Detailed Explanation for Question 32 to 36

For question 32, how to get contract multiplier of 500?

For question 36, why the change in the portfolio yield is 0.01%, and how to get $82.8?

21 Student: ___________________________________________________________________________ 1. The longest time horizons are likely to be set by A. banks. B. property and casualty insurance companies. C. pension funds D. a and c E. b and c 2. The investment horizon is: A. the investor's expected age at death. B. the starting date for establishing investment constraints. C. based on the investor's risk tolerance. D. the date at which the portfolio is expected to be fully or partially liquidated. E. none of these. 3. Variable life insurance A. combines life insurance with a tax-deferred annuity. B. provides a minimum death benefit that increases subject to investment performance. C. can be converted to a stream of income. D. all of these. E. none of these 4. Active portfolio management consists of _________. A. market timing B. security analysis C. indexing D. a and b E. none of these 5. Passive portfolio management consists of _________. A. market timing B. security analysis C. indexing D. market timing and security analysis E. None of these is true. 6. Active portfolio managers try to construct a risky portfolio with _________. A. a higher Sharpe measure than a passive strategy B. a lower Sharpe measure than a passive strategy C. the same Sharpe measure as a passive strategy D. very few securities E. none of these 7. A purely passive strategy is defined as A. one that uses only index funds. B. one that allocates assets in fixed proportions that do not vary with market conditions. C. one that is mean-variance efficient. D. both a and b. E. all of these. 8. The security selection form of active portfolio management relies on __________ forecasting and the market timing form of active portfolio management relies on __________ forecasting. A. macroeconomic, macroeconomic B. macroeconomic, microeconomic C. microeconomic, macroeconomic D. microeconomic, microeconomic E. perfect, imperfect 9. The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct _________. A. a market portfolio B. a passive portfolio C. an active portfolio D. an index portfolio E. a balanced portfolio 10. The critical variable in the determination of the success of the active portfolio is A. alpha/systematic risk B. alphaonsystematic risk C. gamma/systematic risk D. gammaonsystematic risk E. none of these 11. In the Treynor-Black model, the weight of each security in the portfolio should be proportional to its _________. A. alpha/beta B. alpha/beta/residual variance C. beta/residual variance D. alpha/residual variance E. none of these 12. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is _________. A. 0% B. 25% C. 50% D. 100% E. none of these 13. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is _________. A. 48.7% B. 50.0% C. 51.3% D. 100.0% E. none of these 14. The Treynor-Black model A. considers both macroeconomic and microeconomic risks. B. considers security selection only. C. is relatively easy to implement. D. a and c. E. b and c. 15. The Treynor-Black model assumes that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. Cthe optimal weight of a mispriced security in the active portfolio is a function of the degree of . mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. all of these are true. E. none of these are true. 16. The Treynor-Black model does not assume that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. Cthe optimal weight of a mispriced security in the active portfolio is a function of the degree of . mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. indexing is always optimal. Ethe objective of security analysis is to form an active portfolio of a limited number of mispriced . securities; the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock; and the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. 17. