Fight Finance

(a) Stock A has less systematic risk than stock B, so stock A's return should be less than stock B's.

(b) Stock B has the same systematic risk as the market, so its return should be the same as the market's.

(c) Stock B has the same beta as the market, so it also has the same total risk as the market.

(d) If stock A and B were combined in a portfolio with weights of 50% each, the beta of the portfolio would be 0.75.

(e) Stocks A and B have more systematic risk than the risk free security (government bonds) so their return should be greater than the risk free rate.

(a) The risk free rate has zero systematic risk and zero idiosyncratic risk.

(b) The market portfolio has zero idiosyncratic risk.

(c) The market portfolio has zero systematic risk.

(d) a and b are true.

(e) a and c are true.

(a) Idiosyncratic risk.

(b) Systematic risk.

(c) Both idiosyncratic and systematic risk.

(d) Market risk.

(e) Beta risk.

(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) Global economic recession.

(b) A major terrorist attack, grounding all commercial aircraft in the US and Europe.

(c) An increase in corporate tax rates.

(d) The outbreak of world war.

(e) A company's poor earnings announcement.

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) Only (i) and (ii) are true.

(e) All statements (i), (ii) and (iii) are true.

(a) $10

(b) $3

(c) $2.8037

(d) $2.7273

(e) $0

(a) A decrease in house prices in one city.

(b) An increase in mining industry tax rates.

(c) An increase in corporate tax rates.

(d) A case of fraud at a major retailer.

(e) A poor earnings announcement from a major firm.

(a) the firm's industry becoming more systematically risky, for example if it was a mining company and commodities prices varied more strongly and were more positively correlated with the market portfolio.

(b) the firm's industry becoming less systematically risky, for example if it was a child care centre and the government announced permanently higher subsidies for parents' child care expenses.

(c) the firm issuing more debt and using the proceeds to repurchase stock.

(d) the firm issuing more equity and using the proceeds to pay off debt holders.

(e) none of the above.

(a) 9.55%, so buy the stock since its required return is too high for its low risk.

(b) 7.37%, so buy the stock since its required return is too high for its low risk.

(c) 7.37%, so sell the stock since its required return is too high for its low risk.

(d) 3.62%, so buy the stock since its required return is too low for its low risk.

(e) 3.62%, so sell the stock since its required return is too low for its low risk.

(a) A positive NPV and should be accepted.

(b) A zero NPV.

(c) A negative NPV and should be rejected.

(d) A large amount of diversifiable risk.

(e) Zero diversifiable risk.

(a) -1

(b) -0.5

(c) 0

(d) 0.5

(e) 1

(a) Asset A is underpriced.

(b) Asset B has a negative alpha (a negative excess return or abnormal return).

(c) Buying asset C would be a positive NPV investment.

(d) Asset D has less systematic variance than the market portfolio (M).

(e) Asset E is fairly priced.

(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) 0.277075

(b) 0.272519

(c) 0.239954

(d) 0.236008

(e) 0.162070

(a) ##\sigma_\text{yearly} = \sigma_\text{monthly}##

(b) ##\sigma_\text{yearly} = \sigma_\text{monthly} \times 12##

(c) ##\sigma_\text{yearly} = \sigma_\text{monthly} \times 144##

(d) ##\sigma_\text{yearly} = \sigma_\text{monthly} \times \sqrt{12}##

(e) ##\sigma_\text{yearly} = \sigma_\text{monthly} \times {12}^{1/3}##

(a) ##\sigma_\text{yearly}^2 = \sigma_\text{monthly}^2##

(b) ##\sigma_\text{yearly}^2 = \sigma_\text{monthly}^2 \times 12##

(c) ##\sigma_\text{yearly}^2 = \sigma_\text{monthly}^2 \times 12^2##

(d) ##\sigma_\text{yearly}^2 = \sigma_\text{monthly}^2 \times \sqrt{12}##

(e) ##\sigma_\text{yearly}^2 = \sigma_\text{monthly}^2 \times {12}^{1/3}##

(a) ##\sigma_\text{annual} = 0.09 \times 5 + 0.14 \times 7##

(b) ##\sigma_\text{annual} = (0.09 \times 5 + 0.14 \times 7)^{1/2}##

(c) ##\sigma_\text{annual} = (0.09^2 \times 5 + 0.14^2 \times 7)^{1/2}##

(d) ##\sigma_\text{annual} = (1+0.09)^5\times (1+0.14)^7 - 1##

(e) ##\sigma_\text{annual} = \left( \dfrac{0.09^2 \times 5 + 0.14^2 \times 7}{12} \right)^{1/2}##

(a) ##r_V = \dfrac{D}{V}.r_D + \dfrac{E}{V}.r_E##

(b) ##\beta_V = \dfrac{D}{V}.\beta_D + \dfrac{E}{V}.\beta_E##

(c) ##\sigma_\text{V syst}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D syst}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E syst}^2##

(d) ##\sigma_\text{V idio}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D idio}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E idio}^2 + 2.\dfrac{D}{V}.\dfrac{E}{V}.\rho_\text{D idio, E idio}.\sigma_\text{D idio}.\sigma_\text{E idio}##

(e) ##\sigma_\text{V total}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D total}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E total}^2##

(a) Low debt to assets ratios.

