Fight Finance

(a) $1 cash dividend when the pre-announcement stock price was $5.

(b) On-market buy-back of 20% of the company's outstanding stock.

(c) 5 for 4 stock split.

(d) 1 for 5 bonus issue.

(e) 1 for 4 rights issue at a subscription price of $3 when the pre-announcement stock price was $5.

A 1-for-4 bonus issue is equivalent to a 4-for-1 stock split or a 25% stock dividend. or ?

(a) If stock A's return increases, stock B's return is also expected to increase.

(b) If stock A's return decreases, stock B's return is also expected to decrease.

(c) If stock A and B were combined in a portfolio, there would be no diversification at all since they are positively correlated.

(d) Stock A and B's returns have positive covariance.

(e) a and b.

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Capital or labour decision.

(a) Refund the corporate tax paid by companies to their individual shareholders. Therefore they prevent the double-taxation of dividends at the corporate and personal level.

(b) Are distributed to shareholders together with cash dividends.

(c) Are also called imputation credits.

(d) Are worthless to individuals who earn less than the tax-free threshold because they have a zero marginal personal tax rate.

(e) Are worthless to individual shareholders who are foreigners for tax purposes.

(a) Bank accepted bill (BAB).

(b) Certificate of deposit (CD).

(c) Fixed coupon bond.

(d) Promissory note (PN)

(e) Treasury note or bill.

(a) 1 USD = 1.1025 AUD

(b) 1.1025 USD = 1 AUD

(c) 1 USD = 1.05 AUD

(d) 1 USD = 1.1 AUD

(e) 1.1 USD = 1 AUD

(a) I only.

(b) II only.

(c) III only.

(d) I and II.

(e) II and III.

How is the AUD normally quoted in Australia? Using or terms?

(a) AUD 0.2 million.

(b) AUD 0.8 million

(c) AUD 1 million

(d) AUD 1.25 million.

(e) AUD 1.8 million.

(a) Appreciate against the USD, so the 'European terms' quote of the AUD (AUD per USD) will increase.

(b) Depreciate against the USD, so the 'European terms' quote of the AUD (AUD per USD) will decrease.

(c) Appreciate against the USD, so the 'European terms' quote of the AUD (AUD per USD) will decrease.

(d) Depreciate against the USD, so the 'European terms' quote of the AUD (AUD per USD) will increase.

(e) Be unaffected by the change in the policy rate, so the exchange rate will remain the same.

If the Reserve Bank of Australia is expected to keep its interbank overnight cash rate at 2% pa while the US Federal Reserve is expected to keep its federal funds rate at 0% pa over the next year, is the AUD is expected to , , or remain against the USD over the next year?

(a) Buy debt.

(b) Own debt.

(c) Are owed money.

(d) Write debt.

(e) Have debt assets.

(a) -12.5% pa

(b) -4% pa

(c) -1.5% pa

(d) -1% pa

(e) 12.5% pa

(a) The beta of the firm's assets will increase.

(b) The beta of the firm's assets will decrease.

(c) The beta of the firm's equity will increase.

(d) The beta of the firm's equity will decrease.

(e) The beta of the firm's equity will be unchanged.

(a) Has a beta of 0.5.

(b) Is fairly priced.

(c) Has systematic standard deviation equal to 10% pa.

(d) Has diversifiable standard deviation equal to 20% pa.

(e) Has total standard deviation equal to 40% pa.

(a) Systematic risk.

(b) Diversifiable risk.

(c) Total risk.

(d) Credit risk.

(e) Foreign exchange risk.

(a) Adjusted closing prices add back dividends and reverse the effect of stock splits.

(b) Apple's effective annual total return between the market close on 2 January 2008 and 2 January 2009 was -0.534269 (=(24.22-11.28)/24.22).

(c) Sample variance of the S&P500's effective annual total returns over the 3 year period was 0.084452.

(d) Sample covariance of effective total annual returns between Apple and the S&P500 index over the 3 year period was 0.041131.

(e) Apple's equity beta of annual total returns over the 3 year period was 3.530767.

Would you like to the bond or politely ?

(a) Premium bonds have a positive expected capital return.

(b) Discount bonds have a positive expected capital return.

(c) Par bonds have a zero expected capital return.

(d) Par bonds have a total expected yield equal to their coupon yield.

