HISTORICAL RETURN CALCULATIONS

On 1 January 2020, an investor decided to purchase 400,000 shares of Adyen for EUR 300
million exactly. Adyen paid an annual dividend of EUR 15 per share on 1 August 2020. The
investor entered the position with maximum leverage, financing 60% of her position with
debt. The interest rate on the financing from the broker amounted to 6.0% per annum. The
investor sold her position per 30 June 2020. Inflation over the holding period amounted to
0.2%.

1. Calculate the interest payment that the investor needs to make for this investment.
a. EUR 3.6 million
b. EUR 5.4 million
c. EUR 6.3 million
d. EUR 10.8 million

2. Calculate the ending (=end) value of this investment, if the investor would sell for
EUR 1,250 per share. Round to a full million.
a. EUR 315 million
b. EUR 321 million
c. EUR 495 million
d. EUR 501 million

For the following question, suppose the ending (=end) value of this investment is EUR 355
million, regardless of your answer to the preceding question.

3. Calculate the real percentage holding period yield of the investment in this case.
a. 18.33%
b. 95.24%
c. 195.24%
d. 295.83%

For the following question, suppose the investor receives a margin call during the holding
period, and her position is being terminated immediately.

4. Calculate the share price at which the investor would receive a margin call, if the
maintenance margin requirement amounted to 30%. Ignore financing costs and
dividends. Round to a full number.
a. EUR 450
b. EUR 643
c. EUR 765
d. EUR 1,500
 5. Select the statement that is FALSE:
a. An investor that buys an equity position with leverage, could only incur a margin call
if the share price drops compared to the initial price.
b. An investor that is shorting a stock, could only incur a margin call if the share price
drops compared to the initial price.
c. The maximum amount that an investor can lose, when buying an equity position with
leverage, can be calculated upfront.
d. The maximum amount that an investor can lose, when shorting a stock, cannot be
calculated upfront.

RISK AND RETURN

An investor is investigating the stock of a public company. He has compiled the following
monthly historical return information.

Month Return
1 -7.0%
2 +4.0%
3 +10.0%
4 -2.0%
5 +10.0%

6. Calculate the geometric mean return for this stock over the last 5 months.
a. 2.8%
b. 3.0%
c. 14.7%
d. 15.0%

7. Calculate the standard deviation of returns for this stock based on the arithmetic
mean return.
a. 0.6%
b. 2.2%
c. 6.0%
d. 7.5%

An different investor is analysing a portfolio consisting of two stocks. The following

information is available:

Stock A Stock B
Standard deviation 7.0% 12.0%
Expected return 12.0% 18.0%
Weight in portfolio 40.0% 60.0%

For the following question, suppose the correlation coefficient between the returns of the
two stocks is -0.9.

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 8. Calculate the expected return for the portfolio.
a. 9.5%
b. 10.0%
c. 15.0%
d. 15.6%

9. Calculate the standard deviation of returns for the portfolio.

a. 4.8%
b. 9.5%
c. 9.7%
d. 10.0%

10. Select the statement that is TRUE:

a. The correlation coefficient between the returns of two stocks does not impact the
expected return of a portfolio consisting of those two stocks, and is thus irrelevant
for investment decision making.
b. If an investor selects two stocks with a positive correlation coefficient between their
returns, the investor can realise diversification benefits as the positive correlation
coefficient increases the expected return of the portfolio beyond the expected
returns of the individual stocks.
c. If an investor selects two stocks with a negative correlation coefficient between their
returns, the investor can realise diversification benefits as the negative correlation
coefficient increases the expected return of the portfolio beyond the expected
returns of the individual stocks.
d. The correlation coefficient between the returns of two stocks partially determines
the risk of the portfolio consisting of those two stocks, and is thus relevant for
investment decision making.

GLOBAL CAPITAL MARKETS (5 MARKS)

There is an array of investment alternatives available around the globe. Investors should
consider how to deal with these alternatives.

