Finаl Exаm (Grоup B) – FNAN 311 – Spring 2026 – D. Hоrstmeyer Nаme _________________________ Student ID # ____________________ The Hоnor Code is in effect. Total = 100 points. Show all relevant work on computational problems that are not multiple choice. Label each axis and line and point on graphs. Section 1: Multiple Choice (each question is worth 2 points) Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $100 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? $12 $10 $1 $8 Investors who want to liquidate their holdings in a closed-end fund may _________________.A. sell their shares back to the fund at a discount if they wishB. sell their shares back to the fund at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value if they wish Mark the False statement regarding ETFs below A.ETFs are more tax efficient than MFs due to their redeem in kind feature B. ETFs can deviate from their NAV during the dayC. ETFs have a bid-ask spread, while open-end MFs do not have a bid-ask spread since they trade at NAVD. ETFs in general underperform their MF counterparts by about 0.2% per year due to their bid-ask spreads which cost investor every time they trade in and out of them. You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 3%. The securities in the fund increased in value by 8% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? 1.61% 4.23% 3.48% 2.66% You have decided that you want to buy into a mutual fund and hold it for 10 years or longer. Which of the following would be the best to pick if you wish to minimize fees paid:A. front end load = 1%; back-end load = 1%, expense ratio = 2.5%B. front end load = 0.5%; back-end load = 0.5%, expense ratio = 2.5%C. front end load = 2.5%; back-end load = 0.5%, expense ratio = 3%D. front end load = 2.5%; back-end load = 1.5%, expense ratio = 0.2% The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio C? 1.58% 2.38% .91% 12.50% What is the Sharpe measure for portfolio C? 1.21 0.43 0.55 0.60 Consider the Sharpe and Treynor performance measures. When you have made the decision that you want to spread your money across 15 different managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluation if you have decided to put all your money with one manager. A. Treynor; SharpeB. Sharpe; TreynorC. Alpha; TreynorD. Alpha; I-ratio Which of the following would violate the efficient market hypothesis?A. Intel has consistently generated large profits for years.B. Prices in January are always more volatile than other months.C. Investors earn abnormal returns months after a firm announces surprise earnings.D. Google consistently has high cash holdings despite activist investors’ protests. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. strong semistrong perfect weak An implication of the efficient market hypothesis is that nonzero alphas will quickly disappear. TRUE FALSE If the EMH holds then the following must be true: Cov(Ri,Rj)=0 for any two non-overlapping sets of returns, in expectation AND Cannot have a mutual fund manager beating his benchmark in one year by 5+% TRUE FALSE Most believe market efficiency has been weakening over time (since the 1970s) since data availability has increased and inexpensive trading has increased as well. TRUE FALSE You purchase one IBM July 120 put contract for a premium of $7. You hold the option until the expiration date when IBM stock sells for $125 per share. You will realize a ______ on the investment. A. $300 profitB. $700 lossC. $300 lossD. $700 profit The writer of a put option _______________. agrees to sell shares at a set price if the option holder desires agrees to buy shares at a set price if the option holder desires has the right to sell shares at a set price has the right to buy shares at a set price A call option gives its holder the right to _________. A. buy the underlying asset at the exercise price and potentially profit from a price increaseB. buy the underlying asset at the exercise price and potentially profit from a price decreaseC. sell the underlying asset at the exercise price and potentially profit from a price decreaseD. sell the underlying asset at the exercise price and potentially profit from a price increase The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premiumB. larger the lower the stock priceC. unlimitedD. limited The value of a listed call option on a stock is higher when: The exercise price is higher and Stock price goes higher TRUE FALSE The geometric average of -12%, 20%, and 25% is _________.A. 8.1%B. 11.0%C. 6.2%D. 9.7% Consider the following two investment alternatives. First, a risky portfolio that pays 15% rate of return with a probability of 40% or 5% with a probability of 60%. Second, a treasury bill that pays 6%. The risk premium on the investment is _________. A. 9%B. 8%C. 3%D. 1% The risk that cannot be diversified away is __________. A. alphaB. firm specific riskC. idiosyncratic riskD. systematic risk The beta of a security is equal to the _________. A. covariance between the security and market return divided by variance of the market's returns B. covariance between the security and market returns divided by standard deviation of the market's returnsC. variance of the security's returns divided by covariance between the security and marketD. variance of the security's returns divided by the variance of the market's returns Suppose that a stock portfolio and a bond portfolio have a correlation coefficient of .2 (ρ=20%). This means that if the stock portfolio goes down 1% on a given day ______. A. the bond portfolio goes down a lot (big negative returns).B. the bond portfolio weakly goes down (small negative returns).C. the bond portfolio goes up a lot (big positive returns).D. the bond portfolio weakly goes up (small positive returns). In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiableB. marketC. unsystematicD. systematic risk Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 15%? A. .5B. 1.2C. .8D. 1 According to the capital asset pricing model, fairly priced securities have _________. A. negative betasB. positive alphasC. positive betasD. zero alphas In a simple CAPM world which of the following statements is (are) correct?I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.II. Investors' complete portfolio will vary depending on their risk aversion.III. The return per unit of systematic risk will be identical for all individual assets.IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. I and II onlyB. II, III and IV onlyC. I, III and IV onlyD. I, II, III and IV The optimal risky portfolio can be identified by finding ____________.I. the minimum variance point on the efficient frontierII. the maximum return security III. the tangency point of the capital market line and the efficient frontierIV. the line with the steepest slope that connects the risk free rate to the efficient frontier A. I and II onlyB. II and III onlyC. III and IV onlyD. I and IV only Mark the False statement below:A. Uniquely, PE ratios have gone up recently while stock prices have gone down. B.If you are in a market that is zero sum, it may not