Professional Documents
Culture Documents
MODULE 1 (Due On September 3) Lesson 1
MODULE 1 (Due On September 3) Lesson 1
MODULE 1 (Due On September 3) Lesson 1
Lesson 1
1. Which of the following professions has the highest projected employment for
2024?
Financial Advisor
Truck driver
Teacher
Economist
Retire late to accumulate as much wealth as possible, and then give the wealth away
Lesson 2
Tries to incorporate all potential economic and financial crises, such as recessions,
appreciation and depreciation of currency, liquidity crisis, etc.
Does not look at historical returns, and looks at all the details of the portfolios and their
vulnerabilities during all sorts of potential financial crises.
Aims to test the behavior of historical returns and their fluctuations during all sorts of
potential financial crises.
A 5% decline in the value of the asset after 3 month, per each $1 million of notional
A 5% chance of the asset increasing in value by $1 million during the 3-month time
frame.
The likelihood of a 5% of $1 million decline in the asset over the next 3-month.
A 5% chance of the asset declining in value by $1 million during the 3-month time
frame.
3. In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured
by:
The Beta.
The Alpha.
__________.
Is the risk for an asset to experience losses due to factors that affect the entire stock
market; Is the risk which is endemic to a specific asset and therefore not the market as a
whole
Is the risk for an asset to experience losses due to factors that affect the entire stock
market; Is the risk which is endemic to the industry of the asset and therefore not the
market as a whole
Is the risk for an asset to experience losses due factors that solely affect the industry
associated with the asset; Is the risk which is endemic to a specific asset and therefore not
the market as a whole
Is the risk for an asset to not be able to be traded in the market at a later time; Is the risk
for an asset to experience losses due to factors that affect the entire stock market
5. Why might an investor not normally invest large sums of money into Walmart or
Apple stock?
Their stock prices are highly volatile, and thus carry a lot of risk
The stock prices are very stable, making it difficult to gain large sums of money
6. Why is the normal distribution not a good model of some financial data?
It does not have many outliers (Most values drawn from a normal distribution are within a
few standard deviations of the mean. This is not the case in the S&P500 data, for example.)
The standard deviation is too low
Extreme events occur too often
Lesson 3
1. Which of these best describes risk pooling?
If individual events are not independent, risk can be decreased by averaging across all of
the events
Sick people are more likely to sign up for health insurance, and healthy people will not
purchase the policy because this will make the premium more expensive
If individual events are independent, risk can be decreased by averaging across all of
the events
2. Which of the following was NOT a factor which led to the proliferation of life
insurance?
Insurance salespeople
3. What happens in the United States if your insurance company goes bankrupt?
Consumers are insured from insurance company failure at the state level
Insurance companies are partially owned by the government, and thus are not allowed to
fail.
Just like the FDIC protects consumers from bank failures, the federal government insures
against insurance company failures
4. What problem does the US Affordable Care Act (“Obamacare”) attempt to address
and how does it do so?
It addresses moral hazard by allowing hospitals to refuse treatment to those who cannot
pay for it.
It addresses selection bias by forcing everybody to buy health insurance or else face a
tax penalty.
5. One of the main reasons why many homeowners did not have flood insurance before
the advent of Hurricane Katrina in 2005 was:
Homeowners thought that the likelihood of a flood was too low to justify buying a flood
insurance.
Many homeowners were not aware that flood insurance existed in the first place.
Lesson 4
1. Under the “Don’t put all your eggs in one basket” analogy, the eggs represent
individual investments and the basket represents the overall investment portfolio.
Spreading your “eggs” around allows you to:
Maximize the possibility that good luck for a single investment positively affects your
overall portfolio.
Minimize the possibility that bad luck for a single investment adversely affects your
overall portfolio.
With mutual funds or unit investment trusts if you hold a small number of assets.
By including in your portfolio all classes of assets traded in the market, independently
of their risks.
3. Short selling, which is defined as the sale of a security that the seller has borrowed, is
motivated by the belief that:
the simple average of the expected returns of each asset in the portfolio; NOT the
weighted average of the standard deviations of each individual asset
the weighted average of the expected returns of each asset in the portfolio, weighted by
the investment in each asset; NOT the weighted average of the standard deviations of
each individual asset
the simple average of the expected returns of each asset in the portfolio; the weighted
average of the standard deviations of each individual asset
5. An efficient portfolio is a combination of assets which:
Achieves the highest possible covariance among its assets.
Offers a risk free rate of return by minimizing the risk of the portfolio.