11. Diversification is an important topic within investment analysis. Select the statement
that is FALSE:
a. The concept of diversification can be quantified using statistical techniques.
b. Diversification can enable investors to lower their risk, for the same level of expected
return.
c. Diversification can enable investors to increase their expected return, for the same
level of risk.
d. Diversification can be measured in terms of coefficient of variation.

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 12. A distinction can be made between primary and secondary markets. Select the
statement that is TRUE:
a. Securities that trade on primary markets are of higher quality than securities that
trade on secondary markets.
b. Initial Public Offerings take place in the secondary market.
c. If Apple, a public company, decides to issue new shares, this would be considered a
secondary market transaction.
d. Primary markets can be used by issuing companies or governments to raise new
capital.

You inherit EUR 1 million and are considering investing this amount in either a rental
property in Amsterdam or a well-diversified securities portfolio.

13. Select the statement that is FALSE:

a. The securities portfolio offers more diversification benefits than the rental property.
b. The securities portfolio is more “liquid” than the rental property.
c. The rental property will typically provide a periodical cash flow.
d. The rental property can only go up in value, making it a low-risk investment.

14. Investors may use leverage. Select the statement about leverage that is FALSE:
a. Using leverage may cause a margin call to occur.
b. Using leverage amplifies the return of an investment.
c. Using leverage does not affect the risk of an investment.
d. Using leverage results in additional costs for an investor.

You buy 1,000 shares of Royal Dutch shell for EUR 20.00 per share. The share price increases
to EUR 28.00 per share, and you decide to issue a stop-loss order at EUR 24.00 per share.

15. Select the statement that is TRUE in relation to the situation described above:
a. Issuing the stop-loss order aims to limit the downside risk.
b. Issuing the stop-loss order results in a profit between EUR 0 and EUR 4,000.
c. Issuing the stop-loss order results in a profit between EUR 4,000 and EUR 8,000.
d. Issuing the stop-loss order will cap the upside (=profit) in the position.

CAPITAL MARKET EFFICIENCY (5 MARKS)

Whether capital markets are efficient or not, has important implications for the investment
process. The Efficient Market Hypothesis (EMH) recognises three forms of market efficiency.

16. Select the statement that is TRUE:

a. If the EMH holds in its strongest form, there is no opportunity to earn a return.
b. If the EMH holds in its strongest form, investors cannot structurally beat the market.
c. If the EMH holds in its strongest form, investors should expect to generate a lot of
alpha.
d. If the EMH holds in its strongest form, systematic risk is largely removed from the
market.

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Suppose a researcher has established that institutional equity investors in Brasil can use
historical market information on price and volume to generate a (consistently) superior
return in the stock market.

17. Select the statement that is TRUE in the context of the EMH:
a. The Brasilian market is not weak form efficient.
b. The Brasilian market is weak form efficient, but not semi-strong form efficient.
c. The Brasilian market is semi-strong form efficient, but not strong form efficient.
d. The Brasilian market is strong form efficient.

18. Select the statement that MOST APPROPRIATE in the context of the EMH:
a. Technical analysis could work in the Brasilian market, but fundamental analysis
should not.
b. Fundamental analysis could work in the Brasilian market, but technical analysis
should not.
c. Neither technical nor fundamental analysis should work in the Brasilian market.
d. Both technical and fundamental analysis could work in the Brasilian market.

Suppose a researcher has established that institutional equity investors in Thailand cannot
use historical market information on price and volume to generate a (consistently) superior
return in the stock market. However, if these investors use public information (press
releases, analyst and annual reports, et cetera), they are able to generate a (consistently)
superior return.

19. Select the statement that is TRUE in the context of the EMH:
a. The Thai market is not weak form efficient.
b. The Thai market is weak form efficient, but not semi-strong form efficient.
c. The Thai market is semi-strong form efficient, but not strong form efficient.
d. The Thai market is strong form efficient.

20. Select the statement that MOST APPROPRIATE in the context of the EMH:
a. Technical analysis could work in the Thai market, but fundamental analysis should
not.
b. Fundamental analysis could work in the Thai market, but technical analysis should
not.
c. Neither technical nor fundamental analysis should work in the Thai market.
d. Both technical and fundamental analysis could work in the Thai market.

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