(e) Zero coupon bonds selling at par would have zero expected total, income and capital yields.

(a) Premium bond will increase.

(b) Premium bond will decrease.

(c) Premium bond will remain constant.

(d) Par bond will increase.

(e) Par bond will decrease.

(a) 1.0757%

(b) 2.7067%

(c) 5.1333%

(d) 9.0000%

(e) 11.7067%

(a) the bond's face value multiplied by its annual yield to maturity.

(b) the bond's face value multiplied by its annual coupon rate.

(c) the bond's market price at the start of the year multiplied by its annual yield to maturity.

(d) the bond's market price at the start of the year multiplied by its annual coupon rate.

(e) the future value of the actual cash payments of the bond over the year, grown to the end of the year, and grown by the bond's yield to maturity.

(a) The manufacturing firm's before-tax WACC.

(b) The manufacturing firm's after-tax WACC.

(c) A services firm's before-tax WACC, assuming that the services firm has the same debt-to-assets ratio as the manufacturing firm.

(d) A services firm's after-tax WACC, assuming that the services firm has the same debt-to-assets ratio as the manufacturing firm.

(e) The services firm's levered cost of equity.

(a) ##FFCF=EBITDA+ Depr - CapEx -ΔNWC + IntExp##

(b) ##FFCF=EBITDA.(1-t_c )+Depr- CapEx -ΔNWC##

(c) ##FFCF=EBITDA.(1-t_c )+ Depr.t_c - CapEx -ΔNWC + IntExp.t_c##

(d) ##FFCF=EBITDA.(1-t_c )+Depr.(1-t_c )- CapEx -ΔNWC+IntExp.(1-t_c)##

(e) ##FFCF=EBITDA.(1-t_c )- CapEx -ΔNWC##

(a) ##F_2=11.5027, V_0=0, V_{0.5}=1.5715##

(b) ##F_2=11.5027, V_0=0, V_{0.5}=1.8258##

(c) ##F_2=12.9693, V_0=0, V_{0.5}=1.3218##

(d) ##F_2=12.9693, V_0=0, V_{0.5}=1.3896##

(e) ##F_2=12.9693, V_0=0, V_{0.5}=1.6144##

(a) $2,000

(b) $3,200

(c) $4,000

(d) $5,200

(e) $6,000

(a) The initial futures price would be $39.1828.

(b) The initial value of the futures contract would be zero.

(c) If the spot price rose to $45 at month 1, then the value of the futures contract would be positive $4.8999 at that time.

(d) If the spot price fell to $35 at month 3, then the value of the futures contract would be negative $4.1828 at that time.

(e) If the spot price remained at $40 until maturity, then the value of the futures contract would be positive $0.8172 at that time.

(a) ##\min(S_T - K, 0)##.

(b) ##-\min(S_T - K, 0)##.

(c) ##\max(K-S_T, 0)##.

(d) ##-\max(K-S_T, 0)##.

(e)##-\max(S_T-K, 0)##.

(a) Long call option there must be a short call option.

(b) Long put option there must be a short put option.

(c) Long option there must be a short option.

(d) Call option there must be a put option.

(e) Option trader who gains there must be one or more option traders who lose.

(a) Buyers of call options are required to pay an initial margin at the start.

(b) Call options are a zero-sum game in the sense that the winner gains at the expense of the loser.

(c) Buyers of call options have to pay the option price at the start.

(d) Buyers of call options do not care about the credit risk of the original call option seller since the contract is novated by the exchange.

(e) Speculators who sell call options hope that the underlying asset price falls.

(a) Systematic variance of the underlying asset increases.

(b) Idiosyncratic variance of the underlying asset increases.

(c) Systematic, idiosyncratic or total variance of the underlying asset increases.

(d) Systematic variance of the underlying asset decreases.

(e) Systematic, idiosyncratic or total variance of the underlying asset decreases.

(a) Higher than the market portfolio's beta.

(b) Lower than the market portfolio's beta.

(c) Equal to the market portfolio's beta.

(d) There's not enough information to answer the question.

(a) 13.75 years

(b) 14.333333 years

(c) 19.545455 years

(d) 35 years

(e) Infinity

(a) 226.43 points

(b) 220.56 points

(c) 176.21 points

(d) 162.83 points

(e) 128.92 points

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

(a) If the underlying stock price suddenly rose by $0.01, the put option price would be expected to fall by less than $0.00552034777953178.