Honor’s quiz
1. Which of the following are new advancements and changes in finance?
Insurance
Banking
Behavioral finance
Information technology
2. What did Andrew Carnegie believe some people succeed in business and others don't?
The business world selects for people with natural talent
3. The main difference between Value at Risk and Stress Testing is:
A positive alpha is considered overpriced, since the security outperforms the market.
An alpha of zero is able to generate a return which is inferior to the market return.
A positive alpha is considered underpriced, since the security outperforms the market.
We must rely on the central limit theorem to gather useful information about them.
6. If an insurance company has 10000 policies, and each has 0.1 probability of making a
claim, what is the standard deviation of the fraction of policies which result in a claim?
___0.003_______________________________________
To suggest laws that would prevent insurance corporations from becoming “too big to
fail”
To suggest laws that would decrease the complexity of insurance regulation
8. Insurance is managed by employers, so if an employee is sick and loses her job, her
insurance will be expensive due to preexisting conditions; by contrast, a healthy person
who loses his job may not be incentivized to purchase health insurance. This is an
example of
Moral hazard
Selection bias
Pooled risk
HMO
A World War
Bankruptcy Risk
Currency Risk
10. One of the mentioned assumptions of portfolio management theory is that investors
are rational. A rational investor:
Is always averse to risk.
Prefers a higher return for a given risk and prefers a lower risk for a given return
11. The market portfolio, which includes all traded assets available in the market, must
have a beta which is:
Equal to 1
Negative
Equal to 0
Above 1
12. Among the risks associated with short selling a stock are: (check all that apply)
Default risk: potential unlimited losses when buying back the stock.
Regulatory risk: a ban on short sales can create a surge in the stock price.
Dividend risk: the short seller must provide dividend payments on the shorted stock to
the entity from whom the stock has been borrowed.
Systematic risk: the uncertainty inherent to the market as a whole and which cannot be
diversified.
Increases your default risk by magnifying the standard deviation (risk) of your portfolio.
Does not increase the standard deviation of your portfolio, since the borrowed money is
risk free and therefore has a standard deviation of zero.
Increases systematic risk within your portfolio, that is the uncertainty inherent to the
market as a whole and which cannot be diversified. (not selected: Not necessarily. It
depends on the covariance between the risky asset your are increasing your exposure to
and the market as a whole.)
14. You are an investor who wants to form a portfolio that lies to the right of the
“optimal” minimum standard deviation portfolio on the efficient frontier. You must:
Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio
and, in addition, only in risky securities.
Borrow money at the risk-free rate and invest everything in the minimum standard
deviation portfolio.
Lesson 5
1. While discussing what the future of financial markets will look like, the following
arguments were mentioned (check all that apply):
It is hard to predict the nature of future financial markets, since human species is the
product of a complex evolution.
Financial markets will evolve following simple ideas and ideals, such as the ones
historically mentioned by Karl Marx or Robert Owen. (According to the discussion,
financial markets will not evolve following simple ideas and ideals, such as the ones
historically mentioned by Karl Marx or Robert Owen)
It is hard to predict the nature of future financial markets, this evolution will depend on
the involvement of young generations within the financial community.
Financial markets are likely to stay the way they are now for the next three decades.
2. In his work, David Moss describes how investors’ psychology favored limited liability
after the early 19th century New York experiment. In fact, the comparison between
investors’ psychologies in the context of unlimited liability and lottery tickets is:
Symmetrical depending on the amount of money involved. For large amounts, both
unlimited liability and lottery tickets investors tend to overestimate the minimum
probability of loss.
There is no such comparison between lottery tickets and unlimited liability investors.
Symmetrical. Unlimited liability and lottery tickets investors tend to overestimate the
minimum probability of loss.
3. The introduction of inflation indexed debt was motivated by: (check all that apply)
Historical examples of nominal debt being wiped out in real terms by high inflation.
To create a unit of account indexed to inflation, in order to counteract the impact of
hyperinflation.
Lesson 6
1. In the S&P 500 forecasting exercise, many subjects seemed to be subject to the
representativeness heuristic. This concept of behavioral finance posits that:
Most people don’t behave like forecasters, they tend to be affected by their recurring
thoughts at the time.
Most people don’t behave like forecasters, what they saw in the past is representative of
the future.
Most people don’t behave like forecasters, they tend to rely too heavily on the first piece
of new information offered when making decisions.
Most people don’t behave like forecasters, they tend to interpret new evidence as a
confirmation of their existing beliefs or theories.
