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?