1. Shares outstanding (St), stock prices (Pt), and Dividends (Dt+1) for assets A and B are given below. All dividends are paid out at the end of the year, ... [Show More] 12/31/2017. Asset B performed a 1:2 inverse stock split at the beginning of the year, 01/01/2017, where two old shares were combined into one new share. What is the value weighted portfolio return?
2. You regress 5-year excess returns on the dividend yield, i.e. you run the regression
RStocks − RT −bills = α + β • Dt/Pt + εt+5
Your OLS estimates are αˆ = −0.1 and βˆ = 13.6. If the current dividend yield equals
0.03, what is your forecast of the 5-year excess return today?
3. Market timing is possible based on which of the following asset allocation rules / portfo- lios?
4. The relevant measure of the risk for your overall portfolio is
5. If you believe that the value effect represents an anomaly, you should
6. An American call option with a strike price of $45 and three month to maturity...
7. An annual coupon bond with a coupon rate of 5% has a par value of $1,000, matures in 2 years, and is selling today at $991.50. The current yield on this bond is .
8. A European call option with a maturity of one year and a strike price of $60 is selling for $9.06. A European put option with the same maturity and strike price is selling for
$5.58. The underlying trades at $62. In the absence of arbitrage, what is the one year risk-free rate? Assume annual compounding.
1. You purchase a call option with a strike price of $50 and a put option with a strike price of $30, both on the same underlying stock and with identical maturities. Draw a payoff diagram for this strategy, i.e. plot the strategy’s payoff (not it’s profit!) as a function of the future stock price. Label all relevant points on the axes with the appropriate numbers. (No explanation is necessary for this question, just a plot.)
2. You are looking at a mutual fund that is rated by Morningstar. The rating agency states it is a large growth fund. You perform your own analysis, and find that the fund has a Fama-French alpha of α = 2.8% (t-stat= 3.3) a market beta of βM = 1.05 (for the hypothesis H0 : βM = 1, you find t-stat= 0.7) a size beta βSMB = −0.3 (t-stat= −2.1), and a value beta βHML = 0.4 (t-stat= 3.0). Do your results support Morningstar’s analysis?
3. True or False (Explain): Two assets that have identical expected cash flows must have the same price.
4. True or False (Explain): The yield curve is currently flat at 5%. You expect rates of all maturities to increase by 2% over the next year. A strategy that buys short-term bonds and sells long-term bonds will generate positive returns if the anticipated increase in yields occurs.
You are valuing an European put option on MSFT using the binomial tree method with 2 periods (three points in time: 0, 1, and 2). The underlying currently trades at $50 and it has an annual volatility of 30%. The option has three month to maturity and a strike price of $48. The (continuously compounded) risk-free rate equals 3% per year. Note:
1. Returns of all assets in the economy are exposed to two risk factors, f1 and f2. Both factors have mean zero, i.e. E[f1] = E[f2] = 0. You are able to trade in three well- diversified portfolios whose returns are given by
rA =0.04 + 2f1 − 2f2 rB =0.03 − 1f1 + 2f2 rC =0.11 + 3f1
You are also able to buy or sell up to $1000 a risk-free asset with a return of 3%. Is there an arbitrage opportunity? If so, describe in detail how to exploit it. Hint: You need to determine the synthetic risk-free rate by forming a risk-free portfolio of A, B, and C.
2. It is 4/30/2018 and you are assembling a risk parity portfolio for May 2018 that consists of two assets, A and B. To find portfolio weights, you estimate the standard deviation of each asset based on the daily net returns observed during April 2018, which were
Day 1 2 3 4 5 6 • • • 21
Asset A 0.42 0 0 0 0 0 • • • 0
Asset B -0.2 -0.2 0.2 0.2 0 0 • • • 0
The symbol “ ” indicates that both assets had daily net returns of zero on days 5
3. On 1/1/2016, you purchased a three year annual coupon bond with a coupon rate of 6%, a face value of $1,000, and a yield to maturity of 6%. One year later, on 1/1/2017, the 1-year spot rate equals 4%, while the 2-year spot rate equals 5%. On this date, you sell the bond right after collecting its coupon. What is the return on your investment? [Show Less]