Practice Final Exam
FIN 421
Spring 2016
Name:
Student ID:
Section: 10951 (T/Th) 10950 (T only)
Part I / 40
Part II / 20
Part III / 40
Total / 100
• You have 110 minutes to complete this exam.
• Only calculator
...
Practice Final Exam
FIN 421
Spring 2016
Name:
Student ID:
Section: 10951 (T/Th) 10950 (T only)
Part I / 40
Part II / 20
Part III / 40
Total / 100
• You have 110 minutes to complete this exam.
• Only calculator and pen are allowed. A formula sheet is provided on the last pages.
• You are to answer these questions without consulting anyone.
• Show your work wherever necessary.
• Manage your time wisely. Shorter answers are often better.
Part I. Multiple Choice Questions (5 points each)
Choose only one answer for each question and write the corresponding letter in the table
below. No justifications required.
Question Answer
1
2
3
4
5
6
7
8
2
1. Consider the following limit order book of a specialist in a market that allows partial
execution of orders. The last trade in the stock took place at a price of $35.
Bid Bid Qty Ask Qty Ask
34.75 100 800 35.25
34.25 100 1,000 35.50
33.50 400 2,000 35.75
32.25 200 800 36.00
You place a market sell order for 150 shares. What are your proceeds and what is the
new stock price?
A) $5, 187.50 ; $34.75
B) $5, 187.50 ; $34.25
C) $5, 325.00 ; $35.00
D) $5, 287.50 ; $35.25
E) $5, 287.50 ; $35.00
Answer: B
Determining proceeds: Since you are trying to sell shares, you look to the bid price column to see what people are willing to pay for the shares. You are able to sell 100 shares
at $34.75 and 50 shares at $34.25
100 shares × $34.75 + 50 shares × $34.25 = $5, 187.50
Determining new stock price: The stock price is the last price the stock was purchased
for. In this case, it is the price you sold your last 50 shares for, which is $34.25.
2. An investor invests 40% of his wealth in a risky asset with an expected rate of return of
15% and a variance of 4% and 60% in a treasury bill that pays 6%. What is the portfolio’s
standard deviation?
A) 0.64 %
B) 1.6 %
C) 2.4 %
D) 8.0 %
E) 12.0%
Answer: D
.4 ×
√
0.04 = 0.08
3
3. For the aggregate U.S. stock market,
A) daily returns are very predictable
B) daily squared returns are very predictable
C) daily squared returns are positively autocorrelated
D) daily squared returns are negatively autocorrelated
E) B and D
F) B and C
Answer: F
Daily squared returns are highly positively autocorrelated, i.e. they ”cluster”. In U.S.
data, the autocorrelation coefficients of squared daily returns are positive up to at least
252 lags (one year). Therefore, squared daily returns are very predictable. Returns (rather
than squared returns) are only predictable over longer horizons, such as a year.
4. Which of the following portfolios cannot be on the efficient frontier?
Portfolio Expected Return Standard Deviation
I 8% 10%
J 16% 20%
K 15% 25%
L 25% 38%
A) Portfolio I
B) Portfolio J
C) Portfolio K
D) Portfolio L
E) Cannot be determined
Answer: C
Portfolio K because of portfolio J. Look for one that is strictly dominated – higher mean
with same risk or lower risk with same mean or both.
4
5. Market timing is possible based on which of the following asset allocation rules / portfolios? (circle the ones that are correct)
A) tangency portfolio
B) minimum variance portfolio
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