1-You are managing an equity portfolio with the S&P 500 as the performance benchmark. You are introducing a new indicator to your analysis, the basis spread between the S&P index spot and futures contract prices. A narrowing spread implies downward pressure on the spot price and short trade opportunities.

Your prior probabilities for exceeding, meeting, or missing the performance benchmark were: P(exceeding) = 0.35; P(meeting) = 0.50; P(missing) = 0.15. You observe the spread narrowing and feel that shorting the index will enhance your odds for exceeding the benchmark: P(spread narrows?exceeding) = 0.55; P(spread narrows?meeting) = 0.35; P(spread narrows?missing) = 0.10.

In light of the new information (narrowing spread), what is the likelihood that you will exceed the performance benchmark?

a. 0.45

b. 0.51

c. 0.55

d. 0.58

2-You want to add an additional $1 million of bonds to your fixed-income portfolio. You anticipate the general level of interest rates to rise although considerable uncertainty exists in the bond market. You are considering purchasing one of three bonds with varying durations; two, seven, and ten years. You assign the following probabilities in selecting the three bonds: 0.15 (two year), 0.65 (seven year), and 0.20 (ten year). The expected holding period yield for each bond is 5.6 percent (two year), 6.2 percent (seven year), and 7.5 percent (ten year). If you elect to make no addition to the portfolio (maintain status quo), the expected return for the same holding period is 5.75 percent on a current asset balance of $9 million. What would be the expected portfolio holding period return with the additional $1 million of bonds?

a. 5.81%

b. 5.95%

c. 6.20%

d. 6.32%

3- ARI Market Forecasting incorporates a sophisticated macroeconomic model incorporating 42 variables to forecast where the market will end up (up or down) at the end of the calendar year. Actually, ARI bases their forecast on whether the NFC will win the Superbowl (market rises) or the AFC will win the Superbowl (market declines). If the NFC wins, ARI gives a 0.60 probability that the market will rise and a 0.45 probability that the market will rise if the AFC wins. The bookies give 2:1 odds that the NFC will win the Superbowl. What is the probability that the market will rise for the upcoming year?

a. 0.27

b. 0.48

c. 0.55

d. 0.67