Question: Why is portfolio standard deviation not a

> What is a characteristic line, and why is it useful?

> Assuming the CAPM holds, if the expected return on a diversified portfolio lies above the CML, should an investor buy or sell the portfolio?

> Why is beta a measure of market risk for a security?

> Why is the GM return a better estimate of long run investment performance than the AM return?

> What is the difference between ex ante and ex post returns?

> Why do the income and capital gains component of the total return differ between common shares and bonds?

> State three of the most important assumptions underlying Markowitz’s notion of efficient portfolios.

> 1. Calculate the capital gain return for a stock that was purchased at $32 one year ago and is now worth $34. It paid four quarterly dividends of $1.50 per share each throughout the year. a. 9.75 percent b. 6.25 percent c. 13.50 percent d. 11.00 percent

> Why would we sometimes want to use scenario based risk measures rather than the standard deviation of actual returns over a long time period?

> What is the difference between estimating a scenario-based (probability) estimate of risk versus a historic data-based estimate of risk?

> Why is the range sometimes a poor measure of risk?

> What is the difference between diversifiable and non-diversifiable risk?

> What is naïve diversification?

> Five years ago, your dad bought 250 shares of ABC for $6 each and 300 shares of DEF for $7.50 each. He has now given you all his shares, when both stocks are trading at $8. What are the weights of the two stocks in your portfolio?

> Using the following information, calculate the expected return and the standard deviation of ABC. State of the Economy Probability ABC Stock Return (%) Depression 0.15 -5 Recession 0.2 1 Normal 0.4 6 Вoom 0.25 18

> Calculate the covariance and correlation coefficient between the two securities of a portfolio that has 60 percent in stock X (with an expected return of 40 percent and a standard deviation of 12 percent) and 40 percent in stock Y (with an expected retur

> Why is it logical to believe that international diversification will provide benefits to investors?

> You wish to combine two stocks, Encor and Maestro, into a portfolio with an expected return of 16 percent. The expected return of Encor is 2 percent with a standard deviation of 1 percent. The expected return of Maestro is 25 percent with a standard devi

> FinCorp Inc. has been using the services of San Bernadino Brokerage Company (SBBC) for the past six months. SBBC has informed FinCorp Inc. that the geometric mean monthly return was 6 percent and that over the past six months FinCorp Inc. earned 16 perce

> As an analyst for FinCorp Inc., you are responsible for many firms, including ADFC. Currently you have a “hold” recommendation on ADFC. 19 The current price of ADFC is $140. You have conducted an extensive analysis of the industry and you feel that the p

> An investor owns a portfolio of $60,000 that contains $15,000 in stock A, with an expected return of 12 percent; $20,000 in bonds, with an expected return of 8 percent; and the rest in stock B, with an expected return of 20 percent. Calculate the expect

> Calculate the ex post standard deviation of returns for the following: 50 percent, 30 percent, 20 percent, 35 percent, 55 percent.

> Calculate the annual arithmetic mean and geometric mean return on the following security, and state which method is more appropriate for the situation: purchase price = $30; first‐year dividend = $5; price after one year = $35; second‐year dividend = $5;

> At the beginning of last year you invested $24,000 in 1,500 shares of Goran Products Inc. During the year you received $3,750 as a dividend. At the end of the year you sold the shares for $15 each. Calculate your total dollar return, capital gain, percen

> At the beginning of the year you bought 300 shares of Lycel Ltd. at $84 each. During the year you received dividends of $780. At the end of the year the stock is trading for $87 and you decide to sell all your shares. Calculate your capital gain, total d

> The expected return of ABC is 16 percent, and the expected return of DEF is 27 percent. Their standard deviations are 10 percent and 23 percent, respectively. If a portfolio is composed of 40 percent ABC and the remainder DEF, calculate the expected retu

> You wish to combine two stocks, Peledon and Mexcor, into a portfolio with a standard deviation of 6 percent. The expected return of Peledon is 2 percent with a standard deviation of 1 percent. The expected return of Mexcor is 25 percent with a standard d

> Is the zero-risk portfolio described in Question 4 generally equally weighted in both securities? Explain.

