1. A stock has a Beta of 1.5, the risk free rate is 3%, and the expected market
ID: 2624843 • Letter: 1
Question
1. A stock has a Beta of 1.5, the risk free rate is 3%, and the expected market return is 8%. What is the expected return on the stock?
a. 10.5%
b. 11.0%
c. 15.0%
d. 16.5%
2. One week before expiration, a call option with a strike of $50 is selling for $3 when the current stock price is $52. You buy the option and then sell it for $1 two days later.
I. The premium when you bought the option was $1.
II. The stock most likely declined over your two day holding period.
III. You lost $200 in this transaction.
Which of the following is correct?
a. Only I is true
b. Only I and III are true
c. Only II and III are true
d. All three are true
3. Farmer Brown, a wheat farmer, shorts wheat futures contracts at $750 per bushel in an amount equal to his expected crop production.
a. Farmer Brown is hedging against a drop in the price of wheat below $750 per bushel.
b. Farmer Brown will make additional money if the price of wheat is $800 per bushel.
c. If the price of wheat is $600 per bushel at time of delivery, Farmer Brown has lost money in total.
d. If the price of wheat falls to $600 per bushel, Farmer Brown will need to post additional margin.
4. ABC Mutual Fund has an investment objective is to provide long-term growth of capital by investing primarily in common stocks of issuers located in the U.S. with a record of above-average long-term growth. ABC Mutual Fund would be considered:
a. An Emerging Markets Fund
b. An Income Fund
c. An S&P ETF
d. A Growth Fund
5. A Company has a qualified pension plan in which it pays a percentage of an employee
Explanation / Answer
1. A stock has a Beta of 1.5, the risk free rate is 3%, and the expected market return is 8%. What is the expected return on the stock?
ANSWER:- (A) 3% + 1.5(8%-3%)=10.5%
2. One week before expiration, a call option with a strike of $50 is selling for $3 when the current stock price is $52. You buy the option and then sell it for $1 two days later.
ANSWER:- (a )Only I is true
3. Farmer Brown, a wheat farmer, shorts wheat futures contracts at $750 per bushel in an amount equal to his expected crop production.
ANSWER:- (c) If the price of wheat is $600 per bushel at time of delivery, Farmer Brown has lost money in total.
4. ABC Mutual Fund has an investment objective is to provide long-term growth of capital by investing primarily in common stocks of issuers located in the U.S. with a record of above-average long-term growth. ABC Mutual Fund would be considered:
ANSWER:- (b.)An Income Fund
5. A Company has a qualified pension plan in which it pays a percentage of an employee
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