3. The Dividend Discount Model (or Gordon Growth Model) can be stated as follows.
Let the investor’s discount rate be equal to r .If earnings equal dividends, and if dividends
grow at the long-run rate g, then the price of the stock P can be written as follows:
P = (E*r)/(g)
P = E/(r+g)
P = E/(r-g)
P = (E*g)/(r)
4. Human judgment and experience can play a role in the advent of stock market crash
because:
Investors with an experience of financial crises are better at exploiting profit
opportunities.
A lot of people who have lived through financial crises have reported that, as a
consequence of these crises and their narratives, their faiths in the market have
diminished.
Investors with an experience of financial crises are better at diversifying their portfolios.
Investors with an experience of financial crises are better at staying out of the market in
turbulent times.
Lesson 7
Subtle government economic interventions can ensure the sufficient production of goods
to meet society’s demands.
The free market, guided by self-interest, ensures the sufficient production of goods to
meet society’s demands.
2. What problems does prospect theory solve? (check all that apply)
People can underestimate high probabilities and overestimate low probabilities
People think that, if they hope for something strongly enough, it will be more likely to
happen.
People hope that their sports team or political candidate will win
4. Ricardo thinks that, since society seems similar to what it was in the late 1920s, a
second Great Depression is coming soon. To which cognitive bias is Ricardo falling
victim?
Representativeness heuristic
Attention anomalies
People will behave differently if playing games against a computer compared to playing
them with a human opponent.
People behave irrationally when faced with decisions which involve large sums of
money.
People sometimes change their behavior when they learn about a prediction which has
been made about the future.
Lack of empathy
Manipulative
Honors quiz
1. A limited liability corporation in which you are a shareholder has just gone bankrupt.
The company has a large debt, that is its liabilities are far in excess of its assets. Hence,
you will be called on to pay:
A proportional share of all creditor claims based on the number of common shares that
you own.
An amount that could, at most, equal what you originally paid for the shares of common
stock in the corporation.
Nothing.
A proportion of the total debt, which is decided at the discretion of the bankruptcy judge.
2. The inflation risk, which inflation indexation aims to mitigate (check all that apply)
Is the risk that the nominal rate of return of an investment will exceed the rate of
inflation.
Is the risk that the cash flow from an investment won’t be worth as much in the future
because of changes in purchasing power due to inflation.
Is associated with any investment that involves cash flows over time.
Is not the risk that there will be inflation, it is the risk that inflation will significantly
fluctuate over time.
4. The random walk hypothesis of the Efficient Market Theory posits that:
Historical stock prices follow a random walk.
9. Which of the following situations are examples of the framing effect? (check all that
apply)
An elevator lists a maximum capacity of 2000 lbs, even though it can safely carry up to
5000 lbs.
A mattress which costs $1000 is advertised as $4000 with a "75% off" sticker on it
A gold coin is sold for $1000, even though it is only worth $300.
A stock splits from $60 to $30 and investors are given twice as many shares
10. Which of the following defines the relationship of doctors to patients, but generally
does not apply to the relationship of financial advisors to their clients?
Patients can do their own background research on medical concepts to help them better
understand their health, but finance is too complicated for clients to do this.
Doctors use both data and experience/intuition when advising patients, but financial
advisors must use either one or the other.
Doctors have made an oath of loyalty to their patients, but financial advisors have not.
Patients may seek second opinions from other doctors, but not from financial advisors.
11. Which describes the concept of social contagion?
Contagious diseases tend to spread in social situations.
Ideas can evolve and develop in a similar way to genes, and we can use the principles of
evolutionary biology to understand this development.
Lesson 8
Which of the following describes current short term interest rates?
They are changing for the first time in the last 100 years
2. What is the Federal Funds Rate and how long does it take to mature?
The shortest term interest rate in the federal government, which takes one hour to mature.
The shortest term interest rate in the federal government, which takes one month to
mature.
The shortest term interest rate in the federal government, which takes one day to mature.
The longest term interest rate in the federal government, which takes one year to mature.
3. If you put $1000 into an account with a 20% interest rate, how much money will you
have at the end of the year if interest is compounded ONCE per year?
200
1200
1210
1440
You purchase a bond for the same price you eventually sell it for, but bond owners are
eligible for special offers from the federal government, also known as “coupons”, which
incentivize the purchase of the bonds.
You purchase a bond for the same price you eventually sell it for, but if you have a
“coupon”, you may buy it for less money.
