Sample Practice Questions for Test 1 with Answers Semester 2, 2016/2017 Prepared by Dr. Weina Zhang

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%)