(b) If the underlying stock price suddenly fell by $0.01, the put option price would be expected to rise by more than $0.00552034777953178.

(c) If the underlying stock price suddenly rose by $0.01, the call option price would be expected to rise by more than $0.00888138404936379.

(d) To Delta hedge the 1000 long put options, long 552.0348 stocks.

(e) To Delta and Gamma hedge the 1000 long put options, long 2078.4226 call options and short 2397.9617 stocks.

(a) 230.258509% pa

(b) 10.536052% pa

(c) 10.517092% pa

(d) 10.468982% pa

(e) 9.531018% pa

(a) 9.7617696% is the APR compounding semi-annually ##(r_\text{apr comp 6mth})##

(b) 9.5689685% is the APR compounding monthly ##(r_\text{apr comp monthly})##

(c) 9.6454756% is the APR compounding daily ##(r_\text{apr comp daily})##

(d) 9.5310182% is the APR compounding per second ##(r_\text{apr comp per second})##

(e) 9.5310180% is the continuously compounded rate per annum ##(r_\text{cc annual})##

(a) 12.682503% pa

(b) 12.060201% pa

(c) 12% pa

(d) 11.940397% pa

(e) 3.464102% pa

(a) 12.682503% pa

(b) 12.060201% pa

(c) 12% pa

(d) 11.940397% pa

(e) 3.464102% pa

(a) Continuously compounded rate is 5.955445% per annum. Note that this rate is the annual rate with continuous compounding.

(b) Continuously compounded rate is 1.500000% per quarter. Note that this rate is the quarterly rate with continuous compounding.

(c) Effective quarterly rate is 1.500000% per quarter. Note that this rate is the quarterly rate with discrete quarterly compounding.

(d) Effective annual rate is 6.136355% per annum. Note that this rate is the annual rate with discrete annual compounding.

(e) $1,000,000 invested in this bank account for one year will give $1,061,363.551 at the end of the year.

(a) Prices, ##P_1##.

(b) Gross discrete returns per annum, ##r_{\text{gdr 0 }\rightarrow \text{ 1}} = \dfrac{P_1}{P_0} ##.

(c) Effective annual returns per annum also known as net discrete returns, ##r_{\text{eff 0 }\rightarrow \text{ 1}} = \dfrac{P_1 - P_0}{P_0} = \dfrac{P_1}{P_0}-1##.

(d) Continuously compounded returns per annum, ##r_{\text{cc 0 }\rightarrow \text{ 1}} = \ln \left( \dfrac{P_1}{P_0} \right)##.

(e) Annualised percentage rates compounding per month, ##r_{\text{apr comp monthly 0 }\rightarrow \text{ 1 mth}} = \left( \dfrac{P_1 - P_0}{P_0} \right) \times 12##.

(a) Green is a stock's continuously compounded rate of return, also called the log gross discrete return. ##r_\text{cc} = \ln(P_1/P_0)##

(b) Blue is a stock's future price, ##P_1##

(c) Blue is a stock's gross discrete return. ##\text{GDR} = P_1/P_0##

(d) Blue is a stock's effective rate of return. ##r_\text{eff} = (P_1-P_0)/P_0##

(e) Red is a stock's net discrete return. ##\text{NDR} = \text{GDR}-1##

(a) Arithmetic average gross discrete return is ##\text{AAGDR}_{0\rightarrow T} = \dfrac{\text{GDR}_{0 \rightarrow 1}+\text{GDR}_{1\rightarrow 2}+...+\text{GDR}_{T-1 \rightarrow T}}{T}##

(b) Geometric average gross discrete return is ##\text{GAGDR}_{0\rightarrow T} = \dfrac{\text{GDR}_{0 \rightarrow 1} . \text{GDR}_{1\rightarrow 2} ... \text{GDR}_{T-1 \rightarrow T}}{T}##

(c) The geometric average gross discrete return can be quickly found using the first ##(P_0)## and last ##(P_T)## prices. ##\text{GAGDR}_{0\rightarrow T} = \left( \dfrac{P_T}{P_0} \right)^{1/T}##

(d) The arithmetic average is always bigger than or equal to the geometric average, ##\text{AAGDR} \ge \text{GAGDR}##.

(e) The arithmetic and geometric averages of returns will be equal if the variance of the stock's returns is zero.

