marketing and investments
Bentley University
FI 306 (SN3), Exam I
Kartik Raman
Spring, 2021
Student Name: _________________________________
Due Before: 3.29 PM EST on Wednesday, March 10 – by email.
Late submission (based on time stamp in the email) will result in a penalty of 20 points for
each hour (or partial hour), after the deadline.
This is a 1.5 hour exam. You can have an extra 30 minutes if needed, for a maximum of 2 hours.
You can refer to your notes if needed.
Show all your work - otherwise no credit will be awarded - even if you have the correct final
answer. Clearly label the question number or part in your response.
All calculations should be shown in an Excel file. In the same file, use a separate sheet for
each question – showing the formulas used for each cell. Points will be deducted if no formulas
are used to arrive at the values shown in cells.
All written explanations for your answers should be in a Word file.
The Word file should contain a response to each question on the exam.
ATTACHMENTS TO DELIVER by EMAIL:
1. Word File 2. Excel file
Question Points per question Points
3, 5 (a,b,c,d) 4 20
1 (a,b,c), 5 (e,f) 6 30
2, 4, 6, 7 (a,b) 10 50
Total 100
Use the following information for year 2019 to answer questions 1 through 4:
Stock
Price on Jan 1
st
Shares outstanding
on Jan 1 st
(millions)
Closing stock
price on June 1
st
Stock split effective
before trading opens June 2
nd
Price on Dec 31
st
DIS 62 2.00 50 1-for-2 75 XON 58 1.25 62 48 WMT 24 0.90 24 3-for-2 20
1. Answer the following questions pertaining to the price weighted index:
a. If on January 1st, the Price Weighted Index (of above 3 shares) = 100, what is the divisor used to calculate the Price Weighted Index?
b. What is the level of the price weighted index at the close of trading on June 2? c. What is the annual return on the price weighted index?
2. Suppose on January 1, you invest $1000 in the price weighted index. What is the dollar value
of your shares in XON on December 31?
3. Suppose on January 1, you invest $1000 in the value weighted index. What is the dollar value of your shares in XON on January 1?
4. What is the annual return on the value weighted index?
5. Ignore any interest payments when answering this question. On January 1, you purchase on 60% margin, 150 shares of a stock with the following quotes:
Bid Ask $22 $24
The maintenance margin set by your broker is 40%. On January 31 (i.e., at the end of one month), the security price changes as follows:
Bid Ask $14 $17
a. Show your balance sheet from this transaction as of January 1 soon after you complete your purchase.
b. At what threshold price will a margin call be triggered? c. Show your balance sheet from this transaction as of the close of trading January 31. d. On January 31, after the price change, suppose you decide to sell some of the shares to
meet the maintenance margin, how many shares do you have to sell at a minimum? e. Suppose on January 31, after the price change, you decide to maintain the 40% margin by
taking the following action: (i) sell 22 shares, and (ii) deposit cash to make up for any remaining amount required to meet the maintenance margin. How much cash would you have to deposit?
f. Suppose, instead of taking steps (d) or (e) above, you decide to liquidate your entire position by selling all the shares at the end of the month on January 31, what is the return on your investment during the holding period?
6. On January 1, you short sell on 60% margin, 150 shares of a stock with the following quotes:
Bid Ask $22 $24
The maintenance margin set by your broker is 40%. On January 31 (i.e., at the end of one month), the security price changes as follows:
Bid Ask $14 $17
The company pays a dividend of $3 per share on February 3 rd
. Suppose you decide to cover your short position at the close of trading on January 31, and commissions for each transaction are $1 per share. What is the effective annual return on your investment?
7. Consider the following information on all possible asset combinations available to you:
Asset Expected return Standard deviation of return
A 10% 8%
B 6% 5%
C 14% 10%
D 12% 8%
E 6% 6%
F 16% 12%
a. Which of the above assets will lie on the efficient frontier of risky assets? Explain the rationale for your solution.
b. Suppose today’s T-Bond rate is 2% and you have $1,000 to invest in a complete portfolio consisting of the T-Bond and the optimal risky asset. If you desire a total return of 10% on
your complete portfolio, what is the dollar amount you will invest in the T-Bond? Explain
the rational used to arrive at your solution.