1. Mike and Sarah are evaluating two funds in which to invest. Fund

A had a 17% compound annual return with 17% annual volatility,

while fund B had a 14% compound annual return with 7%

volatility. Why might some investors choose to invest in the lower

returning Fund B. Assume the risk free rate was 2% during this

period, calculate a financial ratio for both funds and show why

fund B on this ratio looks more attractive. What is the name of the

ratio you would use to justify your recommendation?

2. Mike and Sarah decide to look at investing in a hedge fund. One

fund, called the Hot Shot fund, returned 10% after fees running its

portfolio with an average beta delta adjusted net portfolio long

position of 90%. The other fund, called Steady Eddy, returned 7%

after fees with an average net beta delta adjusted portfolio long

position of 50%. The index returned 10%. What financial concept

can you use to show that the funds added value that year and

which fund fares the best on this metric? Show your calculations.

3. Mike proposes to Sarah to put a small portion of their domestic

stock portfolio in a basket of frontier markets stocks. The frontier

markets universe has been a poor performer underperforming

US/developed markets in recent years. What are two

principal/potential benefits of investing in frontier markets

equities for their domestic fund? What are two major risks

created by adding frontier markets equities? Which risk can they

hedge and how? Should they hedge this risk?

4. Mike and Sarah consult with a colleague at their firm. He argues

that one of the main benefits of international investing has

diminished due to globalization. Explain what this benefit is and

why it has diminished with globalization of financial markets?

What attribute do certain foreign markets have that might help

offset globalization?

5. Mike and Sarahs colleague says he only invests in the US. What is

the academic term for the bias he is guilty of? What are some of

the reasons for this bias?

6. Mike and Sarah are concerned about rising rates thinking rates

eventually have to go up? Should they choose a long duration or

short duration bond? Mike and Sarah are looking at two bonds a

10 year zero coupon bond and a 30 year zero coupon bond? What

is the duration of these two bonds? Which one should they buy to

mitigate the risk of rising rates?

7. Their colleague believes interest rates are going to fall. He is

looking at a 10 year maturity bond paying a 4% coupon annually, a

10 year zero paying a yield to maturity of 4%, and a five year zero

paying a yield to maturity of 4%. Which should he buy to play

falling future interest rates?

8. What has the correlation of the ten year treasury been with the

S&P 500 returns the last two years? What has been the advantage

of holding part of the portfolio in 10 year treasury bonds over

holding more cash during periods of market turmoil in recent

years? Why hold cash at all, even if one is defensive, and instead

just hold more treasuries instead?

9. An elderly, middle income couple come to a financial adviser

looking to trade options. The old man says he wants to write puts

on blue chips stocks and collect fat premiums just like the great

one Warren Buffet. What is the risk in this practice? Should the

advisor recommend against this? What is this practice akin to?

What are two negatives associated with trading options? What is

the major advantage of options? Suggest a defensive options

strategy that would make sense for an elderly couple looking to

boost portfolio income to undertake?

10. Mike loves Valeant stock. He reads the most recent press

release and exclaims that it is a buy since they always beat the

bottom line numbers. He notes that a prestigious hedge fund just

announced it bought stock. Sarah argues that Mike overlooks the

negatives. He reads the press release and focuses on the

positives and ignores the large cash items that are removed from

earnings. Mike exclaims that VRX at below $125 is a buy since last

year a prominent analyst told him that exact number. What two

behavioral biases is Mike making? Explain. Mike doesnt like to

sell stocks where he has lost big money and realize a loss. What is

the name of this behavioral bias? Sarah on the other hand tends

to run with the pack of smart money investors. This tendency is

called what in behavioral finance?

11. Calculate the WACC and discounted cash flow valuation of

the firm, using a firm that has 100 mm in debt and 100 mm in

market cap with a beta of 1.5, risk free rate of 3%, equity market

risk premium of 6%, and tax rate of 30%, and cost of debt of 5%.

Assume three years of unlevered cash flows of 6, 8, 9 and then a

steady state growth of 3%.

12. Calculate the enterprise value of a firm with 100 mm in

debt, mcap of 200, and 25 mm in cash?

13. Explain two drawbacks of discounted cash flows valuations?

14. Would you value a bank stock using a traditional DCF?

Explain. How would you value a bank stock? Discuss two critical

ratios and one other methodology to value a bank or financial

stock.

15. Mike says he has developed a strategy, which calls for

buying stocks that have just announced huge quarterly earnings

surprises and hold them for the next several months. What is the

academic name of this trading strategy?

16. Sarah likes to buy stocks that are trading two standard

deviations cheap on price earnings relative to five year averages.

This strategy is based on what key concept? Is it a GARP, value or

momentum based strategy?

17. Mike and Sarah want to compare the profitability of some

technology, industrial and other companies from sectors outside

of the banking industry? What metric would you use?

18. Mike and Sarah want to reduce the market risk of their

portfolio but stay 100% invested in their current long stock

positions? What could they do to accomplish this goal?

19. You are brought in as a consultant to a company. You

calculate its WACC to be 9%. Its operating profit is 8 million, tax

rate is 33%, total assets are 105 mm, cash is 5mm and noninterest

bearing liabilities are 0. If you present to the CEO would

you say current profitability is satisfactory? Why not? Show with a

ratio?

20. What are two metrics to value cyclical stocks that are losing

money on the bottom line? What are the pros and cons of these

metrics?

21. You are working at a large pension fund. The CIO tells you

that there will be a strong deflationary pulse in the US and global

economy. The CIO asks you to pick two investments from the

following choices: 2 year treasury bonds, 30 year treasury bonds,

high yield bonds, gold etf, emerging markets equities ETF, a

commodity etf, or a short S&P 500 fund. You also have the choice

of etfs for equities from the following S&P 500 sectors energy,

financials, staples, industrials, utilities, technology, timber reits,

steel stocks, mining stocks and agricultural service stocks. Justify

your two picks for allocation.

22. Next the CIO alters the forecast and says to expect a huge

surge in global growth. Which two investments from the same list

would you recommend and why?

23. The CIO calls for stagflation or high inflation with low

growth. Which two investments would you pick and why?

24. You notice that the yield curve has started to flatten. Which

investment from the prior list would you pick based on this signal?

Justify your response.