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Final Exam, Spring 2017 NAME and ID:______________________________ BAFI/MSFI 429: Investment Management Professor Joonki Noh
INSTRUCTIONS
- Do not turn this page until you are instructed.
- You have one hour and forty five minutes to answer the questions in the exam.
- This is a closed-book and closed-note exam. Calculators are permitted but computers/tablets/ cell phones are not allowed during the exam.
- Write down your name and ID on EVERY page. Make sure that you have 10 pages for the exam in total. 5. You are allowed to refer to the distributed formula paper that contains ONLY formulas covered in classes. Use the distributed white papers as scratch papers if necessary. If you need more scratch papers, ask your proctor.
- This test has 4 multiple choice problems, 4 short problems, and 2 (session II) or 3 (session I) bonus questions. The maximum points that you can obtain in the exam are 90 (session II) or 95 (session I) points.
a. Indicate your answers for the multiple choice problems by writing down the answers on the ANSWER SHEET (on the last page of this exam paper). Correct answers score 2.5 points each. Answers not clearly indicated will earn no credits. Note that no partial credits will be given to the multiple choice problems. b. 4 short problems are worth a total of 70 points. Each of bonus questions is worthwhile 5 points. Points will be awarded for the correctness of your answers and the clarity of the reasoning as well as the intermediate steps leading to those answers. Please state your answers, reasoning, and intermediate steps clearly to obtain partial credits.
GOOD LUCK AND ENJOY YOUR SUMMER!!!
Before you begin, please sign the following statement indicating that you understand the rules of the final exam in BAFI/MSFI 429:
I will not communicate with other students during the exam in any manner. I will not provide assistance to or receive assistance from other students for this exam.
Signature: _______________________________________
MUTIPLE CHOICE PROBLEMS NAME and ID:______________________________
- The risk-free rate is 3.5%. The expected market return is 7%. Based on your security analysis, you expect the APPLE Inc. (Ticker Symbol: AAPL) with a beta of 0.75 to offer a rate of return of 8%, you should
A) Buy AAPL because it is overpriced. B) Sell short AAPL because it is overpriced. C) Sell short AAPL because it is underpriced. D) Buy AAPL because it is underpriced. E) None of the above, as AAPL is fairly priced.
- Which of the following factors are empirically driven?
A) Value-weighted return of market portfolio B) RMW and CMA factors under the Fama-French five-factor model C) SMB and HML factors under the Fama-French three-factor model D) Industrial production E) Aggregate Amihud illiquidity measure
- Suppose that you want to construct trading strategies based on the new stock issuance effect discussed in Lecture 10. What would be your choice of investment horizon?
A) One week to one month B) Three months to twelve months C) One year to three years D) Three years to five years E) None of the above mentioned
- Which of the following statements about (il)liquidity are correct?
A) The wider the bid-ask spread of a given asset is, the more illiquid it is B) The liquidity betas proposed by Pastor and Stambaugh are positively priced in the cross- section of asset returns. C) Illiquidity levels capture the same information as betas of market illiquidity measure D) A and B E) A and C F) B and C
NAME and ID:______________________________
d. (5 points) What is the short-term reversal effect and how would you construct a trading strategy based on it (i.e., which stocks do you want to buy and which stocks do you want to short-sell)?
e. (5 points) What is the factor tilting?
f. (5 points) What are the main differences between the CAPM and the market model? Provide at least two differences.
NAME and ID:______________________________
- (10 points) Suppose that you have the following SML under the CAPM:
E(Ri)
CAPM SML
7.3%
0 0.9 1.1 ๏ขi,CAPM, ,
a. (3 points) Assume that the market portfolio is sufficiently liquid thus its illiquidity cost is close to 0 and you have a stock A whose liquidity-adjusted beta (๏ขA,LCAPM) is 0.9 under the liquidity- adjusted CAPM. What is the liquidity-adjusted expected return of stock A?
b. (3 points) Suppose that you find the expected return of stock A is 8.9%. Under the liquidity- adjusted CAPM, what is the expected illiquidity cost for stock A?
NAME and ID:______________________________
- (20 points) Suppose that you want to test if the downside market risk model that we have discussed in Lecture 7 is supported empirically by financial data. After running monthly cross- sectional regressions, you find the following results: for asset i ,
๐ฬ
๐ฬ
ฬ
โ ๐ฬ
ฬ
ฬ
ฬ
๐ฬ
= ๐พ 0 + ๐พ+๐ฝ๐+^ + ๐พโ๐ฝ๐โ^ + ๐๐
๐พ 0 = 0.001, ๐พ+^ = 0.004, ๐พโ^ = 0.
๐๐ธ 0 = 0.001, ๐๐ธ+^ = 0.006, ๐๐ธโ^ = 0.
where SE is the standard error of slope coefficient estimate. Recall that the downside market risk model is written as ๐ธ[๐๐ โ ๐๐] = ๐พ+๐ฝ๐+^ + ๐พโ๐ฝ๐โ.
a. (5 points) Are the estimates of ๐พ 0 , ๐พ+, and ๐พโ^ that you obtained above reliably different from 0? What are your interpretations of ๐พ 0 , ๐พ+, and ๐พโ? Annualize the price(s) of market risks.
b. (5 points) Suppose that you find stock A whose exposures to upside and downside market risks are ๐ฝ๐ด+^ = 0.9 and ๐ฝ๐ดโ^ = 1.5. Under the downside market risk model, what is the annualized expected return of stock A. Assume that the risk-free rate is 1.5% per year.
NAME and ID:______________________________ c. (5 points) Your friend claims that the results above are supportive for the downside market risk model. Do you agree with your friend? Explain why you agree or disagree with your friend.
d. (5 points) Suppose that after adding twenty more years of data to the test, you find that a new estimate of the intercept: ๐พ 0 = 0.001 and ๐๐ธ 0 = 0.0003 and that the other estimates and their SEs stay the same as above. Would you change your answer in part c? If you think that the new test result is against the downside market risk model, how would you modify it to be supported by the new test result?
ANSWER SHEET FOR MULTIPLE CHOICE PROBLEMS
Name and ID: _______________________________________
1. ________
2. ________
3. ________
4. ________
