CAPM What are the advantages of the index model compared to the Markowitz procedure for obtaining an efficiently diversified portfolio What are its disadvantages The advantage of the index model, compared to the Markowitz procedure, is the vastly reduced number of estimates required. In addition, the large number of estimates required for the Markowitz procedure can result in large aggregate estimation errors when implementing the procedure. The disadvantage of the index model aris from the model's assumption that return residuals are uncorrelated. This assumption will be incorrect if the index ud omits a significant risk factor.
What is the basic trade-off when departing from pure indexing in favor of an actively managed portfolio The trade-off entailed in departing from pure indexing in favor of an actively managed portfolio is between the probability (or the possibility) of superior performance against the certainty of additional management fees.
How does the magnitude of firm-specific risk affect the extent to which an active investor will be willing to depart from an indexed portfolio The answer to this question can be en from the formulas for w 0 (equation and w (equation . Other things held equal, w 0 is smaller the greater the residual variance of a candidate ast for inclusion in the portfolio. Further, we e that regardless of beta, when w 0 decreas, so does w. Therefore, other things equal, the greater the residual variance of an ast, the
smaller its position in the optimal risky portfolio. That is, incread firm-specific risk reduces the extent to which an active investor will be willing to depart from an indexed portfolio.
The concept of beta is most cloly associated with: d) Systematic risk
Beta and standard deviation differ as risk measures in that beta measures:b) Only systematic risk, while standard deviation measures total risk.
Assume the correlation coefficient between Baker Fund and the S&P 500 stock index is .70. What percentage of Baker Fund's total risk is specific .,
nonsystematic) The R^2 of the regression is .70^2
= .49Therefore, 51% of total variance is unexplained
by the market; this is nonsystematic risk.
The correlation between the Charlottesville
International Fund Market Index is . The expected
return on the EAFE Index is 11%, the expected return
is 9%, and the risk-free return is 3%. beta of
Charlottesville International9 = 3 + β (11 − 3) ==> β =
INTEREST RATE AND TERM STRUCTURE
Treasury bonds paying an 8% coupon rate with
miannual payments currently ll at par value.
What coupon rate would they have to pay in order to
ll at par if the bonds instead paid their coupons
annually The effective annual yield on the miannual
coupon bonds is % = (1+8%/2)2 - 1. If the annual
coupon bonds are to ll at par, then they must offer
warranty
the same yield, which will require an annual coupon
rare of %.
Two bonds have identical times to maturity and
coupons rates. One is callable at 105, the other at 110.
Which should have the higher yield to maturity Why
The bond callable at 105 (110) requires the issuing
firm to pay bondholders 105% (110%) of the bond’s
face value if the firm decides to call the bond. The
first bond should therefore ll for a lower price
becau the call provision is more valuable to the
firm that issued i t. Therefore, that bond’s yield to
maturity should be higher than that of the bond
callable at 110.
Consider a newly issued bond that pays its coupon
once annually, and who coupon rate is 5%; the
maturity is 20 years, and yield to maturity is 8%.(a)
The initial price is: P0 = $, for [n = 20; PMT = 50; FV =
淡泊的意思
1000; i = 8] The next year’s price is: P1 = $, for [n = 19;
限制英语
PMT = 50; FV = 1000; i = 7] Thus, the holding period
return (HPR) is given by: HPR = [$50 + ($ – $]/$ =>
HPR = = % (b) Using OID tax rules, the price path of
the bond under the constant yield method is
obtained by discounting at an 8% yield, and reducing
maturity by one year at a time: Constant yield
prices: P0 = $ P1 = $ (implies implicit interest over
first year = $ P2 = $ (implies implicit interest over
cond year = $ Tax on explicit plus implicit interest in
the first year = x ($50 + $ = $ • Capital gain in the
first year = actual price –constant yield price
= $ –= $ • Tax on capital gain = x $ = $ • Total
taxes = $ + $ = $ (d) The after-tax HPR = [$50 +
($$-$]/$ = = %
Assume you have a one-year investment horizon and
are trying to choo among three bonds. All have the
same degree of default risk and mature in 10 years.
The first bond is a zero-coupon bond that pays $1,000
at maturity. The cond one has an 8% coupon rate
and pays the $80 coupon once per year. The third
bond has a 10% coupon rate and pays the $100
coupon once per year.
You have the following information about a
convertible bond issue: Burroughs Corporation 7 ¼%
Due 8-1-2010(a) Market conversion price = value if
converted into stockjunior是什么意思
= market price of common stock x conversion ratio
= x $66 = $ (b) Conversion premium = Bond price –
value if converted into stock
= $1020 –x $66) = $1020 - $ = $ Thus, the
conversion premium per share = ($ = $ (c) Current
yield = (coupon/price) = ($$1020) = = %
(d) Dividend yield on common = (dividend per
share/price) = ($$66) = %
The yield to maturity on one-year zero-coupon bonds
is currently 7%, and the ytm on two-year zeros is 8%.