be considered gambling if one is using it for hedging purposes.C. There is an arbitrage opportunity between the publicly traded BDCs and privately traded BDCs right nowD. Cliff Asness and AQR make most of their money playing value & momentum strategies (and the intersection of those two factors). Hudson River generally does what to make money: High frequency/algorithmic trading to take advantage of mispricings over a 6 to 12 month period.TRUE FALSE If PE truly believed their NAV was accurate, they would issue new shares right now in their own firms to take advantage of the big price difference (difference between price and NAV). TRUE FALSE Section 2- Short Answer: Suppose you purchase one IBM May 100 call contract at $9 and write (sell) one IBM May 110 call contract at $4. Draw/Describe the profit diagram associated with this strategy. (5 points) b) The maximum potential profit of your strategy is ________ if both options are exercised (i.e. if the stock price goes to 120). c) If, at expiration, the price of a share of IBM stock is $103, your profit would be: d) What is the maximum that you can lose with this position you have created? Tim Cook receives compensation in the amount 1 million dollars in cash and 10,000 Apple Call options (Employee stock options – each call option represents 100 shares, as usual). These are the only options that he owns in Apple. It is currently May 1st, 2026 and the options all expire on July 1st, 2026. The current stock price for Apple is 100 dollars and all the options have an exercise price of 100 (S=100, X=100). Tim Cook is evaluating a project with the following terms: - 25% chance the project goes well and increases the stock price to 110. - 50% chance the project does ok and the stock price increases to 101. - 25% chance the project is a disaster and the stock price plummets to 70. a) Given his options holdings, what will Tim Cook’s decision be? What is his expected payout if he does not take the project on? What is the expected payout in his options (expected dollar amount he will get) should he take on the project? Will he take the project or not take on the project? (5 points) b) If he decides to do the project, what are the expected payouts to shareholders (expected dollar amount the stock will go up or down)? c) If you were designing the pay package for Tim Cook (i.e. picking what form his compensation takes) what are two ways you could design his compensation so that his interests are aligned with those of the shareholders? You are an investor who has been looking closely at IBM over the past 2 months. The current stock price sits at 50, and all options that are currently traded are at the money. You say to yourself: “With the upcoming IBM earnings report, I am pretty sure that IBM is going to match earnings exactly or close to it. I don’t know which direction it will move, but whichever direction it moves it will just be a very small move (low volatility).” You have available to you a put, a call, and obviously the stock itself if you want. Given this feeling, what position would you construct (i.e. combine the options in some way to match your sentiment) to perfectly capture this idea that there will be low volatility (without any directional bias)? You can go long, short, buy an option, or sell/write an option if you want. Describe your position below. Draw/Describe the profit diagram to your constructed position as well (assume that a put costs P dollars and a call costs C dollars). What is this position called which you have constructed (i.e the name given to it)? (5 points) b) Referring to the previous question, draw the profit diagram of the market maker who is on the opposite side of this transaction (i.e the one who took the exact opposite position as you and created the options)? (1 point bonus) Fill in the blank: Combining the two profit diagrams together highlights that the options market is a ________________. Below is a picture of the average company reaction to CNBC reports. The 0 date is right when a particular news event is mentioned on CNBC. The cumulative abnormal returns to the company are on the y-axis and minutes are on the x-axis. (4 points) Does this picture support or contradict the Efficient Market Hypothesis? Discuss and justify your response Below is the Shiller P/E ratio over time. This measures the total market’s price (market capitalization) divided by total market earnings. Shiller and Fama both look at this graph and come to very different interpretations regarding EMH. Detail Shiller’s view about what the graph below tells us about EMH and how exactly we can form a trading strategy to exploit the below graph. What is Fama’s response to this exactly? (4 points) We live in a world where there are many risky assets and a risk free asset. Draw/Describe the investment opportunity set on the mean-standard deviation graph (mean-variance graph) that you have as an investor in this world. a) Label the efficient frontier on the graph. Explain in detail how each point on the efficient frontier is constructed (i.e. if you told Excel Solver to construct the EF for you, what is it doing behind the scenes to construct the curve). (4 points) If the simple CAPM is valid, is the situation detailed below possible? Explain in a few short sentences. (4 points) Portfolio Expected Return Std Dev Risk-free 10 0% Market 30% 28% A 22% 18% _________________________________________________________________________ If the simple CAPM is valid, is the situation detailed below possible? Explain in a few short sentences. (4 points) Portfolio Expected Return Beta Risk-free 10 0 Market 18% 1 A 22% 1.25 B 26% 2 ______________________________________________________________________ Answer the following question regarding CAPM (3 points): What is the objective function of an investor in a CAPM world? What is the equation for the equilibrium condition in a CAPM world (i.e. all investors will keep trading stocks and assets until what equality holds)? EXTRA CREDIT: Your portfolio manager tells you that they delivered 15% last year. You follow up with the portfolio manager and ask them for two years of performance data which they give you. You take the data from year t-2 to year t-1 and run the following regression: Ri = Rf + βmRm + βsmbRsmb + βhmlRhml And you find that: βm = 1.10 βsmb = 1.2 βhml = 0.10 Using the following returns from year t-1 to year 0: Rf = 0 Rm = .12 Rsmb = .01 Rhml = .02 Did the portfolio manager actually do well over yr t-1 to 0- what were their FF adjusted returns? According to the Beta coefficients, what types of risk is the manager primarily taking? (3 points) Extra Credit (2 points): Explain the issue with Private credit in open end funds. How does the drag on NAV relate to incentives of the private credit fund and the industry as a whole. Extra Credit (2 points): Explain the “lemons problem” with respect to private credit getting into 401Ks and other retail investor portfolios. Extra Credit (2 points): Explain what Cliff Asness believes Private fund managers are doing with their vol estimates and how this helps them.