An established mining firm announces that it expects large losses over the following year due to flooding which has temporarily stalled production at its mines. Which statement(s) are correct?
(i) If the firm adheres to a full dividend payout policy it will not pay any dividends over the following year.
(ii) If the firm wants to signal that the loss is temporary it will maintain the same level of dividends. It can do this so long as it has enough retained profits.
(iii) By law, the firm will be unable to pay a dividend over the following year because it cannot pay a dividend when it makes a loss.
Select the most correct response:
A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?
(i) buy call options on live cattle.
(ii) buy put options on live cattle.
(iii) sell call options on live cattle.
Select the most correct response:
Your neighbour asks you for a loan of $100 and offers to pay you back $120 in one year.
You don't actually have any money right now, but you can borrow and lend from the bank at a rate of 10% pa. Rates are given as effective annual rates.
Assume that your neighbour will definitely pay you back. Ignore interest tax shields and transaction costs.
The Net Present Value (NPV) of lending to your neighbour is $9.09. Describe what you would do to actually receive a $9.09 cash flow right now with zero net cash flows in the future.
Which of the following statements about short-selling is NOT true?
Question 668 buy and hold, market efficiency, idiom
A quote from the famous investor Warren Buffet: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell."
Buffet is referring to the buy-and-hold strategy which is to buy and never sell shares. Which of the following is a disadvantage of a buy-and-hold strategy? Assume that share markets are semi-strong form efficient. Which of the following is NOT an advantage of the strict buy-and-hold strategy? A disadvantage of the buy-and-hold strategy is that it reduces:
Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?
If a variable, say X, is normally distributed with mean ##\mu## and variance ##\sigma^2## then mathematicians write ##X \sim \mathcal{N}(\mu, \sigma^2)##.
If a variable, say Y, is log-normally distributed and the underlying normal distribution has mean ##\mu## and variance ##\sigma^2## then mathematicians write ## Y \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##.
The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue.
Select the most correct statement:
Question 791 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval
A risk manager has identified that their pension fund’s continuously compounded portfolio returns are normally distributed with a mean of 5% pa and a standard deviation of 20% pa. The fund’s portfolio is currently valued at $1 million. Assume that there is no estimation error in the above figures. To simplify your calculations, all answers below use 2.33 as an approximation for the normal inverse cumulative density function at 99%. All answers are rounded to the nearest dollar. Which of the following statements is NOT correct?
By convention, money market securities' yields are always quoted as:
On which date would the stock price increase if the dividend and earnings are higher than expected?