> On January 1, FinCorp Inc. completed its analysis of the prospects for the Geriatric Toy Store and concluded that there was a 25‐percent chance the stock price would be $150 in one year and a 75‐percent chance the stock price would be $200. Six months la

> On January 1, FinCorp Inc. published the following forecasts for the economy: During the year you observed quarterly returns of 2 percent, −5 percent, 3 percent, and 8 percent. a. Calculate the ex ante expected quarterly return. b. Calc

> You have the following return data on six stocks: a. Graph the returns of each stock (ABC, DEF, GHI, JKL, and MNO) against the returns of XYZ. b. Based on the five graphs, which stocks are positively correlated with XYZ? c. Based on the five graphs, whic

> FinCorp Inc. is exploring the risk of different portfolio allocations between two stocks. Complete the following table. Case 1 Case 2 Weight in stock 1 15% Weight in stock 2 25% Standard deviation of stock 1 15% 2% Standard deviation of stock 2 3% 10

> Your portfolio consists of two securities: Transcomm and MidCap. The expected return for Transcomm is 15 percent, while for MidCap it is 5 percent. The standard deviation is 6 percent for Transcomm and 20 percent for MidCap. If 55 percent of the portfoli

> FinCorp Inc. is exploring different portfolio allocations between two stocks. Complete the following table. Case 1 Case 2 Case 3 Case 4 Case 5 S invested in stock 1 S invested in stock 2 $500 $200 $500 $5,000 Total $ invested $2,000 $5,000 $1,000 Wei

> You observed the following daily returns for two companies, ABC and DEF. a. Calculate the following for each stock: i. Five‐day cumulative return ii. Geometric mean daily return iii. Arithmetic mean daily return iv. Standard deviation

> You have observed the following returns: 18 percent, −15 percent, 8 percent, 6 percent, and −12 percent. a. Calculate the geometric mean return. b. Calculate the arithmetic mean return. c. Calculate the variance and standard deviation of returns.

> Why might a scenario-based estimate be more accurate for a short-run expected return estimate than a historical AM estimate?

> What assumptions about investors underlie Markowitz’s theories regarding efficient portfolios?

> Why is all risk removed in a two-security portfolio if the securities are perfectly negatively correlated?

> What is an unattainable portfolio, and what is a dominated portfolio?

> Why is the efficient frontier bowed?

> How do you form the minimum variance frontier in the two-security case?

> You have received the following incomplete information about a set of currency forwards. All the forwards are for C$1,000 in one year. Complete the following table. Today In One Year Number Spot Cost Spot Profit of (CS/ Today Forward (C$/ Payoff (Los

> Simon manages a large bond portfolio and wishes to hedge against interest rate risk. His portfolio includes Government of Canada bonds and high‐grade Canadian corporate bonds. The correlation between the returns on his fund and the Government of Canada 6

> Why does it make sense that interest rate swaps involve an exchange of net payments, while currency swaps exchange all cash flows?

> Explain how currency swaps are structured and how they can be used for hedging purposes.

> Explain how plain vanilla interest rate swaps are structured and what purpose they serve.

> 1. Which of the following statements concerning Government of Canada bond futures is false? a. The contract price is quoted per $100. b. A maximum position limit is set to prevent a single dominant holding. c. Basis risk exists when the underlying asset

> 1. Which of the following statements is false? a. A spot price is a price today for immediate delivery. b. If a Canadian firm has to pay U.S. dollars in the future, it worries about the potential depreciation of the U.S. dollar. c. The forward price is a

> Compare and contrast forwards and futures.

> What is basis risk? Why is it important for hedgers?

> Explain what is meant by “marked to market”.