(a) The returns ##r_\text{t monthly}## are continuously compounded monthly returns and are likely to be normally distributed, so the mean, median and mode of these continuously compounded returns are all equal to 1% per month.

(b) The annualised average continuously compounded return is ##\bar{r}_\text{cc annual}=12×0.01=0.1=12\%\text{ pa}##. The annualised standard deviation is ##\sigma_\text{annual} = \sqrt{12}×0.05=0.173205081=17.32\%\text{ pa}##.

(c) Over the next 10 years the mean, median and mode continuously compounded 10 year returns will all equal ##0.01 \times 12 \times 10 = 120\%##.

(d) Over the next 10 years the expected mean gross discrete 10 year return is ##e^{(0.01 - 0.05^2/2)×12×10} = 2.857651118## and the median gross discrete 10 year return is ##e^{(0.01 + 0.05^2/2)×12×10}=3.857425531##.

(e) If the current price of the CBA shares is $75, then in 10 years they’re expected to have a mean value of ##75×e^{(0.01 + 0.05^2/2)×12×10} = 289.3069148## and a median value of ##75×e^{0.01×12×10}=249.0087692##.

(a) The geometric average of the gross discrete returns (GAGDR) equals 1 which is 100%.

(b) ##\text{GAGDR} = \exp \left( \text{AALGDR} \right)##. The GAGDR is equal to the natural exponent of the arithmetic average of the logarithms of the gross discrete returns (AALGDR).

(c) ##\text{GAGDR} = \left( P_T/P_0 \right)^{1/T}##. The GAGDR equals the ratio of the last and first prices raised to the power of the inverse of the number of time periods between them.

(d) ##\text{LGAGDR} = \text{AALGDR}##. This is always true, regardless of the distribution of the prices or returns and the number of return observations. The logarithm of the geometric average of the gross discrete returns (LGAGDR) is always equal to the arithmetic average of the logarithms of the gross discrete returns (AALGDR).

(e) ##\text{LAAGDR} = \text{AALGDR} + \text{SDLGDR}^2/2##. This is always true, regardless of the distribution of the prices or returns and the number of return observations. The logarithm of the arithmetic average of the gross discrete returns (LAAGDR) equals the arithmetic average of the logarithms of the gross discrete returns (AALGDR) plus half the variance of the LGDR's.

(a) P1median = $1.105171,   P1mean = $1.521962

(b) P1median = $1.1,             P1mean = $1.42

(c) P1median = $1.521962,   P1mean = $1.105171

(d) P1median = $0.802519,   P1mean = $1.105171

(e) P1median = $1.42,           P1mean = $1.1

(a) $0.332871, $1.648721

(b) $8.16617, $1.648721

(c) $1.61051, $1.648721

(d) $1.61051, $5.773534

(e) $1.648721, $8.16617

(a) The geometric average of the gross discrete returns (GAGDR) equals 1.04075 which is 104.075%.

(b) ##\exp \left( \text{GAGDR} \right) = \text{AALGDR}##. The natural exponent of the GAGDR equals the arithmetic average of the logarithms of the gross discrete returns (AALGDR).

(c) ##\text{GAGDR}^T = \left( P_T/P_0 \right)##. The GAGDR raised to the power of the number of time period that it's measured over equals the ratio of the first and last prices.

(d) ##\text{GAGDR} = \exp \left( \text{AALGDR} \right)##. This is always true, regardless of the distribution of the prices or returns. The logarithm of the geometric average of the gross discrete returns (LGAGDR) is always equal to the arithmetic average of the logarithm of the gross discrete returns (AALGDR).

(e) ##\text{AAGDR} \approx \exp \left( \text{AALGDR} + \text{SDLGDR}^2/2 \right)##. This is only approximately true and depends on the distribution of the prices and returns. It's asymptotically true as the time period that the returns are measured over reaches infinity.

(a) The median portfolio value in one year is $1,105,171. In one month it's $1,008,368.

(b) The mean portfolio value in one year is $1,197,217. In one month it's $1,015,113.

(c) The worst one percentile of portfolio values in one year is $435,178.

(d) The worst one percentile of portfolio values in one month is $933,016.

(e) The 98% confidence interval of portfolio values in two years is between $326,918 and $4,563,305.

(a) 23.17 years.

(b) 41.31 years.

