Sample Final Exam 1

Question 1 (5 marks): An investor is in a 30% combined federal plus state tax bracket.
If corporate
bonds offer 6% yields, what yield must municipals offer for the investor to prefer them to corporate
bonds?
Question 2 (5 marks): Which security should sell at a greater price? A 10-year Treasury bond
with a 4% coupon rate versus a 10-year T-bond with a 5% coupon. Why?
Question 3 (10 marks): Both a call and a put currently are traded on stock XYZ; both have strike
prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call
for $4 in the following scenarios for stock prices in 6 months? What will be the profit in each
scenario to an investor who buys the put for $6?
a. $40 b. $45 c. $50 d. $55 e. $60
Question 4 (10 marks):

The composition of the FanFund portfolio is as follows:
Stock Shares Price
A 300,000 $35
B 200,000 40
C 400,000 20
D 900,000 25
The fund has not borrowed any funds, but its accrued management fee with the portfolio
manager currently totals $40,000. There are 4 million shares outstanding.
a. What is the net asset value of the fund?
b. If during the year the portfolio manager sells all of the holdings of stock D and replaces it
with 300,000 shares of stock E at $50 per share and 300,000 shares of stock F at $25 per
share, what is the portfolio turnover rate?
Question 5 (10 marks):

You manage a risky portfolio with an expected rate of return of 15% and a standard deviation of
24%. The T-bill rate is 6%.
a. Your client wants to have the expected return of 9%. How do you structure his portfolio
(proportion of investment in risky portfolio and risk free asset). What is the standard deviation of
the rate of return on his portfolio?
b. Suppose that your risky portfolio includes the following investments in the given proportions:
Stock A 35%; Stock B 22%; Stock C 43%.
What are the investment proportions of your client’s overall portfolio, including the position in T-
bills?
Question 6 (5 marks)
The correlation coefficients between several pairs of stocks are as follows: Corr(A, B) = - 0.85;
Corr(A, C) = - 0.60; Corr(A, D) = 0.45. Each stock has an expected return of 8% and a standard
deviation of 20%.
a. If your entire portfolio is now composed of stock A and you can add some of only one stock
to your portfolio, would you choose (explain your choice):
b. Would the answer to part (a) change for risk neutral investors
True or false and explain: The standard deviation of the portfolio is always equal to the weighted
average of the standard deviations of the assets in the portfolio.
Kidskin, Inc., stock has a beta of 1.2 and Harley Quinn, Inc., stock has a beta of 1.6. Which stock
should have higher required rate of return? Why?
Investment & Portfolio Management – Page 1

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
Company Discount Store Everything
Forcasted return 12% 11%
Standard deviation of returns 8% 10%
Beta 1.4 1.0
a. What would be the fair return for each company according to the capital asset pricing model
(CAPM)?
b. Characterize each company as underpriced, overpriced, or properly priced.
Question 10: (10 marks)
Pagi, Inc., is expect to have an EPS of 3.2 at the end of the year, the payout ratio is 50%, the
earning is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the
constant-growth dividend discount model is $32.
a. What is the required rate of return?
b. What is the Present value of growth opportunities?

You will be paying $2,000 a year at the end of the next two years. Bonds currently yield 8%. What
is the present value and duration of your obligation?
An investor short a stock for $36 and a put for $.50 with a strike price of $30. The investor buy a
call for $.50 with a strike price of $40. What is the maximum profit and loss for this position?

Consider a stock that pays no dividends on which a futures contract, a call option, and a put option
trade. The maturity date for all three contracts is T, the exercise price of both the put and the call
is X, and the futures price is F. Show that if X = F, then the call price equals the put price. Using
put-call parity and spot-future parity conditions to guide your demonstration.
Investment & Portfolio Management – Page 2

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Question 1 (5 marks): An investor is in a 30% combined federal plus state tax bracket.

Question 4 (10 marks):

Question 5 (10 marks):

Investment & Portfolio Management – Page 1

Question 11: (10 marks)

Question 13: (10 marks)

Investment & Portfolio Management – Page 2

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