1. A portfolio holds stocks in Index A, a value-weighted index consist of Stocks X and Y. During last month, Stock X appreciated in price while Stock Y depreciated. In order to maintain a value weight, this portfolio needs to:
[I] Sell Stock A and buy Stock b
[II] Buy Stock A and sell Stock b
[III] Do nothing
2. He has 100,000 SGD to invest in one fund. If he is risk-averse and rational, which fund does he invest in?
| Return | St. Dev | |
| China | 0.21 | 0.45 |
| Europe | 0.23 | 0.32 |
| United States | 0.15 | 0.35 |
3. Investor X puts up $10,000 and borrows an equal amount of money from her broker to double the amount invested to $20,000. The broker charges 8% interest on the loan. The stock was originally purchased at $20 per share and in one year, Investor X sells the stock for $22. Investor Y does not believe in borrowing to buy shares and invests $20,000 of his own money in the same stock. Investor X’s rate of return is ______ than Investor Y’s return?
– 10% higher
– 2% higher
– 2% lower
– no change
4. You short-sell 10 shares of Amazon.com, Inc today with a 40% margin. The stock price is $2,000 per share. What is your maximum rate of return for this trade when you cover your position in the future (ignoring transactions costs)?
5. Suppose there is only one risky asset and the risk-free asset. If Investor X’s risk aversion is less than Investor Y’s risk aversion, then Investors X and Y’s portfolios will have the same ________
[I] Portfolio weight on the risky asset
[II] Expected return
[III] Sharpe Ratio