The Treasury plans to issue a two-year maturity
coupon bond, paying coupons once per year with a
coupon rate of 9%. The face value of the bond is $100.
(a) P = [(9/ + (109/] = $
(b) YTM = %, which is the solution to: 9 PA(y,2) + 100
PF(y,2) = (c) The forward rate for next year, derived
from the zero-coupon yield curve, is approximately
9%: 1 + f2 = [] = , which implies f 2 = %. Therefore, using an expected rate for next year of r2 = 9%, we can find that the forecast bond price is P = (109/ = $100
(d) If the liquidity premium is 1%, then the forecast interest rate is: E[r2] = f2 – liquidity premium = 9% - 1% = 8%, and you forecast the bond to ll at: (109/ = $.
. Treasuries reprent a significant holding in many pension portfolios. You decide to analyze the yield curve for . Treasury Notes(a) 1000 = [70/(1 + y1)] + [70/(1 + y2)2] + [70/(1 + y3)3] + [70/(1 + y4)
4] + [1070/(1 + y5)5] (b) The spot rate at 4 years is %. Therefore, % is the theoretical yield to maturity for the zero coupon . Treasury note. The price of the zero coupon at % is the prent value of $1000 to be received in 4 years. Annual compounding: PV = [1000/=$ compounding, we would have: PV = [1000/(1 + 2))8] = $
The yield to maturity on one-year-maturity zero coupon bonds is 5% and the yield to maturity on two-year-maturity zero coupon bonds is 6%. The yield to maturity on two-year-maturity coupon bonds with coupon rates of 12% (paid annually) is %. The price of the coupon bond, bad on its yield to maturity, is: 120 PA%, 2) + 1000 PF%, 2) = $1,. If the coupons were stripped and sold parately as zeros, then bad on the yield to maturity of zeros with maturities of one and two years, the coupon payments could be sold parately for [120/] + [1,120/] = $1, arbitrage strategy is to buy zeros with face values of $120 and $1,120 and respective maturities of one and two years, and simultaneously ll the coupon bond. The profit equals $ on each bond.
EVALUATION An investor buys three shares of XYZ at the beginning of 1991, buys another two shares at the beginning of 1992, lls one share at the beginning of 1993, and lls all four remaining shares at the beginning of 1994.(a) What are the arithmetic and geometric average time-weighted rates of return for the investor a ) Time-weighted average returns are bad on year-by-ye
ar rates of return. Year Returnhunt
[(capital gains + dividend)/price)] 1991-1992
[(110-100) + 4]/100 = 14%,1992-1993 [(90 –110) +
4]/110 = % 1993-1994 [(95 –90) + 4 ]/90 = 10%
Arithmetic mean = % Geometric mean = % (b)Time
Cash Flow Explanation0 -300 Purcha of 3 shares at
$100 -208 Purcha of 2 shares at $110 less
dividend income on 3 shares 110 Dividends on 5
shares plus sale of one share at price of $90 396
Dividends on 4 shares plus sale of 4 shares at price of
$95 return = Internal rate of return of cash-flow
ries = %
Consider the two (excess return) index-model
regression results for Stocks A and B. The risk-free
rate over the period was 6%, and the market’s
average return was 14%. rA - rf = 1% + (rM -
rf);R-square = ; residual std deviation , s(eA)
=%;standard deviation of (rA -rf) = %.(i) a is the
intercept of the regression 1% 2%(ii) Appraisal ratio =
a/s(e) (iii) Sharpe measure = (rp – rf)/ (iv) Treynor
measure = (rp –rf)/ b Which stock is the best
choice under the following circumstancesi. This is the
only risky ast to be held by the investor(a) (i) If this
is the only risky ast, then Sharpe’s measure is the
one to ’s is higher, so it is preferred.(ii) If the portfolio
is mixed with the index fund, the contribution to the
overall Sharpe measure is determined by the
appraisal ratio. Therefore, B is preferred. (iii) If it is
one of many portfolios, then Treynor’s measure
counts, and B is the following information
regarding the performance of a money manager in a
recent month.(a) What was the mana ger’s return in
the month What was his or her overperformance or
2012福建高考英语underperformance(a) Bogey: x % + x % + x %
= %Actual: x % + x % + x %
= %Underperformance: %
EFFICIFENCY OF SECURLTIES you believe in the
________ form of the EMH, you believe that stock pr
ices reflect all relevant information including historica
l A) of the EMH typically advocateB) investing in an in
wrapperdex fund. C) a passive investment you believe in the
_______ form of the EMH,you believe that stock price
s reflect all information that can be derived by examin
ing marketC) you believe in the _________ form of th
e EMH, you believe that stock prices reflect all availab
le information, including information that is available
only to insidersB) you believe in the reversal effect, y
ou should C) buy stocks this period that performed po
orly last Technical analystsFocus more on past
price movements of a firm's stock than 7.
