:

2006

Section______ _____________ _______________ ________________

. .
2, 0 .

I. T, F .
1. Put bond .
2. Treasury STRIPS coupon bond.
3. .
4. .
5. (small firm effect)
.
6.
.
7. A put option on a high-beta stock is worth more than one on a low-beta stock.
8. 1.
9. Rolls critique .
10.
small firm effect .

11. Black CAPM .

12. fund manager
dollar-weighted rate of return time-weighted rate of return
.
13. The duration of a level perpetuity is infinitely long.
14. The APT requires that all stocks must satisfy a linear relationship between expected
returns and factor betas.
15. If a risky security is added to a portfolio, the portfolio becomes riskier.

Type A

II. ( ) .
16. KOSPI200 ?
(A) .

(B) 1 .

(C) .
(D) .

(E) None of the above

17. According to the theory of arbitrage:

(A) High-beta stocks are consistently overpriced.
(B) Low-beta stocks are consistently overpriced.
(C) Positive alpha investment opportunities will quickly disappear.
(D) Rational investors will pursue arbitrage consistent with their risk tolerance.
18. ?
(A)

(B) (C) (D)

(E) None of the above

19. M2 measure ?
(A) Jensens alpha

(B) Treynor measure (C) Sharp ratio (D) Appraisal ratio

20. Options with payoffs that depend on the minimum or maxumum price of the underlying
asset during the life of the option. This statement describes
(A) Asian options

(B) Lookback options

(D) Knock-out options

(E) LEAPS

(C) Barrier options

21. If stock prices follow a random walk, you can conclude that
(A) stock prices reflect a majority of available information about the firm.
(B) successive price changes are predictable.
(C) stock prices exhibit a cyclic movements.
(D) On average, mutual funds cannot perform better than the market.
(E) past stock price changes provide little useful information about tomorrows stock price
changes.
[For Questions 22-24] Consider a put option on a stock with an exercise price of $100 and 1
year to expiration. The underlying stock pays no dividends, its current price is $100, and you
believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The
Type A

risk-free rate of interest is 10%.

22. What is the hedge ratio (H) of the put?
(A)

1.1 < H < 0.8

(B)

0.8 < H < 0.5

(D)

0.2 < H < 0.5

(E) None of the above

(C)

0.5 < H < 0.2

23. What is the value (X) of the put?

(A) $1 < X < $5

(B) $5 < X < $9

(D) $15 < X < $19

(E) None of the above

(C) $10 < X < $14

24. What is the value (Y) of the call with an exercise price of $100?
(A) $1 < X < $5

(B) $5 < X < $9

(D) $15 < X < $19

(E) None of the above

(C) $10 < X < $14

25. Choose the most correct statement.

(A) A collar strategy involves three securities: stock, call, and put.
(B) A protective put is a costless way of eliminating the downside risk if holding stock.
(C) A straddle is used when one expects a bear market.
(D) A straddle is used when one expects a bull market.
(E) A straddle is a kind of portfolio insurance.
26. Choose the correct statement.
(A) An investor puts $1 million in Treasury bills and $2 million in the market portfolio will
have a portfolio beta of 2.0.
(B) Diversification is valuable because one can eliminate all risk by diversification.
(C) Diversification works because asset prices tend to move together to the same direction.
(D) The variance of an equal-weight portfolio invested in infinite number of assets is the
average covariance of all asset returns.
(E) None of the above.
27. The 6-month Treasury bill spot rate is 4%, and the 1-year Treasury bill spot rate is 5%. What
is the implied 6-month forward rate for 6 months from now?
(A) 3.0%

(B) 4.0%

(C) 4.5%

(D) 5.5%

(E) 6.0%

[For Questions 28-29] The risk-free rate of return is 8%, the expected rate of return on the
market portfolio is 15%, and the stock of Xyrong Corp. has a beta coefficient of 1.2. Xyrong
Type A

pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share.
Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn
an ROE of 20% per year on all reinvested earnings forever.
28. What is the intrinsic value of a share of Xyrong stock?
(A) between $70 and $80

(B) between $80 and $90

(D) between $100 and $110

(E) None of the above

(C) between $90 and $100

29. If the market price of a share is currently $80, and you expect the market price to be equal to
the intrinsic value 1 year from now, what is your expected 1-year holding-period return on
Xyrong stock?
(A) 30%

Choose the closest answer.