> Define initial margin, maintenance margin, margin call, open interest, and notional amount.

> What is the relationship among spot rates, forward rates, and the cost of carry?

> If the yield curve is upward (downward/inverted) where is the market expecting short-term interest rates to go?

> Discuss three different strategies you can follow to invest in Canadian securities to obtain a return over a three-year period.

> Over a given day, there were 10,000 trades made for corn futures (i.e., 10,000 buyers and 10,000 sellers). A total of 2,000 of these trades were by buyers entering into new positions and 9,000 of these trades were by sellers entering into new positions.

> At the end of the current year, you observe the following data about Government of Canada pure discount bonds (zero coupon bonds): Bond issue: A Years to maturity: 1 YTM%: 5 Bond issue: B Years to maturity:

> Angela, a new investor, has contacted you with a question about the swap market. Provide a response to her question: “A swap agreement allows two companies to swap payments. Presumably, both parties believe that this agreement will make them better off.

> Why is the expected return on a portfolio a weighted average of the expected returns of the underlying securities?

> CanGold Mining Company borrowed €100 million in France at an annual interest rate of 3.5 percent. The principal plus interest is due in one year. CanGold used the funds to purchase machine parts in Germany for use in its Indonesian gold mine. In one year

> Suppose ABC Inc. can borrow at a fixed rate of 9.5 percent or a floating rate of L IBOR 1percent. DEF Inc. can borrow at a fixed rate of 12 percent or a floating rate of L IBOR 1.5percent. Supposing they engage in an interest rate swap in which both comp

> Joyce and Anthony are in the process of renewing their mortgages. Each mortgage is an interest‐only mortgage (i.e., the borrower pays only interest and has a balloon payment at the end) for $100,000. Anthony, having an excellent credit history, is offere

> Bert, the business reporter for the Sidney Driftwood, a small newspaper, has contacted you for information about the oil market. Provide responses to his questions below with arbitrage opportunities. a. “I understand supply and demand and the difference

> CanComp, a Canadian computer manufacturer, will be delivering a large computer system to a German firm in six months. CanComp expects to receive payment of US$1.5 million at that time. Currently the spot rate is C$1.15 per US$ and the six‐month forward r

> If the trading volume of a futures contract has been increasing over the past 5 days, does this mean that the open interest has also been increasing?

> Describe how total return swaps work.

> Explain why two counterparties would enter into an interest rate swap even when one has an absolute financing advantage in both the fixed and the floating rate markets.

> Describe open interest with respect to futures contracts.

> Describe the process of marking to market for futures contracts.

> FinCorp Inc. wants to examine a “real” efficient frontier involving BlackBerry (BB.TO) and the Royal Bank (RY.TO). a. Using monthly data for these two companies from January 2011 to December 2011, graph the relationship between risk and return. b. Explai

> Explain when to use the arithmetic mean and when to use the geometric mean to describe a return series.

> When would a hedger assume a long position in a forward contract on an underlying asset? When would a hedger assume a short position?

> When would a speculator assume a long position in a forward contract on an underlying asset? When would a speculator assume a short position?

> Why do forward contracts involve credit risk for banks?

> certain group of futures traders may be interested only in the financial exposure of the underlying asset. If this is the case, do you think the open interest will increase or decrease as the futures contract gets closer to maturity?

> On a given day, a new futures contract starts to trade. There are five participants in the market labelled as investors V, W, X, Y, and Z. Four sets of trades for the day were as follows: Investor V buys 10 contracts from X and buys 5 contracts from Z. I

> Calculate the F1, F 2, F 3 given the following interest rates on zero coupon bonds: One year 2.1% Four year 3.75% Two year 2.65% Five year 4.05% Three year 3.25%

> You are in the process of developing forecasts of short‐term interest rates. In order to determine a bond trading strategy, you want to determine the market’ s short‐term (one‐year)