(c) 134.19 years.

(d) 536.75 years.

(e) Never.

(a) 23.17 years.

(b) 41.31 years.

(c) 134.19 years.

(d) 536.75 years.

(e) Never.

(a) 23.17 years.

(b) 41.31 years.

(c) 134.19 years.

(d) 536.75 years.

(e) Never.

(a) Prefer more to less, meaning that they will always like to have more wealth.

(b) Be risk averse, meaning that they dislike risk as measured by the standard deviation of wealth.

(c) Have a positively sloped utility function, so the gradient or first derivative of the utility function is always positive.

(d) Have a utility function that increases at a diminishing rate. So the shape is concave down like a frown, or the second derivative is always negative.

(e) Have a utility function that rises until it reaches the satiation point, then it falls because too much wealth causes problems.

(a) Mr Blue and Miss Red prefer more wealth to less.

(b) Mrs Green enjoys losing wealth.

(c) Mr Blue is risk averse.

(d) Miss Red is risk neutral.

(e) Mrs Green is risk averse.

(a) Mr Blue's expected utility of wealth from gambling is 5 while refusing is 7.07. So the gamble makes him less happy.

(b) Mrs Green's expected utility of wealth from gambling is 7.07 while refusing is 5. So the gamble makes her more happy.

(c) Mr Blue's certainty equivalent of the risky gamble is $25. This is less than his current wealth of $50 which is why he would refuse.

(d) Miss Red's certainty equivalent of the risky gamble is $50. This is equal to her current wealth of $50 which is why she is indifferent to gambling or not.

(e) Mrs Green's certainty equivalent of the risky gamble is $70.71. This is more than her current wealth of $50 which is why she would accept.

(a) Mr Blue's expected utility of wealth from gambling is 7.5 while refusing is 8.54. So the gamble makes him less happy.

(b) Miss Red's expected utility of wealth from gambling is 5 and refusing is also 5. So the gamble doesn't affect her happiness at all.

(c) Mr Blue's certainty equivalent of the risky gamble is $25. This is less than his current wealth which is why he would refuse.

(d) Miss Red's certainty equivalent of the risky gamble is any wealth. She's indifferent since she always has the same level of happiness.

(e) Mrs Green's certainty equivalent of the risky gamble is $25. This is less than her current wealth which is why she would refuse.

(a) Mr Blue's expected utility of wealth from gambling is 7.5 while refusing is 6.25. So the gamble makes him more happy.

(b) Miss Red's expected utility of wealth from gambling is 7.5 and refusing is also 7.5. This is why she is indifferent.

(c) Mr Blue's certainty equivalent of the risky gamble is $70.71. So he would pay to take part in the gamble.

(d) Miss Red's certainty equivalent of the risky gamble is $50.

(e) Mrs Green's certainty equivalent of the risky gamble is $70.71. She would enjoy taking part in the gamble.

(a) All people prefer more rather than less wealth which is rational.

(b) Mr Blue is risk averse, Miss Red is risk neutral and Mrs Green is risk loving.

(c) Mr Blue's certainty equivalent of the gamble is $225. This is less than his current $500 which is why he would dislike the gamble.

(d) Miss Red's certainty equivalent of the gamble is $500. This is the same as her current $500 which is why she would be indifferent to gambling.

(e) Mrs Green's certainty equivalent of the gamble is $793.70. This is more than her current $500 which is why she would like the gamble.

(a) Mr Blue, Miss Red and Mrs Green all prefer more wealth to less. This is rational from an economist's point of view.

(b) Mr Blue is risk averse. He will not enjoy a fair gamble and would like to buy fairly priced insurance.

(c) Miss Red is risk-neutral. She will not enjoy a fair gamble but wouldn't oppose it either. Similarly with fairly priced insurance.

(d) Mrs Green is risk-loving. She would enjoy a fair gamble and would dislike fairly priced insurance.

(e) Mr Blue would like to buy insurance, but only if it is fairly or under priced.

(b) Mrs Green would prefer to invest her wealth in a single stock rather than a well diversified portfolio of stocks, assuming that all stocks had the same total risk and return.

(c) The popularity of insurance only makes sense if people are similar to Mr Blue.

(d) CAPM theory only makes sense if people are similar to Miss Red.

(e) The popularity of casino gambling and lottery tickets only make sense if people are similar to Mrs Green.