You purchase a bond for the same price you eventually sell it for, but while it reaches
maturity, you may clip “coupons” off the bond and exchange them for money.
A consol pays a constant quantity (coupon) forever, whereas the annuity also pays a
constant quantity but only until a fixed time T called the maturity date.
An annuity pays a constant quantity (coupon) forever, whereas the consol also pays a
constant quantity but only until a fixed time T called the maturity date.
8. Irving Fisher’s Debt Deflation Theory starts from the observation that:
Deflation redistributed real wealth from creditors to debtors.
Lesson 9
The price per share and the total number of outstanding shares.
is the total number of shares he/she owns with respect to the total number of shares
outstanding.
says that the firm must pay dividends during its lifetime.
says that the firm must repurchase some of its shares beyond a certain threshold of
issuance.
does not say that the firm ever has to issue warrants, convertible debt or any other debt
securities.
5. In the Pecking Order Theory, the companies prioritize their sources of financing in the
following order:
(1) Debt, (2) Internal financing, (3) Equity.
6. A dilution is:
The issuance of new debt by a company.
A program by which investors buy back their previously sold shares of a given company.
Measures the funds provided by creditors versus the funds provided by owners.
Effectively shows the number of years of earnings at which the company is valued given
the current level of the share price.
A non-event.
HONOR’S QUIZ
1. Which of the following did Eugen von Böhm-Bawerk NOT believe caused the interest
rate to be a small positive number?
Financial knowledge and expertise accumulates at a societal level at approximately this
rate.
2. If you put $1000 into an account with a 20% interest rate, how much money will you
have at the end of the year if interest is compounded CONTINUOUSLY
1000e^.2x1 = 1221
3. Suppose that a consol has a promised payment of 6 pounds per 100 pounds notional.
This consol is now traded at 150 pounds. What it the current yield to maturity of the
consol?
1%
2%
3%
4% = 6/150
4. You observe that on today’s yield curve, the one year rate is R1=6% and the two year
rate is R2=6.5%. What is the one year forward rate one year from now ?
6%
5%
6.5%
FISHER EQUATION:
5. A tech company can make a 3% real return on an investment. It can borrow funds to
finance the investment at a nominal rate of 6% and the inflation rate is 1%. Hence:
The real rate of interest is 3%.
The real rate of interest is 2%.
The investment will be unprofitable. (The real rate of interest is 5%. Since the company
can only earn 3% in real terms, the project will be unprofitable.)
6. If expected inflation is less than actual inflation, then wealth will be redistributed from:
The government to consumers.
Borrowers to lenders.
Lenders to borrowers.
8. Which of the following are true for stock splits ? (check all that apply)
Market price per share is reduced after the split.
10. The Pecking Order Theory indicates that firms prefer _______ financing to _______
financing.
stock; debt
flexible; risky
internal; external
11. If the company I invest in issues a stock dividend at 5%, the value of my original
shares are ___________ by a factor ___________. I am ___________ since I have an
additional ___________ of value in the new shares.
raised, 1.05/1, better off, 0.05/1.05
An anticipated earnings growth rate which is less than that of the average traded firm.
14. What are the main implications of John Lintner’s dividend model?
A firm should always pay a dividend equal to its EPS (earnings per share).
A firm has to strike a balance. It should pay a dividend to share some of its earnings
with shareholders but its dividend should not be too high, because that might lead to a cut
in the dividend in a following year, which leads to a negative reaction among
shareholders.
If the company’s EPS is smaller than last year’s dividend, the company should engage in
share repurchases.
The value of her home is less than the value of her mortgage.
3. Why does the 30 year mortgage rate so closely match the 10 year treasury bond YTM?
Banks intentionally track the 10 year treasury bond YTM.
People could choose to finance their home with 10 year treasury bonds instead of with 30
year mortgages.
The interest rate of 30 year mortgages and the price of 10 year treasury bonds are set by
the same organization.
There are similar psychological causes which influence both the 30 year mortgage rate
and the 10 year treasury YTM.
The homeowner
The US government
Thank banks
5. Before the recession in 2007, why were banks giving out mortgages to people who
could not afford them?
Banks would resell to mortgages to CMOs, and thus they were not incentivized to make
sure their mortgages were unlikely to default.
CMOs were incentivized to buy mortgages which were likely to default, since these
would only affect their lowest tranche.
Many people faked documents in order to get a mortgage, known as a “liar loan”
6. Select TWO key causes of the housing bubble which crashed in 2007:
Over-optimistic mortgage lending
Hyper-inflation
7. During the housing bubble of 2007, which of the following tended to fluctuate with
home price index?