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 18%. The standard deviation of the return on the market portfolio is 25%. The nonsystematic standard deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to invest in the active portfolio is _________. A. 50.0% B. 69.4% C. 72.3% D. 80.6% E. 100.0% 18. According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to _________. A. the degree of mispricing; the nonsystematic risk of the security B. the degree of mispricing; the systematic risk of the security C. the market sensitivity of the security; the nonsystematic risk of the security D. the nonsystematic risk of the security; the systematic risk of the security E. the total return on the security; the nonsystematic risk of the security 19. One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's A. Sharpe ratio. B. appraisal ratio. C. alpha. D. Treynor measure. E. none of these. 20. A purely passive strategy A. uses only index funds. B. uses weights that change in response to market conditions. C. uses only risk-free assets D. is best if there is "noise" in realized returns. E. is useless if abnormal returns are available. 21. To determine the optimal risky portfolio in the Treynor-Black Model, macroeconomic forecasts are used for the _________ and composite forecasts are used for the _________. A. passive index portfolio; active portfolio B. active portfolio; passive index portfolio C. expected return; standard deviation D. expected return; beta coefficient E. alpha coefficient; beta coefficient 22. Perfect timing ability is equivalent to having __________ on the market portfolio. A. a call option B. a futures contract C. a put option D. a commodities contract E. None of these is true. 23. The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is _________. A. 36.30% B. 5.84% C. 19.60% D. 24.17% E. 26.0% 24. Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, depends on I) the investor's coefficient of risk aversion II) the value of at-the-money call option on the market portfolio III) the value of out-of-the-money call option on the market portfolio IV) the precision of the security analyst V) the distribution of the squared information ratio of in the universe of securities A. I, II, IV B. I, III, V C. II, IV, V D. I, IV, V E. II, III, V 25. Hedging is a technique used by investors to: A. Reduce the risk and simultaneously increase the rate of return of a portfolio of assets. B. Reduce the risk without affecting the rate of return of portfolio assets. C. Reduce the risk by stabilizing the value of the portfolio of assets. D. All of these. E. None of these. 26. A portfolio of corporate bonds is best hedged with: A. Futures contracts written on corporate bonds. B. Futures contracts written on Canada bonds C. Futures contracts written on Treasury bills. D. Futures contracts written on the TSX 60. E. None of these. 27. To hedge a portfolio of medium to large cap stocks, an investor would use: A. Futures contracts written on each stock in the portfolio. B. Futures contracts written on Treasury securities. C. Futures contracts written on British pounds. D. Futures contracts written on the TSX 60. E. None of these. 28. Suppose that a corporation needs to raise capital by issuing commercial paper with a maturity of 90 days three months from now. What would the firm most likely do as a protection against an unanticipated increase in short-term rates? A. Buy futures contracts written on T-bills. B. Sell futures contracts written on T-bills. C. Buy futures contracts written on corporate bonds. D. Sell futures contracts written on T-bonds. E. None of these. 29. A corporate treasurer expects to receive $1 million in the near future. He wishes to invest the amount in 90-day maturity T-bills. To protect the investment from a decline in the short-term rates, the investor would most likely: A. Buy futures contracts written on T-bonds. B. Sell futures contracts written on T-bills. C. Buy futures contracts written on T-bills. D. Sell futures contracts written on Eurodollars. E. None of these. 30. You hold a portfolio of stocks and you are concerned about a decline in the market value of the portfolio. You might hedge with: A. A short position in stock index futures. B. A long position in stock index futures. C. A long position in call options. D. A short position in put options. E. None of these. 