(B) 40%

(C) 50%

(D) 60%

(E) 70%

30. A bond with a call feature:

(A) Is attractive because the immediate receipt of principal plus premium produces a high
return.
(B) Is more apt to be called when interest rates are high because the interest savings will be
grater.
(C) Will usually have a higher yield than a similar noncallable bond.
(D) Usually gives the bondholders the option to extend or retire the bond.
(E) None of the above.
[For Questions 31-34] The expected rate of return on the market portfolio is 10% and the riskfree rate of return is 5%. John, an analyst, estimates the expected returns and the standard
deviations for stocks A, B, C, D using his own private information. The following table shows
Johns estimates.
Stock A

Stock B

Stock C

Stock D

Expected return

6%

8%

10%

12%

Standard deviation

8%

11%

13%

18%

31. Choose the correct statement.

(A) Among these 4 stocks, stock D is the riskiest to a diversified investor.
(B) Among these 4 stocks, stock D is the riskiest to an undiversified investor who puts
all her funds in one of these stocks.
(C) The standard deviation of the market portfolio return is 13%.
Type A

(D) The standard deviation of the market portfolio return is less than 8%.
(E) None of the above.
32. Suppose that you invest $50,000, $50,000, $200,000, and $200,000 in stocks A, B, C, and D,
respectively. Choose the correct statement.
(A) Your portfolios beta is less than 1.
(B) The expected return on your portfolio is between 8% and 10%.
(C) The standard deviation of your portfolio is between 13% and 18%.
(D) None of the above.
33. Assume that the Sharpe-Lintner CAPM is correct. What should the beta of stock D be?
(A) less than 0.65

(B) between 0.65 and 1.05

(D) between 1.45 and 1.85

(C) between 1.05 and 1.45

(E) above 1.85

34. John calculates that As beta is 0.4 and Bs beta is 0.5. Choose the reasonable statement
given Johns calculation.
(A) Both A and B are undervalued.
(B) Both A and B are overvalued.
(C) A is overvalued and B is undervalued.
(D) A is undervalued and B is overvalued.
(E) None of the above
III.
35. A company has issued bonds that pay semiannually with the following characteristics:
coupon = 8%, YTM = 8%, maturity = 15 years, Macaulay Duration = 10 years. Calculate
the modified duration.
36. A B .
. A 10%,
10%, B 20%, 20%. A
B 800 , 0
.
.
37. A convertible bond has the following features: Coupon = 5.25%, Maturity = June 15, 2007,
Type A

Market price of the bond = $775, Market price of underlying common stock = $28.00,
Annual dividend = $1.20, Conversion ratio = 20.83 shares. Calculate the conversion
premium for this bond.
[For Questions 38-39] The GG Corp. pays no cash dividends currently and is not expected to
for the next 4 years. Its latest EPS was $5, all of which was reinvested in the company. The
firms expected ROE for the next 4 years is 20% per year, during which time it is expected to
continue to reinvest all of its earnings. Starting 5 years from now, the firms ROE on new
investments is expected to fall to 15% per year. GGs market capitalization rate is 15% per year.
38. Estimate GGs intrinsic value per share.
39. Assuming its current market is equal to its intrinsic value, calculate the expected holding
period return over the next year.
40. You will be paying $10,000 a year in tuition expenses at the end of the next 2 years. Bonds
currently yield 8%. What maturity zero-coupon bond would immunize your obligation?
41. A 9-year bond has a yield of 10% and a duration of 7.194 years. If the market yield changes
by 0.5%, what is the percentage change in the bonds price?

[For Questions 42-45] Par value $1 t default-free zero-coupon

bond P(t) , P(1)=0.943396, P(2)=0.881659, P(3)=0.816298.
42.

t=2 , zero-coupon bond YTM .

43. 2 1 .
% ? default risk .
44. 2 default-free coupon bond par value .
coupon bond coupon rate .
45. XYZ default risk , 3 .
1 default-free zero-coupon bond
.
. swap rate
Type A

.
46. The spot price of the British pound is currently $1.60. If the risk-free interest rate on 1-year
government bonds is 4% in the United States and 8% in the United Kingdom, what must be the
forward price of the pound for delivery 1 year from now?
47. (a)

. (a)

?
48. 85 KOSPI200 (1 )
90 KOSPI200 2 . payoff
?

. , KOSPI200

100, 80.

49. 5%, 9%.

13% 25%. U = E ( r ) 0.005k (
2

) (,
) .
, ?

k .

50. John, a farmer, expected that he would harvest a wheat crop of 10,000 bushels in 1 year.
Thus, 20 days ago, John sold wheat futures maturing in one year at a futures price of $3.15 (per
bushel). At that time, the spot price was $3.00. Today he decides to quit wheat farming and buys
back his futures contract. Current spot price is $2.80, and the futures price is $3.08. What is the
total cash flow from the futures contract for the last 20 days?

Type A



2006
Section______ _____________ _______________ ________________

Q# Answer Q# Answer Q# Answer Q#

Answer

Q#

1.

11.

21.

31.

41.

2.

12.

22.

32.

42.

3.

13.

23.

33.

43.

4.

14.

24.

34.

44.

5.

15.

25.

35.

45.

6.

16.

26.

36.

46.

7.

17.

27.

37.

47.

8.

18.

28.

38.

48.

9.

19.

29.

39.

49.

10.

20.

30.

40.

50.

Type A

Answer