NANYANG TECHNOLOGICAL UNIVERSITY

HE3007 FINANCIAL ECONOMICS

MIDTERM QUIZ 2021-2022 SEM2

Name: (Please Print)

.)..

1. Answer ALL questions.

2. There is NO answer book. Write down your answers in the space specified in
this paper.

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I. Multiple Choice Questions

1. Which of the following indices is (are) price-weighted?

I) Standard & Poor's 500
II) The Dow Jones Industrial Average
III) The Straits Times Index
A. II only
B. I and II only
C. I and III only
D. II and III only
E. none of them

2. Which of the following securities is a money market instrument?

A. Treasury bill.
B. Treasury note.
C. Commercial paper.
D. Both A and C

3. Which of the following is the most risky transaction to undertake in the stock index
option markets if the stock market is expected to decrease substantially after the
transaction is completed?
A. Write a call option
B. Write a put option
C. Buy a call option
D. Buy a put option

4. Assume you sell short 200 shares of common stock at $30 per share, with initial margin
at 40%. What would be your rate of return if you repurchase the stock at $35/share? The
stock paid no dividends during the period, and you did not remove any money from the
account before making the offsetting transaction.
A. -33.33%
B. -16.67%
C. -57.14%
D. 41.67%
E. -41.67%
F. 16.67%

5. You have $5000 to invest. Shares of ABC Company is currently selling at $100 per
share. If the initial margin is 40%, how many share of ABC Company can you buy?
A. 100
B. 110
C. 120
D. 130
E. none of the above

6. Which of the following is true regarding equity mutual funds?

I) They invest in stocks only.
II) Most equity mutual funds invest in both stocks and money market securities.
III) Actively managed funds typically charge a higher management fee than passively
managed funds.
IV) Front-end load is typically a one-time fee.

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A. I and III
B. I, III, and IV
C. II, and IV
D. II, and III
E. II, III, and IV

7. Commercial paper is a short-term security issued by ________ to raise funds.

A. the Federal Reserve Bank
B. small companies
C. the New York Stock Exchange
D. large, well-known companies
E. state and local governments

8. The ask price of a T-bill in the secondary market is

A. the price at which the dealer in T-bills is willing to sell the bill.
B. never quoted in the financial press.
C. the price at which the investor can sell the T-bill.
D. lower than the bid price of the T-bill.

9. When two risky securities that are positively correlated are held in a portfolio,
A. the portfolio standard deviation will be greater than the weighted average of the
individual security standard deviations.
B. the portfolio standard deviation will always be equal to the weighted average of the
individual security standard deviations.
C. the portfolio standard deviation will be equal to or less than the weighted average of
the individual security standard deviations.
D. none of the statements are true.

10. Which of the following statements are true?

A. An investor who wishes to sell share immediately should ask his or her broker to enter
a limit order.
B. The ask price is less than bid price.
C. An issue of additional shares of stock to the public by Microsoft would be called an
IPO.
D. none of the statements are true.

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11. Consider the following probability distribution for a risky asset Security A.

State Probability Return on Security A

1 60% 30%
2 40% -10%

The rate of return on Treasury bills is 4%. Assume a client’s utility function is as follows:
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U =E ( r )−4 σ

The client can only invest in Security A and risk-free Treasury bills.

The client’s optimal complete portfolio is composed of x% in Security A and 1-x% in T-

bills. What is the value of x? ___ The client’s optimal complete portfolio is composed of
x% in Security A and (100-x)% in T-bills. What is the value of x? ___ (rounded to the
second decimal place, x takes the value between 1 to 100. For example, if the investment
proportion in Security A is 51.23%, then x=51.23)