Fight Finance

Question 82  portfolio return

Portfolio Details
Stock	Expected return	Standard deviation	Correlation	Dollars invested
A	0.1	0.4	0.5	60
B	0.2	0.6		140

What is the expected return of the above portfolio?

(a) 0.15

(b) 0.17

(c) 0.1908

(d) 0.2412

(e) 0.34

Question 170  NPV, DDM

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs)	0	1	2	3	4	...
Dividend ($)	8	8	8	20	8	...

After year 4, the dividend will grow in perpetuity at 4% pa. The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates. Note that the $8 dividend at time zero is about to be paid tonight.

What will be the price of the stock in 5 years (t = 5), just after the dividend at that time has been paid?

(a) 166.79

(b) 149.98

(c) 144.21

(d) 138.67

(e) 128.21

Question 274  derivative terminology, option

The 'option price' in an option contract is paid at the start when the option contract is agreed to. or ?

Question 298  interest only loan

A prospective home buyer can afford to pay $2,000 per month in mortgage loan repayments. The central bank recently lowered its policy rate by 0.25%, and residential home lenders cut their mortgage loan rates from 4.74% to 4.49%.

How much more can the prospective home buyer borrow now that interest rates are 4.49% rather than 4.74%? Give your answer as a proportional increase over the original amount he could borrow (##V_\text{before}##), so:

###\text{Proportional increase} = \frac{V_\text{after}-V_\text{before}}{V_\text{before}} ###

Assume that:

• Interest rates are expected to be constant over the life of the loan.

• Loans are interest-only and have a life of 30 years.

• Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates compounding per month.

(a) 0.055679

(b) 0.029631

(c) 0.029547

(d) 0.006245

(e) 0.0025

Question 328  bond pricing, APR

A 10 year Australian government bond was just issued at par with a yield of 3.9% pa. The fixed coupon payments are semi-annual. The bond has a face value of $1,000.

Six months later, just after the first coupon is paid, the yield of the bond decreases to 3.65% pa. What is the bond's new price?

(a) $1,000

(b) $1,019.9181

(c) $1,033.8330

(d) $1,052.7005

(e) $1,060.5226

Question 391  real option, option

An expansion option is best modeled as a or option?

Question 393  real option, option

A timing option is best modeled as a or option?

Question 525  income and capital returns, real and nominal returns and cash flows, inflation

Which of the following statements about cash in the form of notes and coins is NOT correct? Assume that inflation is positive.

Notes and coins:

(a) Pay no income cash flow.

(b) Have a nominal total return of zero.

(c) Have a nominal capital return of zero.

(d) Have a nominal income return of zero.

(e) Have a real total return of zero.

Question 590  future, market efficiency

Which of the following statements about futures contracts on shares is NOT correct, assuming that markets are efficient?

When an equity future is first negotiated (at t=0):

(a) The futures price quote ##(F_T)## is 'fair'. It's neither over- nor under-priced to the long or short trader.

(b) The futures price quote ##(F_T)## equals the expected underlying asset price at maturity.

(c) The futures price quote ##(F_0)## is initially zero.

(d) The value of the future ##(V_0)## is initially zero to both the long and short trader.

(e) If the value of the future ##(V_0)## rises for the long trader, it must have fallen for the short trader, and vice versa.

Question 637  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

(a) ##f_{SC,T}=max⁡(S_T-X_T,0)##

(b) ##f_{SC,T}=max⁡(X_T-S_T,0)##

(c) ##f_{SC,T}=-max⁡(S_T-X_T,0)##

(d) ##f_{SC,T}=-max⁡(X_T-S_T,0)##

(e) ##f_{SC,T}=min⁡(X_T-S_T,0)##