Question 1 - You are given the following information regarding the trading activity of IBM. CIRCLE your answer for each part.

(i) Trade 1: Buy / Sell / Indeterminate. Why?

(ii) Trade 2: Buy / Sell / Indeterminate. Why?

(iii) Trade 3: Buy / Sell / Indeterminate. Why?

(iv) Trade 4: Buy / Sell / Indeterminate. Why?

Question 2 - (i) What intraday pattern of volume would you expect for IBM? Why?

(ii) What is the relationship between the Bid-Ask spread and volume? Justify your answer.

Question 3 - (i) State the Sharpe Ratio

(ii) Describe the intuition behind the formula

(iii) What are the limitations to the Sharpe ratio?

(iv) Define Sortino ratio

(v) Define Information ratio

(vi) Define Stutzer Index             

Question 4 - Which asset class, if any, exhibits the best risk-adjusted performance?

Does the data conform with historical evidence?             

Question 5 - Describe in words the process to optimal portfolio selection. In addition, include graphs indicating your minimum variance portfolio, efficient frontier and market portfolio where applicable. Indicate the regions where high and low risk-averse investors would choose.

(i) Consider the case without the risk-free asset.

(ii) Consider the case with the risk-free asset.

Question 6 - Define the following terms.

(i) Minimum variance portfolio

(ii) Market portfolio

(iii) Indifference curve

Question 7 - Answer the following questions using the information provided below. Assume the return on the risk-free asset is 5%.

 (i) Calculate the Expected Return for IBM

(ii) Calculate the Expected Return for ATT.

(iii) Calculate the Variance and Standard Deviation of IBM.

(iv) Calculate the Variance and Standard Deviation of ATT.

(v) Construct a portfolio with 30% IBM and 70% ATT. Calculate the Variance of the portfolio.

(vi) Construct a portfolio with 30% in IBM, 50% in ATT and 20% in the Risk-Free asset. Calculate the mean, variance and standard deviation of the portfolio.

Question 8 -

(i) What is the expected return of the Market and the Risk-Free asset?

(ii) What is the variance of returns for the Market and Risk-Free asset?

(iii) What is the covariance between the Risk-Free Asset and the Market return?

Question 9 - You are the portfolio manager for Fidelity and you are introducing a new mutual fund called the Hofstra 30 Star Fund. Your portfolio will consist of 20 large cap stocks from various industries. Your first task is to estimate the variance of the portfolio using historical data.

(i) How many covariance pairs are there in Hofstra 30 Star Fund portfolio?

(ii) You are also introducing a mutual fund called Four Star Fund which consists of 4 growth stocks you believe have superior earning potential. Assume the portfolio is equally-weighted, write the EXACT formula for the portfolio variance.

(iii) Write the full equation for determining the variance of a 6-asset portfolio.

Question 10 - Discuss the similarities and differences between mutual funds, ETFs, and hedge funds.

Question 11 - Discuss the similarities and differences between callable bonds, puttable bonds, convertible bonds, floating rate notes, inverse floaters step-up notes.

Question 12 - Discuss the similarities and differences between dividend discount models, free cash flow models and residual income models.

Question 13 - Discuss the similarities and differences between futures and forwards.

Question 14 - You are given that expected returns for a Stock A and Stock B are 10% and 18%, respectively. The variance of returns for each stock is 16 and 36, respectively. Draw (do NOT calculate) the investment opportunity set assuming:

(i) ρ_A,B = 1

(ii) ρ_A,B = .3

(iii) ρ_A,B = 0

(iv) ρ_A,B = -.4

(v) p_A,B = -1

In addition, identify the minimum variance portfolio.