Financial Markets

Past Exam Questions

1. 2016: You need to invest USD 25 million for 3 months on the money market.
End of August 2016, you observe the following sequence of USD Libor rate (in
%):

USD 1-Month Libor rate: 0.3423

USD 3-Month Libor rate: 0.5476
USD 6-Month Libor rate: 0.8544
USD 1-Year Libor rate: 1.0814

On this basis, you can deduce that, before fees, your investment interests
should amount to:

A) USD 34’225
B) USD 540 760
C) USD 1100 920
D) USD 1360 900

2. 2016: You find on the market a financial asset that you could buy at a price of
CHF 20’500. If you require a rate of return of 4.0% per year (discrete
compounding) and if this financial asset pays a cash flow of CHF 2’500 every 6
months for the next 5 years, you deduce :

A) that this financial asset is interesting since the present value of

the future cash flows is larger than the price to pay to get them.
B) that this financial asset generates a return of exactly 4%.
C) that this financial asset generates a return smaller than the required 4%.
D) that this financial asset is not interesting since the present value of its
cash flows is less than the price to pay to get them.
3. 2016: A colleague at your investment firm has developed an investment
strategy for the Swiss market in which he selects every 6 months the 20 stocks
with the highest historical returns. According to his analysis, this strategy
allows him to generate a risk-adjusted return that exceeds the market by more
than 5% per year. On this basis, we can deduce that :

A) The market is efficient since historical prices only were used to build
portfolios.
B) The market is weak-form inefficient since your colleague used
historical prices.
C) The market is semi-strong efficient since public information was used to
build the portfolios.
D) The market is strong-form inefficient since this strategy used publicly
available information.

4. 2013: Which of the following propositions is true ?

A) The ”book-to-market” (BTM) ratio is computed by dividing the

accounting value by the market value and a growth firm is characterized
by a high BTM while a value firm is characterized by a low BTM.
B) Historically, growth firm rates of return have been lower than value firm
returns.
C) The factor model proposed by Fama and French in 1993 does not include
the market portfolio as a factor.
D) Historically, rates of return for low market capitalization firms
have been higher than rates of return for high market
capitalization firms.

5. 2016: You invested in two stocks whose expected returns and risks
(volatilities) are displayed below:

E[R] σ
Stock A 7.50% 12%
Stock B 8.25% 14%

Given that the correlation between both stocks is 0.35, how much should you
invest in stock A if your goal is to minimize the risk of your investment?

A) 38.31%

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 B) 42.34%
C) 55.55%
D) 61.69%

6. 2016: You built a portfolio of three stocks whose expected returns, risks
(volatilities) and correlations are given below:

E[R] σ ρij
Stock 1 5.50% 10.50% ρ12 0.40
Stock 2 6.75% 12.25% ρ13 0.35
Stock 3 7.10% 13.00% ρ23 0.25

Knowing that you invested 20% in the first stock, 40% in the second one and
that the budget constraint is respected, you deduce that the expected return
and the risk (volatility) of your portfolio are respectively:

A) 6.64% (E[Rp ]) and 7.89% (σp )

B) 6.64% (E[Rp ]) and 9.17% (σp )
C) 7.44% (E[Rp ]) and 7.89% (σp )
D) 7.44% (E[Rp ]) and 9.17% (σp )

7. 2016: You are looking at the stocks of the bank ”alma” and the bank ”mater”.
The first one has a systematic risk - or beta, which amounts to 0.80 whereas
the systematic risk - or beta, of the second one is equal to 0.90.
The financial analysts who work in your company estimate that the expected
returns for the stocks of these two banks are the same, equal to 5.1%. These
same analysts estimate that the market’s expected return should be equal to
5.5%, whereas the riskless rate is 1.5%.
On this basis, and assuming that the CAPM is true, you deduce that:

A) The stock ”mater” and the stock ”alma” are correctly valued
B) The stock ”mater” and the stock ”alma” are respectively undervalued
and overvalued
C) The stock ”mater” is correctly valued, whereas the stock ”alma” is
overvalued
D) The stock ”mater” is correctly valued, whereas the stock
”alma” is undervalued

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 8. 2014: According to modern portfolio choice theory, the rational investor
problem who adopts a mean-variance approach is to:

A) Maximize portfolio variance for a desired return level.

B) Maximize portfolio return for a maximum risk.
C) Minimize portfolio return for a desired risk level.
D) Minimize portfolio variance for a desired return level.

9. 2017: You are asked to compute the price (including accrued interests) of an
ordinary bond with a maturity of 5 years issued exactly two and a half years
ago. The bond is characterized by an annual coupon rate of 4% and a nominal
value of CHF 1000. Assume a (discrete) annual risk-free rate of 5%.

A) 98.46%
B) 99.68%
C) 100%
D) 101.18%

10. 2016: You built an equally weighted portfolio constituted of three bonds
issued by top quality borrowers. Their modified duration (sensitivity) amount
to respectively 5.45, 7.25 and 10.35. If you anticipate an interest rate increase
of 50 basis points (discrete compounding), you deduce that:

A) The loss in capital of your portfolio will be in the order of

around 3.8%
B) The loss in capital of your portfolio will be equal to around 11.52%
C) The loss in capital of your portfolio will have to be equal to the interest
rate’s variation of 50 basis points
D) The gain in capital of your portfolio will be equal to around 3.9%

11. 2014: At date 0, you take a long position on 10 forward contracts with
maturity of 2 year on gold. The forward price written in those contracts is
1250 US$. After a year, spot price on gold is S1 = 1265 US$. Knowing that
the riskless interest rate at that time is 0.10%, what is the value of your
forward position ? NB: use a continuous capitalization, and consider that
storage costs and convenience yield are nil.

A) 147.43 US$
B) 150.00 US$

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C) 157.50 US$
D) 162.49 US$