31. Stock index futures contracts are tools used by equity investors to reduce: A. Interest rate risk. B. Systematic risk. C. Exchange rate risk. D. All of these. E. None of these. TSX 60 Cash = 400 TSX 60 Futures = 410 32. Approximately how many TSX 60 futures contracts are needed to hedge a portfolio constructed of 4500 shares of each of the three stocks, X, Y and Z against a 20 point movement in the TSX? A. 5 B. 3 C. 4 D. 2 E. none of these 33. A decrease in the cash TSX 60 index to 390 would represent a decrease of __________ in the value of the portfolio composed of 4500 shares of each of the three stocks. A. $15,187 B. $11,228 C. $10,800 D. $10,125 E. none of these 34. A decrease in the TSX 60 index futures to 400 would lead to a __________ on each long TSX 60 futures contract. A. loss of $2500 B. profit of $2500 C. loss of $5000 D. profit of $5000 E. neither loss nor profit 35. A portfolio manager holds a $10 million bond portfolio with a modified duration of 7 years. What is the price value of a basis point (PVBP)? A. $700,000 B. $70,000 C. $7,000 D. $700 E. none of these 36. You hold a $10 million bond portfolio with a modified duration of 8 years. How would you, using Tbond futures, hedge this portfolio? Assume that the bond to be delivered has a modified duration of 9 years and that the futures price is currently $92 for $100 par value. A. Sell approximately 97 contracts B. Buy approximately 97 contracts C. Sell approximately 90 contracts D. Buy approximately 90 contracts E. None of these 37. Hedging A. provides a link between the CAPM and the multifactor APT. B. is very risky as options are involved. C. allows one to limit the risk of the portfolio. D. a and b. E. a and c. 38. Hedging against future interest rate changes A. is very simple as futures contracts on many different fixed income investments are available. B. provides for less risk than an unhedged position, even if cross-hedging is used. C. is complex as yield spreads fluctuate over time. D. a and b. E. b and c. 39. Delta A. is the slope of the option-pricing curve. B. tells how many shares of underlying stock one must hold to offset the exposure from an option position. C. is meaningful in terms of U. S. southern geography and in the naming of social organizations, but has no financial connotation. D. a and b. E. none of these. 40. A position in stocks and options that is hedged with respect to fluctuations in the price of the underlying asset is said to be A. stable. B. delta neutral. C. volatility neutral. D. riskless. E. none of these. 41. Cross-hedging A. accounts for most hedging activity. B. uses a hedge vehicle that is based on a different asset than the one to be hedged. C. can eliminate a large fraction of the total risk of an unprotected portfolio. D. both b and c. E. all of these. 42. A fund places 40% of its money in an active portfolio and 60% in a market index. If the return on the market index is 16% and the return on the active portfolio is 18%, the return on the entire fund is _________. A. 16.4% B. 16.8% C. 17.2% D. 17.6% E. none of these In a particular year, Wiseguys Mutual Fund earned a return of 15% by making the following investments in the following asset classes 43. The total excess return on the Wiseguys managed portfolio was _________. A. 1% B. 3% C. 4% D. 5% E. none of these 44. The contribution of asset allocation across markets to the total excess return was A. 1% B. 3% C. 4% D. 5% E. none of these 45. The contribution of selection within markets to Wiseguys total excess return was A. 1% B. 3% C. 4% D. 5% E. none of these 46. Discuss the Treynor-Black model. 47. You have a record of an analyst's past forecasts of alpha. Describe how you would use this information within the context of the Treynor-Black model to determine the forecasting ability of the analyst. 48. Describe how one might hedge against systematic risk. 49. Discuss the problem associated with hedging interest rate risk. What is cross-hedging? Is cross-hedging of any value? Explain. 50. Discuss the relationship between hedging demands, the capital asset pricing model, and arbitrage pricing theory. 