The percentage of new homeowners who think that investing in real estate is a good
long term investment.
The percentage of new homeowners who think investing in real estate is a bad long term
investment.
The percentage of new homeowners who have been evicted from their home.
Lesson 11
1.Why might companies like the idea of regulation?
It allows them to compete on a level at which they do not have to use (potentially
unethical or unfair) special tricks to avoid letting their competitors gain a competitive
advantage.
Regulation could be used to give them a legal monopoly over a particular sector.
It helps them ensure they are representing the interests of their customers.
Companies have enough money to bribe government officials to create regulation that
favors them.
2. What is tunneling?
When a small group of majority shareholders in a company allow the company to be
bought out for a very low price by another company in which the small group are also
majority shareholders.
Any trick that somebody in the company uses to steal money from the company.
When a member of the board of directors fires a high ranking employee so that a family
member can take their place.
The shareholders
The CEO
A fixed rate charged by all brokerages to buy or sell shares on the stock market.
Fixed taxes imposed on brokerages if they wished to operate in the stock market.
5. Which of the following describes the contrast of federal vs state regulation in the US?
Securities are primarily regulated by state governments but corporate regulation is
primarily by the federal government.
Securities regulation and corporate regulation are both primarily controlled by the state
governments.
Securities regulation and corporate regulation are both primarily controlled by the federal
government.
6. What is the US Securities and Exchange Commission (SEC) NOT responsible for
doing?
To authorize companies to be traded publicly on the stock market.
Martha receives private information about a company from her stock broker. As a result,
she sells all of her shares in this company, which fall substantially in price the next day.
Leah is a short sells shares for a company she used to work for and then creates a fake
press release with bad news from the company.
Mohammed is a secretary for a large corporation and overhears that they are about to take
over a smaller corporation. He tells his wife, who purchases a large number of shares in
the company immediately before the acquisition is announced.
People began to distrust brokerages and pulled their money out of stocks.
Because Goodbody and Company held the shares for their clients, people lost most or all
of their stocks.
9. Which of the following describes the Bank for International Settlements (BIS)?
A bank for citizens of any country which allows them to deal in other currencies.
The English name for the national bank of Switzerland, which strategically fosters
relationships between banks internationally.
A bank for central banks which provides an intermediary for the central banks to deal
with each other.
Honors Quiz
1. Why must we consider psychological factors when speaking about housing prices?
Applying certain psychological factors can increase a portfolio’s risk.
3. Which of the following definitions are correct? (check all that apply)
Fixed rate mortgages are mortgages where the interest rate does not change over time.
An adjustable rate mortgage (ARM) does not have a fixed interest rate, but increases
gradually over time.
Shared Appreciation Mortgages (SAMs) require you to pay some percentage of the
appreciation of your house.
Banks are usually in the business of initiating but not keeping mortgages, so offering
QRMs allows them to sell them all to a CMO.
QRMs are mortgages that are unlikely to default, so by offering them, banks can ensure
that they will not lose large amounts of money from defaults.
Banks are usually in the business of initiating but not keeping mortgages, but QRMs are
high enough quality that banks would want to keep them.
Regulation can cause a monopoly if only one company can keep up with the expenses of
complying with the regulations.
7. Which of the following correctly describes a type of hedge fund? (check all that apply)
3c1 hedge funds can take no more than 99 investors, each of whom must have an
income of at least $200,000 or investable assets of at least $1,000,000.
3c3 hedge funds can take up to 999 investors, each of whom must be an individual with a
net worth of at least $10,000,000 or an organization with a net worth of at least
$100,000,000.
3c7 hedge funds can take up to 500 investors, each of whom must be an individual with
a net worth of at least $5,000,000 or an organization with a net worth of at least
$25,000,000.
3c8 hedge funds can take no more than 50 investors, each of whom must have an income
of at least $200,000 or investable assets of at least $5,000,000.
Banks tell rating services the rating they wanted before it was rated.
Banks stop caring about the rating anymore as long as they can find someone to buy it.
Most shortages could have been prevented if traders had not speculated on grain prices.
Warehouses buy from the farmer in forwards, and then hedge on futures.
3. When an investor uses margin to buy or sell securities, how are the securities paid for?
On money borrowed from a broker whereby the broker may tell the investor at any time
to sell securities or contribute money.
