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Homework answers / question archive / Queens College BUS350: Investment Analysis Instructor: Luc Marest Fall 2020 Midterm 1 Problem 1: During the past three years, annual rates of return of the stocks LGM and KFM: Year Stock LGM Stock KFM 1 0
Queens College BUS350: Investment Analysis Instructor: Luc Marest Fall 2020
Midterm 1 Problem 1: During the past three years, annual rates of return of the stocks LGM and KFM:
Year Stock LGM Stock KFM
1 0.12 0.08 2 0.08 0.07 3 -0.02 0.01
A hedge fund has a portfolio consisting of these 2 stocks. It shorted $40 million of stock KFM. It bought $200 million of stock LGM.
a/ What is the expected return of the portfolio? b/ What is the standard deviation of the portfolio? c/ Show your result on a graph in which you draw a Markowitz Frontier of portfolios composed of KFM and LGM.
d/ In what sense behavioral finance and complex system theory contribute to the disequilibrium theory?
Problem 2:
We have three stocks A, B, and C. There are two risk factors, 1 and 2. The risk premiums are kl = 0.08 A.2 = 0.11 The three stocks have the following betas:
Factor 1 Factor 2 A 0.6 -0.1 B 1.2 0.4 C 1.2 0.6
The risk-free rate is 2.9%
a/ What is the expected return of the three stocks? b/ The current prices of the stocks are: PA=$78 PB=S66 Pc=$36 What are the expected prices in one year? c/ You did an analysis and you found out that the prices of the stocks in one year will be: PA=$90 PB—$68 Pc=$45 Which stocks do you want to buy or short? d/ You want to build a riskless arbitrage portfolio; it means that you do not want any initial investment, no risk, and you still want to make money. Build that portfolio. e/ What is the profit you can make from the portfolio you built in question d/?
f/ What does it mean abnormal return? g/ What does EMH implies for fundamental analysis?
Problem 3.
Wileinhdaeve the following stocks that compose an index: Price Price Price Price Stock Number of shares at t41 at t=1 at t=2 at t=3 A 2,000 25 28 35 32 13,000 46 47 45 51 15,000 36 35 33 39
Construct a value-weighted index for these three stocks: what is the value of the index at each of the times,
2/ Passive Manager We are examining a manager's return thr the last 3 years
lifear 3
Manager's return 2.07% 0.03% 11.14%
What is the tracking error for the manager?
3/ Active Manager The manager decides to create another fimd and opens a margin account through another broker at 1=3 so he can do some active management like a hedge fund. Reminder: there is a 50% initial margin and 25% maintenance margin. The manager decides to buy 10,000 shares of stock C at 1=3.
a/ What is the minimum amount that the hedge fimd must deposit in the account?
Now, supposc that the hcdgc fiind deposited thc minimum amount.
b/ If the stock goes down to $25 alter, calculate the new margin. ci Does the hedge fund receive a margin call? d/ What does the manager can do in case he receives a margin call? e/ In what sense this process can influence financial markets? f/ What price of the stock brings the margin to the 25% threshold?
