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Question 92 CAPM, SML, CML

Which statement(s) are correct?

(i) All stocks that plot on the Security Market Line (SML) are fairly priced.

(ii) All stocks that plot above the Security Market Line (SML) are overpriced.

(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.

Select the most correct response:

Question 102 option, hedging

A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?

(i) buy call options on live cattle.

(ii) buy put options on live cattle.

(iii) sell call options on live cattle.

Select the most correct response:

Question 173 CFFA

Find Candys Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

Candys Corp
Income Statement for
year ending 30th June 2013
	$m
Sales	200
COGS	50
Operating expense	10
Depreciation	20
Interest expense	10
Income before tax	110
Tax at 30%	33
Net income	77

Candys Corp
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	220	180
PPE
Cost	300	340
Accumul. depr.	60	40
Carrying amount	240	300
Total assets	460	480

Liabilities
Current liabilities	175	190
Non-current liabilities	135	130
Owners' equity
Retained earnings	50	60
Contributed equity	100	100
Total L and OE	460	480

Note: all figures are given in millions of dollars ($m).

Question 215 equivalent annual cash flow, effective rate conversion

You're about to buy a car. These are the cash flows of the two different cars that you can buy:

You can buy an old car for $5,000 now, for which you will have to buy $90 of fuel at the end of each week from the date of purchase. The old car will last for 3 years, at which point you will sell the old car for $500.
Or you can buy a new car for $14,000 now for which you will have to buy $50 of fuel at the end of each week from the date of purchase. The new car will last for 4 years, at which point you will sell the new car for $1,000.

Bank interest rates are 10% pa, given as an effective annual rate. Assume that there are exactly 52 weeks in a year. Ignore taxes and environmental and pollution factors.

Should you buy the or the ?

Question 470 accounting ratio, no explanation

Which of the following statements is NOT correct?

Question 477 income and capital returns

An asset's total expected return over the next year is given by:

###r_\text{total} = \dfrac{c_1+p_1-p_0}{p_0} ###

Where ##p_0## is the current price, ##c_1## is the expected income in one year and ##p_1## is the expected price in one year. The total return can be split into the income return and the capital return.

Which of the following is the expected capital return?

Question 698 utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

Question 715 return distribution

If a variable, say X, is normally distributed with mean ##\mu## and variance ##\sigma^2## then mathematicians write ##X \sim \mathcal{N}(\mu, \sigma^2)##.

If a variable, say Y, is log-normally distributed and the underlying normal distribution has mean ##\mu## and variance ##\sigma^2## then mathematicians write ## Y \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##.

The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue.

Select the most correct statement:

(a)##Red \sim \mathcal{N}(\mu, \sigma^2)##, ##Green \sim \mathcal{N}(\mu, \sigma^2)## and ##Blue \sim \mathcal{N}(\mu, \sigma^2)##

(b) ##Red \sim \mathcal{N}(\mu, \sigma^2)##, ##Green \sim \mathcal{N}(\mu, \sigma^2)## and ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(c) ##Red \sim \mathcal{N}(\mu, \sigma^2)##, ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)## and ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(d) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##, ##Green \sim \mathcal{N}(\mu, \sigma^2)## and ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(e) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##, ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)## and ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

Question 825 future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD500 million diversified equity portfolio with a beta of 0.9. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to 1.5, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,155 points and the spot price is 2,180 points. Each point is worth $250.

The number of one year S&P500 futures contracts that the fund manager should buy is:

Question 831 option, American option, no explanation

Which of the following statements about American-style options is NOT correct? American-style: