Which one of the following will increase the Cash Flow From Assets in this year for a tax-paying firm, all else remaining constant?

Fundamentalists who analyse company financial reports and news announcements (but who don't have inside information) will make positive abnormal returns if:

Your friend just bought a house for $**1,000,000**. He financed it using a $**900,000** mortgage loan and a deposit of $**100,000**.

In the context of residential housing and mortgages, the 'equity' or 'net wealth' tied up in a house is the value of the house less the value of the mortgage loan. Assuming that your friend's only asset is his house, his net wealth is $100,000.

If house prices suddenly fall by **15%**, what would be your friend's percentage change in net wealth?

Assume that:

- No income (rent) was received from the house during the short time over which house prices fell.
- Your friend will not declare bankruptcy, he will always pay off his debts.

Which firms tend to have **low** forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.

A company advertises an investment costing $**1,000** which they say is underpriced. They say that it has an expected total return of **15**% pa, but a required return of only **10**% pa. Assume that there are no dividend payments so the entire 15% total return is all capital return.

Assuming that the company's statements are correct, what is the **NPV** of buying the investment if the 15% return lasts for the next **100** years (t=0 to 100), then reverts to 10% pa after that time? Also, what is the NPV of the investment if the 15% return lasts forever?

In both cases, assume that the required return of 10% remains constant. All returns are given as effective annual rates.

The answer choices below are given in the same order (15% for 100 years, and 15% forever):

Assets A, B, M and ##r_f## are shown on the graphs above. Asset M is the market portfolio and ##r_f## is the risk free yield on government bonds. Assume that investors can borrow and lend at the risk free rate. Which of the below statements is **NOT** correct?

"Buy low, sell high" is a well-known saying. It suggests that investors should buy low then sell high, in that order.

How would you re-phrase that saying to describe short selling?

**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**?

**Question 965** foreign exchange reserve, foreign exchange rate, no explanation

Observe the below graph of Chinese foreign exchange reserves held by the central bank, as well as the Chinese currency the Yuan (CNY, also called the Renminbi, RMB) against the US Dollar. Note the inverted y-axis scale on the Yuan exchange rate graph.

Which of the below statements is **NOT** correct?