deactivate
________ above which it is difficult for the market to
riB) Resistance level is a the return on a stock beyo
nd what would be predicted from market movements
alone. A) An excess economic return is C) An abnorm
al return is debate over whether markets are efficien
t will probably never be resolvedD) all of the above. c
ommon strategy for passive management isA) creatin
g an index fund10.
Proponents of the EMH think technical analysts E) are
wasting their November 22, 2005 the stock price of
Walmart was $ outperforming, buying 12.
A market decline of 23% on a dayD) would
not be, it was not a clear respon to macroeconomic
.The weakform of the efficient market
hypothesis asrts thatB) future changes in stock pric
es cannot be predicted from past pricesC) technicians
cannot expect to outperform the support level is the
price range at which a technical analyst would expect
theC) demand for a stock to increa substantially 15.
The weak form of the efficient market
hypothesis contradictsD) technical analysis, but is sile
nt on the possibility of basic assumptions of technical
美少女的谎言analysis are that curity prices adjust C) gradually to
new information and market prices are determined b
y the interaction of supply and demand 17.
In an efficient market the correlation
coefficient betweenC) zero 18.In an efficient market
orca
one would expect the price of Florida Orange's stock t
o A) drop immediately. 19.Matthews Corporation
has a beta of . B) good news about Matthews was an nounced yesterday 20.You obrve that Nicholas had an abnormal return of % yesterday.
C) investors expected the earnings increa to be larg er than what was actually announced. 21.If stock prices follow a random walkD) price changes are mai n difference between the three forms of market effici encyD) the definition of information differs. 23. Chartists practice A) technical analysis.
24the best strategy for a small investor with a portfolio worth $40,000 is probably to E) invest in mu tual funds24.Google has a beta of . B) good news
about Google was announced yesterday 25.Music Doctors has a beta of . A) bad news about Music Do ctors was announced .QQAG has a
beta of .C) no significant news about QQAG was announced .QQAG just announced
yesterday that its 4th quarterC) investors expected th e earnings increa to be larger than what was
actuall y announced. 28.LJP Corporation just announced yesterdayD) investors view the international joint ven ture as good .Music Doctors just announced yesterday that its 1st quarter C) investors expected th e sales increa to be larger than what was actually a nnounced. Food and Drug Administration (FDA) just a nnounced yesterdayD) the approval was already antic ipated by the market professor finds a stocktrading r ule that generatesB) lection bias 32.
At freshman orientation, 1,500 students areD) the luc ky event issue 33.If you believe in the reversal effect , you should C) ll stocks this period that performed well last .Tests of rial correlation in stock returns 35.Changes in variance are somewhat predictable from past data36.accounting anomalies37.Volatility effect 38.firms that are owned by few institutions tend to have higher returns 39.Returns on clod-end funds that trade at a discount tend to hnical analysis, but is silent on the possibility of successful fundamental analysis41. curity prices are ldom far above or below their justified level42.future price changes are
uncorrelated with past price changes43.Earnings
announcement reactions take considerable time44.
Changes in variance are somewhat predictable from
past data.
SECURITY ANALYSIS AND STOCK
The Digital Electronic Quotation System (DEQS)
The MoMi Corporation’s cash
FI Corporation.
Xyrong Corporation
DEQS Corporation
The formula for a multistage DDM
Duo Growth Co.
Generic Genetics (GG) Corporation
CPI Corporation
Part A risk and return
Rates of Return for Different Holding
Periods:
Zero Coupon Bond, Par
= $100, T=maturity, P=price, r f(T)=total
risk free return
HPR = Holding Period Return
P0= Beginning
price P1= Ending
price D1 = Dividend
during period
one
Estimated Variance =
expected value of
squared deviations
Sharpe Ratio for Portfolios
CAPM Risk premium (Rm-Rf), Market index (risk) decide by residual stander alpha of regression, fraction decide by R-squire, firm special-risk decide by residual stander deviation Sharp ratio=.
Reward-to-risk ratio for investment in market portfolio:
interest rate and term structure
Total value=+
Forward Rates from Obrved Rates=
bond portfolio management
=Required Return
Intrinsic
value=
(Ed=dividend, Ep=price)