21 Key 1. The longest time horizons are likely to be set by A. banks. B. property and casualty insurance companies. C. pension funds D. a and c E. b and c See Table 21.3 Bodie - Chapter 21 #1 Chapter 21 Difficulty: Moderate 2. The investment horizon is: A. the investor's expected age at death. B. the starting date for establishing investment constraints. C. based on the investor's risk tolerance. D. the date at which the portfolio is expected to be fully or partially liquidated. E. none of these. Bodie - Chapter 21 #2 Chapter 21 Difficulty: Easy 3. Variable life insurance A. combines life insurance with a tax-deferred annuity. B. provides a minimum death benefit that increases subject to investment performance. C. can be converted to a stream of income. D. all of these. E. none of these all of the above are characteristics of a variable life insurance Bodie - Chapter 21 #3 Chapter 21 Difficulty: Easy 4. Active portfolio management consists of _________. A. market timing B. security analysis C. indexing D. a and b E. none of these Although one can engage in various degrees of active portfolio management (security selection without market timing and vice versa), the most active portfolio management strategy consists of engaging in both pursuits. Bodie - Chapter 21 #4 Chapter 21 Difficulty: Easy 5. Passive portfolio management consists of _________. A. market timing B. security analysis C. indexing D. market timing and security analysis E. None of these is true. Although one can engage in various degrees of active portfolio management (security selection without market timing and vice versa), the most active portfolio management strategy consists of engaging in both pursuits. Passive management is an indexing strategy. Bodie - Chapter 21 #5 Chapter 21 Difficulty: Easy 6. Active portfolio managers try to construct a risky portfolio with _________. A. a higher Sharpe measure than a passive strategy B. a lower Sharpe measure than a passive strategy C. the same Sharpe measure as a passive strategy D. very few securities E. none of these A higher Sharpe measure than a passive strategy is indicative of the benefits of active management. Bodie - Chapter 21 #6 Chapter 21 Difficulty: Moderate 7. A purely passive strategy is defined as A. one that uses only index funds. B. one that allocates assets in fixed proportions that do not vary with market conditions. C. one that is mean-variance efficient. D. both a and b. E. all of these. A purely passive strategy is one that calls for no market analysis Bodie - Chapter 21 #7 Chapter 21 Difficulty: Easy 8. The security selection form of active portfolio management relies on __________ forecasting and the market timing form of active portfolio management relies on __________ forecasting. A. macroeconomic, macroeconomic B. macroeconomic, microeconomic C. microeconomic, macroeconomic D. microeconomic, microeconomic E. perfect, imperfect Security selection involves microeconomic forecasting, and market timing involves macroeconomic forecasting. Bodie - Chapter 21 #8 Chapter 21 Difficulty: Moderate 9. The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct _________. A. a market portfolio B. a passive portfolio C. an active portfolio D. an index portfolio E. a balanced portfolio The Treynor-Black model utilizes the statistics of diversification to select securities for an actively managed portfolio. Bodie - Chapter 21 #9 Chapter 21 Difficulty: Easy 10. The critical variable in the determination of the success of the active portfolio is A. alpha/systematic risk B. alphaonsystematic risk C. gamma/systematic risk D. gammaonsystematic risk E. none of these A portfolio with a positive alpha is outperforming the market. If this portfolio also has a low degree of nonsystematic risk, the portfolio is adequately diversified. Bodie - Chapter 21 #10 Chapter 21 Difficulty: Moderate 11. In the Treynor-Black model, the weight of each security in the portfolio should be proportional to its _________. A. alpha/beta B. alpha/beta/residual variance C. beta/residual variance D. alpha/residual variance E. none of these Use the estimates of alpha, beta, and residual risk to determine the optimal weight of each security in the portfolio. Bodie - Chapter 21 #11 Chapter 21 Difficulty: Moderate 12. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is _________. A. 0% B. 25% C. 50% D. 100% E. none of these wO = [2%/1%]/[(16% - 8%)/4%] = 1, or 100%; w* = 1/[1 + (1 - 1)1] = 1. Bodie - Chapter 21 #12 Chapter 21 Difficulty: Difficult 13. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is _________. A. 48.7% B. 50.0% C. 51.3% D. 100.0% E. none of these wO = [1%/1%]/[(16% - 8%)/4%] = 0.5; w* = 0.5/[1 + (1 - 1.05)0.5] = 0.513, or 51.3%. Bodie - Chapter 21 #13 Chapter 21 Difficulty: Difficult 14. The Treynor-Black model A. considers both macroeconomic and microeconomic risks. B. considers security selection only. C. is relatively easy to implement. D. a and c. E. b and c. A and C are true for the model. Bodie - Chapter 21 #14 Chapter 21 Difficulty: Easy 15. The Treynor-Black model assumes that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. C the optimal weight of a mispriced security in the active portfolio is a function of the degree of . mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. all of these are true. E. none of these are true. All of the statements correctly describe assumptions of the Treynor-Black model. Bodie - Chapter 21 #15 Chapter 21 Difficulty: Moderate 16. The Treynor-Black model does not assume that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. C the optimal weight of a mispriced security in the active portfolio is a function of the degree of . mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. indexing is always optimal. Ethe objective of security analysis is to form an active portfolio of a limited number of mispriced . securities; the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock; and the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. The Treynor-Black model does not assume that the objective of security analysis is to form an active portfolio of a limited number of mispriced securities, the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock, and the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. Bodie - Chapter 21 #16 Chapter 21 Difficulty: Moderate 17. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 18%. The standard deviation of the return on the market portfolio is 25%. The nonsystematic standard deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to invest in the active portfolio is _________. A. 50.0% B. 69.4% C. 72.3% D. 80.6% E. 100.0% wO = [3%/2.25%]/[(18% - 6%)/6.25%] = 0.6944; w* = 0.6944/[1 + (1 - 1.2)0.6944] = 0.8064, or 80.6%. Bodie - Chapter 21 #17 Chapter 21 Difficulty: Difficult 18. According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to _________. A. the degree of mispricing; the nonsystematic risk of the security B. the degree of mispricing; the systematic risk of the security C. the market sensitivity of the security; the nonsystematic risk of the security D. the nonsystematic risk of the security; the systematic risk of the security E. the total return on the security; the nonsystematic risk of the security The weight of the mispriced security in the active portfolio depends on the degree of mispricing (alpha) in proportion to the nonsystematic risk added by holding the security. Bodie - Chapter 21 #18 Chapter 21 Difficulty: Moderate 19. One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's A. Sharpe ratio. B. appraisal ratio. C. alpha. D. Treynor measure. E. none of these. When optimized, a property of the overall risky portfolio is that its squared Sharpe measure increases by the square of the active portfolio's appraisal ratio. Bodie - Chapter 21 #19 Chapter 21 Difficulty: Moderate 20. A purely passive strategy A. uses only index funds. B. uses weights that change in response to market conditions. C. uses only risk-free assets D. is best if there is "noise" in realized returns. E. is useless if abnormal returns are available. A purely passive strategy uses only index funds and keeps the proportions constant when there are changes in perceived market conditions. Bodie - Chapter 21 #20 Chapter 21 Difficulty: Moderate 21. To determine the optimal risky portfolio in the Treynor-Black Model, macroeconomic forecasts are used for the _________ and composite forecasts are used for the _________. A. passive index portfolio; active portfolio B. active portfolio; passive index portfolio C. expected return; standard deviation D. expected return; beta coefficient E. alpha coefficient; beta coefficient The two factors combine to determine the optimal risky portfolio. Bodie - Chapter 21 #21 Chapter 21 Difficulty: Moderate 22. Perfect timing ability is equivalent to having __________ on the market portfolio. A. a call option B. a futures contract C. a put option D. a commodities contract E. None of these is true. Perfect foresight is equivalent to holding a call option on the equity portfolio. Bodie - Chapter 21 #22 Chapter 21 Difficulty: Easy 23. The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is _________. A. 36.30% B. 5.84% C. 19.60% D. 24.17% E. 26.0% s = [(1.45)2(0.22)2 + 0.03]1/2 = [0.13176]1/2 = 36.3%. Bodie - Chapter 21 #23 Chapter 21 Difficulty: Difficult 24. Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, depends on I) the investor's coefficient of risk aversion II) the value of at-the-money call option on the market portfolio III) the value of out-of-the-money call option on the market portfolio IV) the precision of the security analyst V) the distribution of the squared information ratio of in the universe of securities A. I, II, IV B. I, III, V C. II, IV, V D. I, IV, V E. II, III, V Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, depends on the investor's coefficient of risk aversion, the precision of the security analyst, and the distribution of the squared information ratio of in the universe of securities. Bodie - Chapter 21 #24 Chapter 21 Difficulty: Moderate 25. Hedging is a technique used by investors to: A. Reduce the risk and simultaneously increase the rate of return of a portfolio of assets. B. Reduce the risk without affecting the rate of return of portfolio assets. C. Reduce the risk by stabilizing the value of the portfolio of assets. D. All of these. E. None of these. Bodie - Chapter 21 #25 Chapter 21 Difficulty: Easy 26. A portfolio of corporate bonds is best hedged with: A. Futures contracts written on corporate bonds. B. Futures contracts written on Canada bonds C. Futures contracts written on Treasury bills. D. Futures contracts written on the TSX 60. E. None of these. Bodie - Chapter 21 #26 Chapter 21 Difficulty: Easy 27. To hedge a portfolio of medium to large cap stocks, an investor would use: A. Futures contracts written on each stock in the portfolio. B. Futures contracts written on Treasury securities. C. Futures contracts written on British pounds. D. Futures contracts written on the TSX 60. E. None of these. Bodie - Chapter 21 #27 Chapter 21 Difficulty: Easy 28. Suppose that a corporation needs to raise capital by issuing commercial paper with a maturity of 90 days three months from now. What would the firm most likely do as a protection against an unanticipated increase in short-term rates? A. Buy futures contracts written on T-bills. B. Sell futures contracts written on T-bills. C. Buy futures contracts written on corporate bonds. D. Sell futures contracts written on T-bonds. E. None of these. Bodie - Chapter 21 #28 Chapter 21 Difficulty: Moderate 29. A corporate treasurer expects to receive $1 million in the near future. He wishes to invest the amount in 90-day maturity T-bills. To protect the investment from a decline in the short-term rates, the investor would most likely: A. Buy futures contracts written on T-bonds. B. Sell futures contracts written on T-bills. C. Buy futures contracts written on T-bills. D. Sell futures contracts written on Eurodollars. E. None of these. Bodie - Chapter 21 #29 Chapter 21 Difficulty: Moderate 30. You hold a portfolio of stocks and you are concerned about a decline in the market value of the portfolio. You might hedge with: A. A short position in stock index futures. B. A long position in stock index futures. C. A long position in call options. D. A short position in put options. E. None of these. Bodie - Chapter 21 #30 Chapter 21 Difficulty: Moderate 31. Stock index futures contracts are tools used by equity investors to reduce: A. Interest rate risk. B. Systematic risk. C. Exchange rate risk. D. All of these. E. None of these. Bodie - Chapter 21 #31 Chapter 21 Difficulty: Easy TSX 60 Cash = 400 TSX 60 Futures = 410 Bodie - Chapter 21 Chapter 21 32. Approximately how many TSX 60 futures contracts are needed to hedge a portfolio constructed of 4500 shares of each of the three stocks, X, Y and Z against a 20 point movement in the TSX? A. 5 B. 3 C. 4 D. 2 E. none of these Portfolio value = 4,500 x (20 + 30 + 40) = $405,000; = (1.2 + 1.1 + 0.9)/3 = 1.07; For a 5% change in the index (20/400), portfolio value will change with 1.07 x 5% = 5.33%. Actual change 5.33% x 405,000 = $21,600; For a contract multiplier of $500, a 20-point swing in the index, the profit on the futures contract varies by $10,000. Thus the number of futures contracts needed will be: 21,600/ 10,000 = 2.16, approximately 2. Bodie - Chapter 21 #32 Chapter 21 Difficulty: Difficult 33. A decrease in the cash TSX 60 index to 390 would represent a decrease of __________ in the value of the