> David says, “CDS is essentially the same as buying default insurance on the risky corporate bond, where the buyer pays for the default protection and the seller sells the protection.” Thus he concludes that CDS is the same as other insurance. Comment on

> Aqua Boat Company recently issued floating rate debt. The rate is L IBOR 3percent, reset semi‐annually. Compost Earth Company has recently issued fixed rate debt. The rate is 5 percent per year. Aqua and Compost have entered into a two&

> Ethel decided to invest in the futures market. She entered a long position in 1,000 futures contracts that require a $30,000 initial margin. The maintenance margin is $22,500. Assume that Ethel deposits the minimum amount of cash required to satisfy any

> You have observed the following monthly returns for ABC and DEF. a. Graph the relationship between the weight in ABC and the portfolio returns (restrict all weights to be greater than or equal to zero). b. Graph the relationship between the weight in ABC

> An investor enters into a short position in 50,000 futures contracts that require a $50,000 initial margin and have a maintenance margin that is 75 percent of this amount. The futures price associated with the contracts is $20. Assume the spot price of t

> An investor enters into a long position in 50,000 futures contracts that require a $50,000 initial margin and have a maintenance margin that is 75 percent of this amount. The futures price associated with the contracts is $20. Assume the spot price of th

> Ethel and Egbert have decided to invest in the futures market. Both entered into 1,000 futures contracts, which required a $30,000 initial margin. The maintenance margin for each investor is $22,500. Ethel and Egbert disagree about the future so Ethel we

> Explain basis risk and the advantage of forward contracts over future contracts in minimizing basis risk.

> Explain the difference between forwards and futures.

> CanComp has a contract to deliver a large computer system to a South African company in one year and would like to hedge the currency risk. CanComp will receive payment of R3.5 million (the currency of South Africa is the rand) in one year for the comput

> The spot exchange rate is C$1.4665 per euro, while the six‐month forward rate is C$1.50 per euro. Suppose a firm expects to receive €100,000 in six months from a foreign customer and decides to eliminate its foreign exchange exposure by entering into a s

> The spot exchange rate is C$1.4665 per euro, while the six‐month forward rate is C$1.50 per euro. Suppose a firm has to pay a foreign supplier €100,000 in six months and decides to eliminate its foreign exchange exposure by entering into a six‐month forw

> Assume an investor takes a €100,000 short position in the six‐month euro forward contract with forward rate of C$1.50 per euro. Determine the investor ’ s profit (loss) if the spot rate in six months equals the following amounts: a. C$1.40 per euro b. C$

> Suppose the spot exchange rate is C$1.4665 per euro, while the six‐month forward rate is C$1.50 per euro. What will be the profit for an investor who assumes a €100,000 long position in the forward contract if the spot rate in six months equals the follo

> FinCorp Inc. wishes to examine the effect of correlation on the efficient frontier that can be created by investing in ABC and FGI. The expected return of ABC is 6 percent, with a standard deviation of 10 percent. The expected return of FGI is 10 percent

> The Health Bracelet Company will need 1 ,000 kilograms of copper in one year and is trying to decide between buying the copper on the spot market or using a forward contract. The spot price of copper is $15 per kilogram. The forward price is $19 per kilo

> Complete the following table. The underlying asset is ounces of gold. Assume no arbitrage. 1-Year 1-Year Annual Cost of Forward Interest Storage Cost Spot Carry Price Rate A $200 8% 4% of spot B $235 $285 2% of spot $300 7% 3% of spot $350 $400 4% $2

> Why would making CDSs an exchange-listed product have avoided the collapse of AIG and averted the 2008–9 financial crisis?

> How and why did AIG fail?

> Explain the difference between an insurance contract and a credit default swap.

> 1. Which of the following statements about strong form EMH is false? a. It encompasses both the weak and semi-strong EMH. b. It is the most flexible form of market efficiency. c. It states that prices reflect both public and private information. d. It im