early signals

8/9/2019 Early signals

1/32

Diagnostic Exam I

Which is the better portfolio in terms of risk and return among the following two portfolios?T-bill has 5% return

Explanation :

The Sharpe ratio of Portfolio A is 0.25 whereas for Portfolio B it is 0.30. This means that for a unitof risk taken by the portfolio B, the return is 0.30 which is higher than 0.25

Portfolio A is better

Portfolio B is better

Both give same return

Questions 1 of 36

Page 1 of 1KESDEE - Quiz

1/4/1980http://www.kesdee.com/prm/RandomizedPRMExam.jsp?sessionID=1&examType=2


2/32

Diagnostic Exam I

The correlation coefficient respecting the following dataset is:

Explanation :

0.134

0.146

1.271

0.984

Questions 2 of 36




3/32

Diagnostic Exam I

A risk-free portfolio is non-existent since

Explanation :

Portfolio risk can be decomposed into unsystematic risk and systematic risk; the latter cannot bediversified away.

it is impossible to construct a risk-free portfolio

a risk free portfolio exists only at a conceptual level and hence is impractical

systematic risk cannot be diversified away

unsystematic risk cannot be diversified away

Questions 3 of 36




4/32

Diagnostic Exam I

A portfolio comprised of 20 - 30 assets

Explanation :This is because risks that arise at the micro-level or firm level or industry level tend to cancel

each other out without in any way contributing to overall portfolio risk.

can achieve greater risk reduction if the number of assets is raised to 300

can achieve greater risk reduction if the number of assets is brought down to just 3

can achieve greater risk reduction if the number of assets is brought down to 100

can achieve the same level of risk reduction that can be achieved by increasing the

number of assets to 100 or 300.

Questions 4 of 36




5/32

Diagnostic Exam I

The major benefit of diversification is to:

Explanation :

The main advantage of portfolio diversification is it reduces the expected risk.

Increase the expected return

Increase the size of the investment portfolio

Reduce brokerage commission

Reduce the expected risk

Questions 5 of 36




6/32

Diagnostic Exam I

Which of the following is not an assumption of the Capital Assets Pricing Model (CAPM)?

Explanation :

Investors make their investment decisions based on a single period horizon i.e., the next

immediate time period.

Investors are risk-averse and use the expected rate of return and standard deviation of

return as appropriate measures of return and risk respectively.

Investors make their investment decisions based on a single period horizon i.e., thenext immediate time period.

Transaction costs in financial markets are low enough to ignore and assets can bebought and sold in any unit desired.

Investors make their investment decisions based on multi-period horizon.

Questions 6 of 36




7/32

Diagnostic Exam I

True or False?Tax liability need not be adjusted while calculating the cost of debt.

Explanation :Cost of debt needs an adjustment for tax liability for the reason that, interest is a charge on profit

and is an deductible expenditure for computation of tax purposes. Cost of debt is given by: Kd =

(I NP) * (1 T)

True

False

Questions 7 of 36




8/32

Diagnostic Exam I

The following monthly data of yields on 5-year Treasury bonds was extracted from the ReserveBank Bulletin:

What type of yield curve is indicated by the above data set?

Explanation :

Since it can be noticed that the short-term yield are higher than the long-term yield.

Normal yield curve

Inverse yield curve

Humped yield curve

Variable yield curve

Questions 9 of 36




9/32


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12/32

Diagnostic Exam I

If an asset is selling at US$120.30 in the cash market, and the price of a futures contract on thesame asset is 98.28, what is the basis?

Explanation :Basis point = $120.30 - $98.28 = 22.02

22.02

218.58

Zero

-22.02

Questions 10 of 36




13/32

Diagnostic Exam I

In May, Company A bought a 3 x 6 FRA from Novel bank at a bid rate of 3.65% for a notionalprincipal amount of $50,000. If on August the LIBOR rate is 3.22%, how will the settlement takeplace?

Explanation :The buyer of FRA is protecting itself from a rise in interest rates. In case the interest rate risesabove the FRA rate, the bank will make payment to company and when interest rate falls belowFRA rate, the company makes payment to bank.

Company A receives 3.65% from Novel bank

Company A pays 3.65% to Novel Bank

Company A pays 0.43% to Novel Bank

Company A receives 0.43% from Novel bank

Questions 11 of 36




14/32

Diagnostic Exam I

The fractional price change in an option resulting from a one-point change in price of theunderlying instrument is called:

Gamma.

Hedge ratio.

Vega.

Sharpe Ratio.

Questions 12 of 36




15/32

Diagnostic Exam I

Which of the following is/are true?

Explanation :For American put, the restriction is P < X.

So, P1 - P2 = X1 - X2

The price difference between two American puts cannot exceed the difference in

exercise prices

The price difference between two European puts cannot exceed the difference inexercise prices

The price difference between two American puts cannot exceed the difference in thepresent value of exercise prices

Both (a) and (b)

Questions 13 of 36




16/32

Diagnostic Exam I

If the current yield on a bond is 9% and its face value is $1000 with a coupon rate of 7% itscurrent market price is

Explanation :Current yield = Annual dollar coupon interest/Price0.09= 70/PricePrice =$778

$700

$778

$845

$1175

Questions 17 of 36




17/32

Diagnostic Exam I

In September, the December natural gas futures are trading at US$4.12 while the January naturalgas futures are trading at US$ 4.26. A spread trader expects the spread to narrow over the nextmonth, with the December price down relative to the January price. What positions will the tradertake to profit from this situation?

