Portfolio Management Final. Business & Marketing.

Final Exam
Portfolio Management (FINA-4720)
Instructor: Dr. Ligang Zhong
April 16th 8:30am-11:30am (3 hours), 2020
(Total: 100 Marks with 14 Pages)
Student Name____________
Student ID______________
There are 30 multiple choice questions and 2 long answer questions.
Provide you solutions for multiple choice questions (MCs) in front of the corresponding question number. NO partial marks will be credited for MCs. Provide you solutions for the long answer questions on the exam paper after the corresponding questions. Partial marks will be credited for long answer questions if you provide the right process without getting the right answer.
* This is an open book exam.
* You should finish the exam by yourself. Maintaining academic integrity is always our top priority.
* Formulas can be found in the blackboard website in the tab named: Final Exam Materials
* I will not answer any content related questions so to be fair to all students. If you strongly believe some questions are wrong, write them down and send me an email with details of the explanation after the exam is done. I will take an investigation on those questions. If it turns out that you are right (The questions are indeed wrong), I will add back your marks & other students’ marks for the question.
* To avoid overloading the blackboard system, you should download the exam and work on it offline. Then you can submit the exam online through the assignment submission system before 11:30am on April 16th.
* As a last resort, if you can not submit in the blackboard, you can always send me an email with the exam attached before 11:30am on April 16th.
* Late submission will not be accepted so to be fair to all students! In that scenario, your exam mark will be 0.
Multiple Choices (Total 30 Questions with 60 Marks, each question has the same weight of 2 Marks; No Partial Marks will be provided; Each question has only one correct answer; Providing more than one answer for each question will be given a mark of 0).
1. Value stocks would have the following characteristics:
A. low price/book and high price/earnings
B. low price/book and low price/earnings
C. high EPS growth and high profitability
D. low EPS growth and high profitability
2. The goal of the passive portfolio manager is to minimize
A. Alpha
B. Beta
C. Standard Error
D. Tracking Error
3. Regarding the determinants of the price of a bond, which one of the following is TRUE?
A. Other things equal, the higher the coupon, the lower the price
B. Other things equal, the higher the yield, the lower the price
C. Other things equal, the longer the maturity, the lower the price
D. Other things equal, the shorter the maturity, the lower the price
4. Assume that you purchased an 8% coupon, 20-year, $1,000 par, semiannual payment bond priced at $1,012.50 when it has 12 years remaining until maturity. Compute its yield to call if the bond is callable in 4 years with a call price of $1,100:
A.9.72%
B.9.00%
C.10.73%
D.8.86%
5. One active bond trading strategy is yield spread analysis. Assuming you are confident that the yield spread between different sectors will converge to the historical norm, what is your trading strategy based on information provided from the following table? __________
(In table below, bps stands for Basis Points)
Sector

Yield

Current Spread over T-Bills (bps)

Historical Spread over T-Bill (bps)

Municipal Bonds

7.50%

90 bps

100 bps

AAA rated Corporate Bonds

8.25%

120 bps

120 bps

High Yield Corporate Bonds

12.00%

400 bps

500 bps

Utility Bonds

9.00%

500 bps

350 bps

A. Buy municipal bonds
B. Buy AAA rated Corporate Bonds
C. Buy high yield corporate bonds
D. Buy Utility bonds
6. If you predict that the future interest rate will increase, among the following choices, which type of bond you should buy? _____
A. Low yield to maturity, High coupon rate, Long term to maturity.
B. Low yield to maturity, Low coupon rate, Long term to maturity.
C. High yield to maturity, High coupon rate, Short term to maturity.
D. High yield to maturity, Low coupon rate, Short term to maturity.
7. The yield curve for U.S. government bonds is currently flat across all maturities at 5.5%. You have observed the following “paired” transaction by your portfolio manager:
Bond

Transaction

Type

Credit Spread (bp)

Maturity (yrs.)

Coupon rate (%)

Modified Duration

E

Sell

U.S. Govt.

---

15

0

14.599

F

Buy

Corporate

100

7

8

5.386

What this paired trade suggests to you about the manager’s implied view:
A. The manager expects future interest rates to decrease;
B. The manager expects the shape of yield curve will become upward sloping;
C. the manager expects the corporate-treasure spread will widen;
D. None of the above.
8. You are financing a 5-year liability with investment in a portfolio of 2-year bonds (the term to maturity of bonds are all 2 years), you will have the best outcome if interest rate
A. increases in the next 5 years
B. decreases in the next 5 years
C. does not change in the next 5 years
D. either increases, decreases or stays flat
9. You are financing a 2-year liability with investment in a portfolio of 5-year bonds (the term to maturity of bonds are all 5 years), you will have the best outcome if interest rate
A. increases in the next 2 years
B. decreases in the next 2 years
C. does not change in the next 2 years
D. either increases, decreases or stays flat
10. Which of the following best describes the security market line (SML)?
A. SML shows the relationship between the expected or required rate of return and the systematic risk on a risky asset.
B. Individual investors should differ in position on the SML depending on risk preferences.
C. How an investor gets to a point on the SML is based on financing decisions.
D. The investment decision of choosing the point on SML is separate from the financing decision of reaching there through either lending or borrowing.
11. The major factor that allowed portfolio theory to develop into capital market theory is the concept of a risk-free asset. Which one of following statement is NOT a characteristic of such asset?
A. An asset with zero standard deviation.
B. An asset that has zero correlation with all other risky assets.
C. Provides the risk-free rate of return.
D. Will lie on the horizontal axis of a portfolio graph.
12. You use the relative valuation approach to analyze a set of security and is confident that the key relationship between PBV (price to book value ratio) and ROE (Return on Equity) should be PBV = 0.5 + 20 * ROE. Given this information, which of the following traded security is over-valued?
A. Traded PBV = 20, ROE = 0.5
B. Traded PBV = 10.5, ROE = 0.5
C. Traded PBV = 14.5, ROE = 1.0
D. Traded PBV = 15, ROE = 0.75
13. Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today. Johnson Company expects a constant growth of 5% in dividends forever. The required rate of return for this company's common stock is 15%. What is the value of one share of common stock? (Find the closest value)
A. $17.50
B. $14.13
C. $18.38
D. $22.97
14. If an individual owns a well-diversified portfolio, and decides to add one security to her portfolio, what is the most appropriate measure of risk for this security that will be added? ____
A. Standard deviation
B. Covariance
C. Beta
D. Correlation
15. Which one of the following is NOT considered an asset allocation strategy:
A. integrated asset allocation
B. strategic asset allocation
C. tactical asset allocation
D. full replication
Using the following information to answer questions 16 & 17 & 18
The Citic Corporation has just issue...