Question 119 market efficiency, fundamental analysis, joint hypothesis problem
Your friend claims that by reading 'The Economist' magazine's economic news articles, she can identify shares that will have positive abnormal expected returns over the next 2 years. Assuming that her claim is true, which statement(s) are correct?
(i) Weak form market efficiency is broken.
(ii) Semi-strong form market efficiency is broken.
(iii) Strong form market efficiency is broken.
(iv) The asset pricing model used to measure the abnormal returns (such as the CAPM) is either wrong (mis-specification error) or is measured using the wrong inputs (data errors) so the returns may not be abnormal but rather fair for the level of risk.
Select the most correct response:
You just agreed to a 30 year fully amortising mortgage loan with monthly payments of $2,500. The interest rate is 9% pa which is not expected to change.
How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change. The below choices are given in the same order.
When someone says that they're "buying American dollars" (USD), what type of asset are they probably buying? They're probably buying:
Which of the following is the least useful method or model to calculate the value of a real option in a project?
Question 407 income and capital returns, inflation, real and nominal returns and cash flows
A stock has a real expected total return of 7% pa and a real expected capital return of 2% pa.
Inflation is expected to be 2% pa. All rates are given as effective annual rates.
What is the nominal expected total return, capital return and dividend yield? The answers below are given in the same order.
A stock is just about to pay a dividend of $1 tonight. Future annual dividends are expected to grow by 2% pa. The next dividend of $1 will be paid tonight, and the year after that the dividend will be $1.02 (=1*(1+0.02)^1), and a year later 1.0404 (=1*(1+0.04)^2) and so on forever.
Its required total return is 10% pa. The total required return and growth rate of dividends are given as effective annual rates.
Calculate the current stock price.
On 22-Mar-2013 the Australian Government issued series TB139 treasury bonds with a combined face value $23.4m, listed on the ASX with ticker code GSBG25.
The bonds mature on 21-Apr-2025, the fixed coupon rate is 3.25% pa and coupons are paid semi-annually on the 21st of April and October of each year. Each bond's face value is $1,000.
At market close on Friday 11-Sep-2015 the bonds' yield was 2.736% pa.
At market close on Monday 14-Sep-2015 the bonds' yield was 2.701% pa. Both yields are given as annualised percentage rates (APR's) compounding every 6 months. For convenience, assume 183 days in 6 months and 366 days in a year.
What was the historical total return over those 3 calendar days between Friday 11-Sep-2015 and Monday 14-Sep-2015?
There are 183 calendar days from market close on the last coupon 21-Apr-2015 to the market close of the next coupon date on 21-Oct-2015.
Between the market close times from 21-Apr-2015 to 11-Sep-2015 there are 143 calendar days. From 21-Apr-2015 to 14-Sep-2015 there are 146 calendar days.
From 14-Sep-2015 there were 20 coupons remaining to be paid including the next one on 21-Oct-2015.
All of the below answers are given as effective 3 day rates.
Question 702 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?
A one year European-style call option has a strike price of $4.
The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.
The risk-free interest rate is 10% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:
Question 883 monetary policy, impossible trinity, foreign exchange rate
It’s often thought that the ideal currency or exchange rate regime would:
1. Be fixed against the USD;
2. Be convertible to and from USD for traders and investors so there are open goods, services and capital markets, and;
3. Allow independent monetary policy set by the country’s central bank, independent of the US central bank. So the country can set its own interest rate independent of the US Federal Reserve’s USD interest rate.
However, not all of these characteristics can be achieved. One must be sacrificed. This is the 'impossible trinity'.
Which of the following exchange rate regimes sacrifices convertibility?