Which of the following is true for first-degree price discrimination?
a. It does not reach the efficient quantity
b. It does not generate any deadweight loss
c. All surplus goes to consumer surplus
d. It is easy for companies to carry out the first-degree price discrimination
(6 points) Mortgage backed securities have a variety of risks in addition to interest rate risk. Pension fund XYZ is thinking to invest in senior tranches of mortgage backed securities. The Board of Directors (BoD) of XYZ received two proposals to invest in: I. Non-agency Residential Mortgage Backed Securities (RMBS). II. Commercial Mortgage Backed Securities (CMBS). (a) (2 points) (1) List the two principal risks inherent in a pool of residential mortgages that non-agency RMBS deals are structured to manage. (ii) Explain how non-agency RMBS deals are structured to manage these two risks. (iii) Compare non-agency RMBS and CMBS based on 3 key attributes. Consider a newly written CMBS with an annual coupon rate of 3% and two sequential tranches: A senior tranche of $20 million and a junior tranche of $80 million. All payments received will be used to service senior tranches first. The underlying mortgage pool is modeled based on generic 5-year mortgages with: Annual interest rate of 4.5% Prepayment rate of 150% PSA (see below) . . Default rate of 1% per year Recovery rate of 60%. 150% PSA model: Prepayments begin at a monthly conditional prepayment rate (CPR) rate of 0.3% in the first month and increase at a rate of 0.3% per month until they reach CPR of 9.0% in month 30. (b) (2.5 points) Calculate expected amount for the following at the beginning of the second month post issuance, assuming both default and prepayment take place at the end of the month and that default takes place after prepayment. Principal Interest Remaining Par Payment Payment Value Senior tranche Junior trancheCurrent portfolio of XYZ also contains callable bonds, so the BoD of XYZ is concerned with adding mortgage backed securities given a low interest rate environment and pessimistic macro-economic outlook. (c) (1.5 points) (i) Explain the similarities in risk exposure between callable bonds and mortgage backed securities: (ii) Define a make-whole call provision and explain why it is preferable to fixed-price call provision.(7 points) XYZ manages $50 billion in equity assets backing pension liabilities in the U.S., Canada, and Europe. Its equity portfolio benchmark is the MSCI World Index. Using historical data, XYZ constructs the efficient frontier of its managers as follows. Efficient Frontier of Managers 45% Active Mar C 4.0% 15% Active Mar B 2.5% Expected Alpha Active Mor A 15% LOK Samlaclive 05% 0.0% Index 0.0% 1ON 10% 3.0% 5 0% 6.OK B.ON Tracking Risk (Note: Index is the benchmark MSCI World Index; Assume that active returns are uncorrelated.) XYZ's current portfolio mix is as follows: Allocation Index 20% Semiactive 40% Active Manager A 20% Active Manager B 10% Active Manager C 10% Total 100% (a) (2 points) Calculate the information ratio of the XYZ equity portfolio.XYZ is considering an alternative active strategy with the following overall portfolio allocation: Allocation Index 60% Active Manager C 40% (b) (/ point) Evaluate whether the reallocation is justifiable as an alternative active strategy. (c) (I point) Characterize the structure of the portfolio of managers in parts (a) and (b). respectively. To evaluate manager performance, XYZ collects the following information: Manager's Normal Benchmark Benchmark Manager Annual Return XYZ MSCI World Index 10% Active Manager A MSCI World Value Index 11% Active Manager B MSCI World Growth Index 14% Active Manager C MSCI World Ex Japan Growth Index 15% (d) (2 points) (i) Calculate Manager B's "true" active return Calculate Manager C's "misfit" return (e) (/ point) Describe one advantage and one disadvantage of using the Completeness Fund approach to build a portfolio of multiple active managers.1. Which of the following would cause the short run aggregate supply curve to shift to the right? a. A drop in oil reserves b. An increase in business taxes C. A net increase in capital stock d. An increase in federal minimum wage 2. Which of the following components is not included in the calculation of GDP? a. Consumption b. Company stocks c. Imports d. Military expenditures 3. Which is a form of price discrimination? a. A firm hires marketing experts to increase brand loyalty. b. A firm charges a different price for a bulk purchase. c. A firm charges a price above marginal cost. d. A firm bundles related products together to sell. 4. The demand and supply functions for laptops in Laptopia are given by P = 1200-30 and P = 500 + 70. Imposing a $100 per unit tax on laptops, collected from buyers, will: a. Decrease equilibrium quantity by 60 and increase the price that buyers pay by $70. b. Decrease equilibrium quantity by 60 and leave the price that buyers pay unchanged. c. Decrease equilibrium quantity by 10 and increase the price that buyers pay by $80. d. Decrease equilibrium quantity by 10 and increase the price that buyers pay by $70