4. What is the primary purpose of purchasing futures if they are rarely delivered?
To purchase the industry standard of a commodity, such as those put out by the Chicago
Board of Trade (CBOT)
To allow a corporation to buy and sell commodities, which would be impossible without
futures.
5. What often happens to futures at the time of the crop for commodities with a specific
well-defined harvest window?
They tend to be traded above the expected spot price at the contract’s maturity.
They tend to be traded exactly at the expected spot price at the contract’s maturity,
making it difficult to profit as an investor.
They tend to be traded below the expected spot price at the contract’s maturity.
There is a large fine on anyone who still holds the security on the final day.
Anyone still holding the security on the final day will receive a proportionate number of
shares in an S&P500 index fund.
On the last day there is a final settlement of the difference between the futures price and
the actual index.
On the last day, there is a final settlement of a combination of the other commodities on
the futures market.
7. What is the fair value of a futures contract with a storage cost of 3%, an interest rate of
5%, and a spot price of $1000 over a 1 year time period?
$1800.00
$1000.00
$1080.00
$1081.50
If the price is falling at an increasingly fast rate (has a negative second derivative), it is
backwardation, but if it is rising at an increasingly fast rate (has a positive second
derivative), it is contango.
If the price rises over time (has a positive derivative), it is backwardation, but if it falls (a
negative derivative), it is contango.
If the price falls over time (has a negative derivative), it is backwardation, but if it rises (a
positive derivative), it is contango.
If the price is rising at an increasingly fast rate (has a positive second derivative), it is
backwardation, but if it is falling at an increasingly fast rate (has a negative second
derivative), it is contango.
Futures contracts created by an exchange board which are settled at the end of each year
for 100 minus the federal funds rate averaged over the month.
Futures contracts created by the government which are settled at the end of each month
for 100 minus the federal funds rate averaged over the month.
Futures contracts created by the government which are settled at the end of each year for
100 minus the federal funds rate averaged over the month.
Futures contracts created by an exchange board which are settled at the end of each
month for 100 minus the federal funds rate averaged over the month.
Lesson 13
1. What are the two types of options?
A “call” option is the right to buy and a “put” option is the right to sell.
A “put” option is the right to buy and a “call” option is the right to sell.
A “get” option is the right to buy and a “push” option is the right to sell.
A “push” option is the right to buy and a “get” option is the right to sell.
2. Why do some stock options have an exercise price which is more than the cost of the
stock?
For “call” options, this provides the option to buy at this price if the stock goes up before
the exercise date.
The stock options sell for negative prices, because the investor will lose money if the
stock price does not fluctuate.
New investors often mistake “put” and “call” options, leading to an easy profit for the
dealer.
These options are “put” options, giving you the option to sell at a higher price.
3. Which of the following is NOT a behavioral reason why people buy options?
People will feel better about themselves if their stocks go down if they have purchased a
put option on them, regardless of whether or not they gained or lost overall.
Portfolio managers will usually buy options for clients without them knowing so that if
the stock price goes down, the manager will come across as thinking ahead and watching
out for their clients.
People will pay attention to specific aspects of their portfolio more so than others, so they
will buy options when they hear about volatility in the market to protect certain
components of their portfolio.
1
point
4.
Are mortgages in the US similar to options from the perspective of the homeowner?
Yes, because they can be sold by banks to Fannie Mae and Freddie Mac.
1
point
5.
What is the put-call parity relationship?
A method of arbitrage for options exchanges.
A mathematical formula specifying that the put price of an option minus the call price of
an option equals the price of the stock
A relationship between the put price, the call price, and the stock price for European-style
stock options.
An instruction to your broker indicating that they should sell your shares once they get
above a certain price.
The same thing as a put option, except you do not have to pay for it.
An instruction to your broker indicating that they should sell your shares once it drops
below some price.
Honor’s quiz
1.
If you are a Japanese producer who sells products in the US, you want a foreign exchange
future without going through the futures market. So, you borrow money in dollars with an
interest rate of 5% and immediately convert it to yen at a rate of 1 dollar to 100 yen. Then
you put the money in a Japanese interest-bearing account with an interest rate of 10%.
What is the forward exchange rate in this case?
Oil is primarily sold in long-term contracts, so there is no clear spot price of oil.
Oil is primarily traded in private markets, so very few people know how much money it
is selling for.
Oil cannot be stored efficiently, and thus special types of futures contracts are needed
which do not incorporate spot price.
1
point
3.
Intel Corp has a share price of $31.63 and a yearly dividend of $1.50 per year. An option
with a strike price of $27 has a call price of $6.10, and a put price of $2.65. Assuming no
interest, what is the predicted share price according to the put-call parity relationship?
