Sample Practice Questions for Test 1 with Answers
Semester 2, 2016/2017
Prepared by Dr. Weina Zhang
1. You want to purchase GM stock at $10 from your broker using as little of your own
money as possible. If initial margin is 60% and you have $2400 to invest, how many
shares can you buy?
A. 200 shares
B. 300 shares
C. 400 shares (answer: 2400/0.6 = $4000; $4000/$10 = 400 shares)
D. 600 shares
E. 800 shares
2. Assume you sold short 100 shares of common stock at $40 per share. The initial
margin is 60%. What would be the maintenance margin if a margin call is made at a
stock price of $50?
A. 40%
B. 20% (answer: equity drops from $2000 to $1000. =>$1000/($50*100) = 20%)
C. 35%
D. 25%
E. None of the above.
(Use the balance sheet:
Asset Liability
Sale proceeds $4000 $5000
Margin $2000
Equity
$1000
Maintenance margin $1000/$5000 = 20%)
3. You are evaluating two investment alternative. One is a passive market portfolio with
an expected return of 8% and a standard deviation of 12%. The other is a fund that is
actively managed by your broker. This fund has an expected return of 15% and a
standard deviation of 16%. The risk-free rate currently is 5%. What is the maximum
fee your broker could charge and still leave you as well off as if you had invested in
the passive market fund?
A. 4.00%
B. 4.33%
C. 6.00% (answer: (8% - 5%)/12% = (15% - 5%-x) /16% => x = 6%)
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, D. 7.00%
E. none of the above
The following statement is used for answer Q4 and Q5.
Below is the probability distribution for the holding-period return for a stock:
State of the Economy Probability HPR
Boom 0.40 22%
Normal growth 0.35 11%
Recession 0.25 -9%
4. What is the expected holding-period return for the stock?
A. 11.67%
B. 8.33%
C. 9.56%
D. 12.4%
E. 10.4% (Answer: 0.4*22%+0.35*11%+ 0.25*(-9%) = 10.4%)
5. What is the expected standard deviation for the stock?
A. 2.07%
B. 9.96%
C. 7.04%
D. 1.44%
E. 12.17%
(answer: [0.4*(22% - 10.4%)^2+0.35*(11%-10.4%)^2+0.25*(-9% - 10.4%)^2)]^0.5
= 12.17%)
The following statement is used for answer Q6 and Q7.
Assume an investor with the following utility function: U = E(r) - 3/2(σ2), where E(r) is
the return and σ is the standard deviation.
6. To maximize her expected utility, she would choose the asset with an expected rate
of return of and a standard deviation of , respectively.
A. 12%; 20%
B. 10%; 15%
C. 10%; 10%
D. 8%; 10%
E. 10%; 12%
(Answer: highest utility for option C: U=0.085; Option A: U = 0.06; option B:
U=0.06625; option D: U = 0.065; and option E: U = 0.0784)
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Semester 2, 2016/2017
Prepared by Dr. Weina Zhang
1. You want to purchase GM stock at $10 from your broker using as little of your own
money as possible. If initial margin is 60% and you have $2400 to invest, how many
shares can you buy?
A. 200 shares
B. 300 shares
C. 400 shares (answer: 2400/0.6 = $4000; $4000/$10 = 400 shares)
D. 600 shares
E. 800 shares
2. Assume you sold short 100 shares of common stock at $40 per share. The initial
margin is 60%. What would be the maintenance margin if a margin call is made at a
stock price of $50?
A. 40%
B. 20% (answer: equity drops from $2000 to $1000. =>$1000/($50*100) = 20%)
C. 35%
D. 25%
E. None of the above.
(Use the balance sheet:
Asset Liability
Sale proceeds $4000 $5000
Margin $2000
Equity
$1000
Maintenance margin $1000/$5000 = 20%)
3. You are evaluating two investment alternative. One is a passive market portfolio with
an expected return of 8% and a standard deviation of 12%. The other is a fund that is
actively managed by your broker. This fund has an expected return of 15% and a
standard deviation of 16%. The risk-free rate currently is 5%. What is the maximum
fee your broker could charge and still leave you as well off as if you had invested in
the passive market fund?
A. 4.00%
B. 4.33%
C. 6.00% (answer: (8% - 5%)/12% = (15% - 5%-x) /16% => x = 6%)
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, D. 7.00%
E. none of the above
The following statement is used for answer Q4 and Q5.
Below is the probability distribution for the holding-period return for a stock:
State of the Economy Probability HPR
Boom 0.40 22%
Normal growth 0.35 11%
Recession 0.25 -9%
4. What is the expected holding-period return for the stock?
A. 11.67%
B. 8.33%
C. 9.56%
D. 12.4%
E. 10.4% (Answer: 0.4*22%+0.35*11%+ 0.25*(-9%) = 10.4%)
5. What is the expected standard deviation for the stock?
A. 2.07%
B. 9.96%
C. 7.04%
D. 1.44%
E. 12.17%
(answer: [0.4*(22% - 10.4%)^2+0.35*(11%-10.4%)^2+0.25*(-9% - 10.4%)^2)]^0.5
= 12.17%)
The following statement is used for answer Q6 and Q7.
Assume an investor with the following utility function: U = E(r) - 3/2(σ2), where E(r) is
the return and σ is the standard deviation.
6. To maximize her expected utility, she would choose the asset with an expected rate
of return of and a standard deviation of , respectively.
A. 12%; 20%
B. 10%; 15%
C. 10%; 10%
D. 8%; 10%
E. 10%; 12%
(Answer: highest utility for option C: U=0.085; Option A: U = 0.06; option B:
U=0.06625; option D: U = 0.065; and option E: U = 0.0784)
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