MFIN1151_Fall21_Midterm_Version_A

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Feb 20, 2024

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MFIN 1151 Midterm Exam: Fall 2021 Page 1 MFIN1151: Investments Fall 2021 Midterm Exam Prof. David Solomon INSTRUCTIONS You have one hour and fifteen minutes to complete this exam. This exam is closed book and closed notes, except for one sheet of 8.5x11 notes (both sides). Calculators are allowed. There are 11 questions for a total of 180 points This exam is taken under the Academic Integrity Policy, which stipulates: Cheating is the fraudulent or dishonest presentation of work. Cheating includes but is not limited to: -the use or attempted use of unauthorized aids in examinations or other academic exercises submitted for evaluation; -copying from another student's work; -actions that destroy or alter the work of another student; -unauthorized cooperation in completing assignments or during an examination; -dishonesty in requests for make-up exams, for extensions of deadlines for submitting papers, and in any other matter relating to a course. Please sign your name below to acknowledge and accept the Academic Integrity Policy. SIGNATURE: (Please sign) NAME: (Please print) STUDENT ID:
MFIN 1151 Midterm Exam: Fall 2021 Page 2 1. (30 points total) You are an investment manager, and can combine a risk-free T-Bill which earns 1% (which you can either buy or short) with a single risky asset. You only care about the mean and variance of your portfolio. You can choose your single risky asset from two alternatives Your current stock index has an expected return of 9% and a standard deviation of 24% You are considering switching to a bond index, with an expected return of 5% a) (15 points) What standard deviation of returns for the bond index would make you switch, and why?
MFIN 1151 Midterm Exam: Fall 2021 Page 3 b) (15 points) Suppose that the bond portfolio has a standard deviation of 10%, with other parameters the same as before. You are currently invested 100% in the stock portfolio, as per the wishes of your client, Andropov. You are suggesting switching to the bond portfolio plus some position in the T-Bill. Andropov says “You know, I don’t really care a great deal about risk, I mostly just care about mean returns. Reducing risk from 24% to 10% doesn’t appeal to me much , and the bond index has lower average returns. I’m fine with a standard deviation of 24%, so I don’t want to switch.” Given this set of preferences, should the client switch? If so, explain why, and how those preferences can be satisfied. If not, explain why not.
MFIN 1151 Midterm Exam: Fall 2021 Page 4 2. (20 points) Suppose your friend Chernenko is trading on Robinhood, and he sees a stock with a bid of $10 and an ask of $10.10. He buys 100 shares of the stock using a market order, and pays no commission to Robinhood. The stock rises in price to a bid of $10.50, and an ask of $10.60. He sells the 100 shares of the stock using a market order. Chernenko explains to you “I don’t pay any fees to Robinhood, and since the stock went up in price, my trades are free.” Do you agree? Please explain your reasoning , and show the costs of the trade, if any. Hint: For purposes of comparison, you may consider the profits from the trade relative to the bid-ask midpoint prices.
MFIN 1151 Midterm Exam: Fall 2021 Page 5 3. (20 points) You currently hold a portfolio that is 100% invested in US stocks, with an expected return of 12% and a standard deviation of 18%. The risk-free rate is 2%. You are considering investing some of your portfolio in French stocks, which have a standard deviation of 21%, and a correlation with the US of 0.4 For what expected return on French stocks will you want to take a short position in France if you want a higher Sharpe Ratio?
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