Best efforts: the underwriters tries to sell shares at some price, and the deal collapses if
they don’t.
Short cut: the underwriters will cut the price of the shares if some of them remain unsold.
Loss safe: the underwriter will pay a penalty to the company if not all of the shares sell.
They want their favorite customers to be able to buy shares for cheaper
1
point
3.
Which of the following was NOT a feature that Charles Ellis believed made Goldman
Sachs successful?
Becoming prestigious
Personal anonymity
Making money
1
point
4.
What is a rating agency?
Any agency which refuses to take money from corporations for rating their securities.
1
point
5.
Why was the Glass-Steagall Act of 1933 repealed in 1999?
American banks claimed that it made it hard to compete with European banks, which
offered both investment and commercial banking services.
Investors felt inconvenienced that a single bank could not function as both an investment
and a commercial bank.
Investment banking was too costly for some companies, which could not manage both
investment and commercial banking services.
A law which limits the amount of risk with which funds managers may invest money
A guideline that individuals should look for funds managers who show prudence.
A law which mandates that investment managers must do what another educated,
experienced investment manager might do in a similar circumstance.
A new rule for fund managers which is starting to apply to newer regulations.
1
point
8.
Which of the following is NOT true of mutual funds?
Massachusetts Investment Trust was an early model for mutual funds in the US.
You join the fund at 4:00 PM on the day you decide to invest.
Lesson 15
1.
The difference between dealers and brokers is:
Receive price discounts on transactions from exchanges that come with co-location.
Take advantage of the maintenance services provided by the exchanges if any of their
servers fails.
The compensation and benefit a brokerage receives by directing orders to different parties
to be executed.
Lesson 16
1.
Some of Carmen Reinhart’s historical findings on sovereign defaults include: (check all
that apply)
Governments who cannot repay their creditors often tend to repudiate their sovereign
debt contracts.
It is common for governments to solve their debt problems by inflating their currencies.
1
point
2.
Which of the following are justifications given for the existence of a corporate profits
tax? (check all that apply)
Governments may have to step in for environmental damages beyond the limited liability
of the company that has caused the damages, as exemplified by TEPCO in Japan
following the earthquake from 2011.
Governments may be forced to bail companies out or assist companies during bankruptcy
proceedings, as exemplified by General Motors in the aftermath of the financial crisis
from 2007-2008.
1
point
3.
How do local governments typically make use of the money generated by municipal bond
issues?
Municipalities use the money to finance the salaries of public works employees.
Municipalities use the money to finance purchase of equipment such as fire trucks.
1
point
4.
The social insurance system in the U.S. is commonly referred to as the OASDI. What
kinds of insurance does this abbreviation encompass? (check all that apply)
Asset Insurance.
Disability Insurance.
Survivors insurance.
Honor’s Quiz
1.
The _________ price is the amount a dealer wants you to pay for a security whereas the
_________ price is the amount a dealer is willing to pay you for the security.
Bid; Ask
Ask; Bid
Ask; Receiving
Selling; Bid
1
point
2.
There are numerous factors that are taken into account in deciding on which stock
exchange to list on. One factor is the so-called “familiarity bias” which in this context
posits that:
Investors may have a preference for investing in only a specific (and familiar) class of
securities, such as stocks only.
Investors may often chase past performance in the mistaken belief that historical returns
predict future investment performance.
There are actually no behavioral biases that are taken into account when deciding on
which stock exchange to list on.
After applying for Chapter 9 bankruptcy, a municipality has to have a balanced budget
for 10 years, before it can start issuing tax-exempt municipal bonds again.
Any corporation must satisfy the balanced budget rule, which means that a corporation’s
assets must be equal to its short-term liabilities.
A state’s operating budget typically has to be balanced. This does however not mean that
states cannot go into debt, as states also have a capital budget, to which the balanced
budget rule does not apply.
1
point
6.
Which type of insurance coverage would likely cause more moral hazard problems:
Cooperatives do not have the maximization of profits as the very first objective.
Lesson 18
1.
What does the term “democratization of finance” mean?
Illegitimate debt raised by government, used for ill purposes against the will of the
people.
Human population can grow faster than humans can produce commensurate amounts of
food.
arithmetical; geometrical
arithmetical; linear
geometrical; arithmetical
linear; geometrical
1
point
5.