(b) High quick ratios.

(c) Low interest coverage ratios.

(d) Positive amounts of net working capital.

(e) High net profit margins.

(a) Low debt to assets ratios.

(b) Low quick ratios.

(c) High interest coverage ratios.

(d) Positive amounts of net working capital.

(e) High net profit margins.

(a) Stocks are higher risk investments than debt.

(b) Stocks have higher expected returns than debt.

(c) Firms' past realised stock returns are always higher than their past realised debt returns.

(d) In the event of bankruptcy, stock holders are paid after debt holders are fully paid.

(e) Stock holders have a residual claim on the firm's assets.

(a) Alice has $6,000 cash, owes $10,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $10,000 and liabilities of $3,000.

(b) Billy has $10,000 cash, owes $6,000 credit card debt due immediately and 100% owns a corporate business with assets worth $3,000 and liabilities of $10,000.

(c) Carla has $6,000 cash, owes $10,000 credit card debt due immediately and 100% owns a corporate business with assets worth $10,000 and liabilities of $3,000.

(d) Darren has $10,000 cash, owes $6,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $3,000 and liabilities of $10,000.

(e) Ernie has $1,000 cash, lent $3,000 to his friend, and doesn't have any personal debt or own any businesses.

(a) Systematic risk increases.

(b) Idiosyncratic risk increases.

(c) Total risk increases.

(d) Systematic risk decreases.

(e) Idiosyncratic risk decreases.

(a) Less than or equal to negative two percent per annum ##(r_\text{shares} \leq -0.02)##.

(b) Exactly negative two percent per annum ##(r_\text{shares} = -0.02)##.

(c) More than or equal to negative two percent per annum ##(r_\text{shares} \geq -0.02)##.

(d) Less than or equal to zero percent per annum ##(r_\text{shares} \leq 0)##.

(e) More than or equal to zero percent per annum ##(r_\text{shares} \geq 0)##.

(a) Asset A has the same systematic risk as asset B.

(b) Asset A has more total variance than asset B.

(c) Asset B has zero idiosyncratic risk. Asset B must be a portfolio of half the market portfolio and half government bonds.

(d) If risk-averse investors were forced to invest all of their wealth in a single risky asset, so they could not diversify, every investor would logically choose asset A over the other three assets.

(e) Assets M and B have the highest Sharpe ratios, which is defined as the gradient of the capital allocation line (CAL) from the government bonds through the asset on the graph of expected return versus total standard deviation.

(a) ##Β_E=\dfrac{cov(r_E,r_M )}{var(r_M)}##

(b) ##Β_E=\dfrac{correl(r_E,r_M ).sd(r_E)}{sd(r_M)} ##

(c) ##Β_E=\dfrac{sd(r_E)}{sd(r_M)}##,   since ##var(r_E)=β_E^2.var(r_M)##

(d) ##Β_E=\dfrac{r_E-r_f}{r_M-r_f }##,   since ##r_E=r_f+Β_E. (r_M-r_f )##

(e) ##Β_E= \left(B_V - \dfrac{D}{V}.Β_D \right).\dfrac{V}{E}##,   since ##B_V=\dfrac{E}{V}.Β_E+\dfrac{D}{V}.Β_D ##

(a) $1000 of Australian federal government bonds.

(b) $2 million of Australian federal government bonds.

(c) A $1 million residential house asset.

(d) A home loan secured on a $1 million residential house asset with an LVR of 80%.

(e) Equity (the deposit) in a $1 million residential house asset with an LVR of 80%.

(a) The more risky the asset is from a financial analyst’s perspective.

(b) The higher the chance of a large loss.

(c) The higher the chance of a large gain.

(d) The more predictable the asset’s future price is.

(e) The higher the variance of returns.

(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.

(a) The zero coupon bond liabilities are currently priced at $0.835270 billion.

(b) If the hedge fund were to immediately liquidate all shares and repay all bond liabilities, it would have $0.264730 billion of assets now.

(c) The hedge fund's current market capitalisation of equity would be worth $0.341971 billion.

(d) The probability that the hedge fund's share assets are worth less than its liabilities when the bond matures is 58.406040% in a risk-neutral world where all assets earn the risk free rate.

(e) The probability that the hedge fund's share assets are worth less than its liabilities when the bond matures is 22.339580% in the risk-averse world where investors earn the higher returns on stocks for bearing risk.