a _ index changes in the value of the stock with the greatest market value will move the index value the most everything else equal.A.value weighted indexB.equal weighted indexC.price weighted indexD.bond price indexDifficulty: Medium6. 12.A _ drop in the Dow Jones Industrial Average would stop trading for the day.A.10%B.20%C.30%D.40%Difficulty: Medium7. 23.If an investor places a _ order the stock will be sold if its price falls to the stipulated level. If an investor places a _ order the stock will be bought if its price rises above the stipulated level.A.stop-buy; stop-lossB.market; limitC.stop-loss; stop-buyD.limit; marketDifficulty: Easy8. 36.The _ system enables exchange members to send orders directly to a specialist over computer lines.A.FAXB.Direct PlusC.NASDAQD.SUPERDOTDifficulty: Easy9. 42.The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the _.A.market spreadB.bid-ask spreadC.bid-ask gapD.market variationDifficulty: Easy10. 54.You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?A.$50B.$150C.$10,000D.unlimitedThere is no upper limit to the price of a share of stock; therefore no upper limit the price you will have to pay to replace the 200 shares of Tuckerton.Difficulty: Easy11. 20.The primary measurement unit used for assessing the value of ones stake in an investment company is _.A.Net Asset ValueB.Average Asset ValueC.Gross Asset ValueD.Total Asset ValueDifficulty: Easy12. 30.Investors who wish to liquidate their holdings in a unit investment trust may _.A.sell their shares back to the trustee at a discountB.sell their shares back to the trustee at net asset valueC.sell their shares on the open marketD.sell their shares at a premium to net asset valueDifficulty: Easy13. 44.Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called _.A.income fundsB.balanced fundsC.asset allocation fundsD.index fundsDifficulty: Easy14. 3.If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the _.A.geometric average returnB.arithmetic average returnC.dollar weighted returnD.index returnDifficulty: Medium15. 26.The reward/variability ratio is given by _.A.the slope of the capital allocation lineB.the second derivative of the capital allocation lineC.the point at which the second derivative of the investors indifference curve reaches zeroD.portfolio excess returnDifficulty: Easy16. 22.Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares?A.$12.00B.$9.00C.$10.00D.$1.00Difficulty: Easy17. 48.A bond issued by the State of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of _.A.4.50%B.7.25%C.8.68%D.none of the aboveDifficulty: Medium Feedback: 8.68% = 6.25%/(1 - 0.28)18. 70.Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million and $150 million respectively. If you were to construct a price-weighted index of the three stocks what would be the index value?A.300B.39C.43D.30Index = (12 + 75 + 30)/3 = 39Difficulty: Medium19. 74.An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?A.$14.57B.$15.95C.$17.55D.$16.49Difficulty: Medium20. 38.If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?A.5.48%B.8.74%C.9.00%D.12.00%Difficulty: MediumPart B: Problems (total 60 points total) I. Pricing T-Bill (10 points)26.A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value an investor could buy this bill forA.$10,000.00B.$9,878.50C.$9,877.00D.$9,880.16Difficulty: Hard-II.Return Calculation: Margin Purchase and Short Sell (20 points)Please do two of the following problems57.You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below _. (Assume the stock pays no dividends and ignore interest on the margin loan.)A.$26.55B.$35.71C.$28.95D.$30.77Difficulty: Hard79.An investor puts up $5,000 but borrows an equal amount of money from their broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share and in one year the investor sells the stock for $28. The investors rate of return was _.A.17%B.12%C.14%D.19%Difficulty: Hard86.You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends)A.10.00%B.20.00%C.6.67%D.15%Difficulty: Hard-III.Risk and Return of a portfolio (10 points)52.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 portfolios expected rate of return and standard deviation are _ and _ respectively.A.10.0%, 6.7%B.12.0%, 22.4%C.12.0%, 15.7%D.10.0%, 35.0%Difficulty: MediumIV.Asset Allocation (20 points)You invest $1,000 in a complete portfolio. The complete portfolio is composed of