What are some reasons that inequality exists? (check all that apply)
Unmanaged risks
Political power
FINAL EXAM
1. Why was the Yale portfolio primarily in bonds and other “safe” investments?
Yale did not want the strong variation that are common in investment
Are concerned about by the performance of the riskier assets once they have created the
diversifying portfolio.
Ultimately earn the same return if they share the same level of risk-aversion.
4. If you want to protect the risk consisting in the fluctuations of the value of your home,
you would ideally:
Want to stay market-neutral (neither long nor short) in the market for homes in your city.
The strong form states that stock prices reflect all the information that can be observed on
the trading floor.
The weak form states that current market prices reflect all information that can be
relevant to the valuation of the firm.
The semi-strong form states all publicly available information about a firm’s prospects
are reflected within the firm’s stock price.
The hypothesis does not hold if asset prices reflect all -including inside- relevant
information.
6. Nastya’s makes risky investments with 25% of her portfolio and invests the rest of the
portfolio in low-variance investments. This is an example of
Attention anomalies
Disjunction effect
Representativeness heuristic
Mental compartmentalization
7. Today, the nominal rate of interest is 6% and the inflation rate is 2%. The real rate of
interest is therefore:
1%
2%
3%
4%
The capital received by the company after the dilution can improve the company’s
profitability and its stock price.
The company will increase its dividend payments over the short to medium-term.
Dividends are immediately taxed while capital gains are deferred until the stock is sold.
Capital gains are immediately taxed while dividends are deferred until the stock is sold.
Both dividends and capital gains are theoretically taxed every year but in practice, capital
gains are rarely taxed.
There is no difference: both dividends and capital gains are taxed every year.
1
point
10.
What was the major sign that lead Professor Shiller to predict the crash of the housing
market?
Housing prices had been rising for 100 years, but then suddenly started to fall.
Housing prices had been rising at a steady rate for 100 years, but then suddenly started to
rise at a much higher rate.
Housing prices had been falling for 100 years, but then suddenly started to rise.
Housing prices had been relatively constant for 100 years, but then suddenly started to
rise.
1
point
11.
How does the Dodd-Frank incentivize banks to only offer mortgages which they believe
will not default?
A bank must sell at least 5% of the Qualifying Residential Mortgages (QRMs) that it
initiates.
A bank must hold at least 5% of the Qualifying Residential Mortgages (QRMs) that it
initiates.
With the exception of Qualifying Residential Mortgages (QRMs), a bank must hold 5%
of the mortgages that it initiates.
1
point
12.
Which of the following is an example of tunneling?
Insider trading.
Telling friends inside information which helps them exploit a business opportunity.
A broker, after receiving a large order from a client, purchases all of the shares at the
same time, causing the price of the stock to fluctuate and creating instability in the price
of the stock.
A broker uses decimalization, or the fact that stocks are traded in pennies instead of
1/16ths of a dollar, to take advantage of other investors.
A broker temporarily invests a client’s entire portfolio in a single investment so that the
price goes up, and then sells it quickly with the higher price.
1
point
14.
Suppose Maria invests in futures. Which of the following is true?
Maria’s margin account will be adjusted each day to account for price changes.
Maria must be an employee at a warehouse because only they have the commodities to
trade.
Maria is responsible for making margin calls to ensure that she has enough money to
honor the price of her futures.
Backwardation is when futures prices are above their expected price at maturity, whereas
contango is when they are below their expected price at maturity.
Backwardation is when futures prices are below their expected price at maturity, whereas
contango is when they are above their expected price at maturity.
A single stock price does not represent a single risk; it represents many risks, which
matter in different ways to different people.
Companies would like people to purchase call options for their stocks, because then it
reduces their risk. Put options serve as the natural extension of call options.
Options serve the same role as insurance for investors, because they are able to insure
themselves against large losses for long periods of time.
17. Why does the put-call parity relationship only come close to holding, but not predict
the exact price?
Transaction costs cause the prices to be slightly different from the prediction.
The put-call parity relationship is a theoretical finding which cannot be expected to hold
in practice.
18. What was the most remembered aspect of the Glass-Steagall Act of 1933?
It specified that a single company cannot be both an investment bank and a commercial
bank.
20. Bankruptcy laws can make the government a shareholder in all businesses. Chapter 7
of the U.S. Bankruptcy Code (Liquidation) involves:
Paying off the existing debt of a firm and negotiating new debt contracts.
Terminating a firm and selling the assets based on their salvage value.
21. In the U.S., the very first benefit corporation was created:
In Illinois (2005).
In Pennsylvania (2010).