test

Instruction:

Paraphrasing is important because it is an online test. The instructor already provided the solutions, so do not copy and paste. After understanding them, paraphrase them. Due to paraphrasing, the answers among lecture notes, assignments, and exams must be different. More detailed explanations will be better graded.

1. Explain several mechanisms that mitigate potential agency problems.

2. Explain efficient markets.

3. Explain the difference between Price-Weighted Index and Value-Weighted Index.

4. Explain Call Option and Put Option with examples.

5. Consider a mutual fund that manages a portfolio of securities worth $210 million. Suppose the fund owes $5 million to its investment advisers and another $4 million for rent, wages due, and miscellaneous expenses. The fund has 5 million shares outstanding. Net asset value?

6. Explain about Hedge Fund.

7. To see how expenses can affect rate of return, consider a fund with $150 million in assets at the start of the year and with 5 million shares outstanding. The fund invests in a portfolio of stocks that provides no income but increases in value by 7%. The expense ratio, including 12b-1 fees, is 2%. What is the rate of return for an investor in the fund?

8. An investor’s portfolio currently is worth $1 million. During the year, the investor sells 510 shares of FedEx at a price of $150 per share and 3,300 shares of Cisco at a price of $23 per share. The proceeds are used to buy some shares of IBM with the money.

a. What is the portfolio turnover rate?

b. If the shares in FedEx originally were purchased for $142 each and those in Cisco were purchased for $21, and the investor’s tax rate on capital gains income is 15%, how much extra will the investor owe on this year’s taxes as a result of these transactions?

9. Tax bracket: 18%, nominal return: 7%, Inflation rate: 3%

a. before-tax real rate?

b. after-tax real return?

c. after-tax nominal return?

d. after-tax real interest rate?

e. it =?

f. after tax real return – after tax real interest rate – it =?

10. Explain Sharpe Ratio.

Bonus)

11. What factors did bring about the financial crisis of 2008?