Sell December futures and buy January futures

Buy September futures and sell December futures

Buy December futures and sell January futures

Cannot answer without more information

Questions 20 of 36




18/32

Diagnostic Exam I

A portfolio manager wants to invest $5 million in T-bonds in six months from now. He fears thatthe interest rates will fall and therefore wants to hedge his risk. Which hedging strategy isadvisable?

Reverse hedge

Long hedge

Long hedge

Cross hedge

Questions 21 of 36




19/32

Diagnostic Exam I

Companies employ Swaps for

Explanation :

Swaps help companies to meet all of the mentioned objectives.

Investment purposes

Hedging

Reduce funding costs

All of the above

Questions 22 of 36




20/32

Diagnostic Exam I

Assume that the daily volatility of a stock is 1.75%, and trading happens on 256 days a year. Thevolatility () used in the Black & Scholes formula should be:

Explanation :1.75 * Sqrt(256)

= 28%

30%

1.92%

1.38%

28%

Questions 23 of 36




21/32

Diagnostic Exam I

If the Spread consists of buying lower strike price Call Option and selling higher strike price CallOption, it is referred to _________________.

Explanation :In a bull call spread, a Call option is bought with a strike price of x and another call option, soldwith a strike of y, producing a net initial payment. (x < y).

Bull Call Spread

Bear Call Spread

Bull Put Spread

Bear Put Spread

Questions 24 of 36




22/32

Diagnostic Exam I

Which of the following is a type of credit derivative?I. A put option on a corporate bond

II. A total return swap on a loan portfolioIII. A note that pays an enhanced yield in the case of a bond downgrade

IV. A put option on an off-the-run treasury bond

Explanation :An option on a T bond has no credit component.

I, II, and III

II and III only

II only

All of the above.

Questions 25 of 36




23/32

Diagnostic Exam I

The option component of the swaption can be designated to be exercised only at its expirationdate for _________________; on specific pre-specified dates for ________________; at any

time up to and including the exercise date for ______________.

Bermudan swaption; American swaption; European swaption

American swaption; Bermudan swaption; European swaption

European swaption; Bermudan swaption; American swaption

American swaption; European swaption; Bermudan swaption

Questions 26 of 36




24/32

Diagnostic Exam I

A repurchase agreement occurs when:

Explanation :A repurchase agreement involves the sale of a security to a counterparty with an agreement to

repurchase it at a fixed price on an established future date.

A company agrees to buy back its commercial paper before maturity

A bank depositor agrees, in advance, to re-invest money in a negotiable certificate of

deposit

An investor buys part of a government security dealers inventory and simultaneously

agrees to sell it back

The federal government agrees to buy T-bills

Questions 27 of 36




25/32

Diagnostic Exam I

The quoted rate on a US T-bill with 60 days to maturity is 8.12%. Its purchase price is $ 98.0 per$ 100. The money market yield is:

Explanation :MMY = (100-98.00)/98.00*(360*100/60)=12.25%

10.25%

11.25%

12.25%

13.25%

Questions 28 of 36




26/32

Diagnostic Exam I

What is the correct order for progress in the foreign exchange?I. The Inter-war Period

II. The Gold StandardIII. The Floating Rate Period

IV. The Bretton Woods Par Value Period

Explanation :The Gold Standard, 1880 - 1914

The Inter-war Period, 1919 - 1939The Bretton Woods Par Value Period, 1946-1971

The Floating Rate Period, 1971 to Present

I, II, III, IV

II, I, IV, III

IV, III, II, I

III, II, I, IV

Questions 30 of 36




27/32

Diagnostic Exam I

You are short CHF 13 million at 1.4525. If the USD/CHF is now quoted at 1.4685/90 and if youdeal at that rate, what profit or loss would you make?

Explanation :To settle the short CHF position you need to buy CHF. You can buy 13 million CHF at13,000,000/1.4685 i.e., USD 8,852,570.65. The initial value of 13 million CHF is

13,000,000/1.4525 i.e., USD 8,950,086.06. so the profit is USD 8,950,086.06 minus USD8,852,570.65 i.e., USD 97,515.41.

Profit of USD 100,528.54

Loss of USD 99,980.83

NIL

Profit of USD 97,515.41

Questions 31 of 36




28/32

Diagnostic Exam I

An order in which no time or price is fixed for the execution of the order for the security to bepurchased or sold and it remains in effect until it is either cancelled or executed is known as:

Market order

Open order

Stop order

Limit order

Questions 32 of 36




29/32

Diagnostic Exam I

Which of the following intermediaries operate in the equity markets?

Dealers

Brokers

Sub-brokers

All of the above

Questions 33 of 36




30/32

Diagnostic Exam I

Tick size is the minimum price fluctuation available in a marketplace-expressed in terms of pointsor fractions of a point of the price or rate.

True

False

Questions 34 of 36




31/32

Diagnostic Exam I

Which of the following statements is not true?

Explanation :

Commodities are traded in spot as well as derivatives market.

Commodities are store of value

Commodities are physical substances

Commodities are traded only in spot markets

Commodities are traded in spot and derivative markets

Questions 35 of 36




32/32

Diagnostic Exam I

Power markets are more fragmented than other commodity markets because it cannot be storedin the conventional sense. Therefore it is known as a _____ commodity.

Explanation :Since, storage of electricity cannot be done in the conventional sense it is known as a flowcommodity.

flow

cash and carry

volatile

all of the above

Questions 36 of 36


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