portfolio composed of 4500 shares of each of the three stocks. A. $15,187 B. $11,228 C. $10,800 D. $10,125 E. none of these A decrease in the cash TSX 60 index to 390 would represent a 2.5% change. Given portfolio's value of 405,000 and beta of 1.07 this would result in a change in portfolio value of (-2.5%) x 1.07 x 405,000 = $10,800 Bodie - Chapter 21 #33 Chapter 21 Difficulty: Moderate 34. A decrease in the TSX 60 index futures to 400 would lead to a __________ on each long TSX 60 futures contract. A. loss of $2500 B. profit of $2500 C. loss of $5000 D. profit of $5000 E. neither loss nor profit Change in TSX 60 index futures: 410-400 = 10. With a contract multiplier of $500 the change will be 500 x 10 = - $5,000, or a loss of $5,000 Bodie - Chapter 21 #34 Chapter 21 Difficulty: Moderate 35. A portfolio manager holds a $10 million bond portfolio with a modified duration of 7 years. What is the price value of a basis point (PVBP)? A. $700,000 B. $70,000 C. $7,000 D. $700 E. none of these The capital loss on the bond portfolio for a change in yields with one basis point: D* x y = 7 x .01% = .07%. Thus the price value of a basis point is: .07% x $10,000,000 = $7,000 Bodie - Chapter 21 #35 Chapter 21 Difficulty: Moderate 36. You hold a $10 million bond portfolio with a modified duration of 8 years. How would you, using Tbond futures, hedge this portfolio? Assume that the bond to be delivered has a modified duration of 9 years and that the futures price is currently $92 for $100 par value. A. Sell approximately 97 contracts B. Buy approximately 97 contracts C. Sell approximately 90 contracts D. Buy approximately 90 contracts E. None of these The PVBP for the futures contract: If the yield on the delivery bond rises by 1 basis point, the bond value will fall by D* x y = 9 x 0.01% = 0.09%. The futures price will also decline from 92 to 82.8. Since the contract multiplier is $1,000, the gain on each short contract is: 1,000 x .0828 = $82.8. The hedge ratio: $8,000/$82.8 = 96.6, approximately 97 contracts. Bodie - Chapter 21 #36 Chapter 21 Difficulty: Difficult 37. Hedging A. provides a link between the CAPM and the multifactor APT. B. is very risky as options are involved. C. allows one to limit the risk of the portfolio. D. a and b. E. a and c. Bodie - Chapter 21 #37 Chapter 21 Difficulty: Easy 38. Hedging against future interest rate changes A. is very simple as futures contracts on many different fixed income investments are available. B. provides for less risk than an unhedged position, even if cross-hedging is used. C. is complex as yield spreads fluctuate over time. D. a and b. E. b and c. Bodie - Chapter 21 #38 Chapter 21 Difficulty: Easy 39. Delta A. is the slope of the option-pricing curve. B. tells how many shares of underlying stock one must hold to offset the exposure from an option position. C. is meaningful in terms of U. S. southern geography and in the naming of social organizations, but has no financial connotation. D. a and b. E. none of these. Bodie - Chapter 21 #39 Chapter 21 Difficulty: Easy 40. A position in stocks and options that is hedged with respect to fluctuations in the price of the underlying asset is said to be A. stable. B. delta neutral. C. volatility neutral. D. riskless. E. none of these. Bodie - Chapter 21 #40 Chapter 21 Difficulty: Moderate 41. Cross-hedging A. accounts for most hedging activity. B. uses a hedge vehicle that is based on a different asset than the one to be hedged. C. can eliminate a large fraction of the total risk of an unprotected portfolio. D. both b and c. E. all of these. Bodie - Chapter 21 #41 Chapter 21 Difficulty: Moderate 42. A fund places 40% of its money in an active portfolio and 60% in a market index. If the return on the market index is 16% and the return on the active portfolio is 18%, the return on the entire fund is _________. A. 16.4% B. 16.8% C. 17.2% D. 17.6% E. none of these 0.4(18%) + 0.6(16%) = 16.8%. Bodie - Chapter 21 #42 Chapter 21 Difficulty: Moderate In a particular year, Wiseguys Mutual Fund earned a return of 15% by making the following investments in the following asset classes Bodie - Chapter 21 Chapter 21 43. The total excess return on the Wiseguys managed portfolio was _________. A. 1% B. 3% C. 4% D. 5% E. none of these 15% - 10% = 5%. Bodie - Chapter 21 #43 Chapter 21 Difficulty: Moderate