Equity Investments - Markets, Indexes, and Efficiency

An investor primarily invests in stocks of publicly traded companies. The investor

wants to increase the diversification of his portfolio. A friend has recommended

investing in real estate properties. The purchase of real estate would

best be characterized as a transaction in the:

• derivative investment market.

• traditional investment market.

• alternative investment market.

A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation?

• Closed-end funds are unavailable to new investors.

• When investors sell the shares of an open-end

  fund, they can receive a discount or a premium to the fund’s net asset value.

• When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.

A German company that exports machinery is expecting to receive $10 million

in three months. The firm converts all its foreign currency receipts into euros.

The chief financial officer of the company wishes to lock in a minimum fixed

rate for converting the $10 million to euro but also wants to keep the flexibility

to use the future spot rate if it is favorable. What hedging transaction is most

likely to achieve this objective?

• Selling dollars forward.

• Buying put options on the dollar.

• Selling futures contracts on dollars.

The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The latest price of a share of SPDRs is $290. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in six months and have an exercise price of $305 per share. On the expiration date, the trader will exercise the call options (ignore any transaction

costs) if and only if the shares of SPDRs are trading:

• below $305 per share.

• above $305 per share.

• above $308 per share.

Pierre-Louis Robert just purchased a call option on shares of the Michelin

Group. A few days ago he wrote a put option on Michelin shares. The call and

put options have the same exercise price, expiration date, and number of shares

underlying. Considering both positions, Robert’s exposure to the risk of the

stock of the Michelin Group is:

• long.

• short.

• neutral.

Caroline Rogers believes the price of Gamma Corp. stock will go down in the

near future. She has decided to sell short 200 shares of Gamma Corp. at the

current market price of €47. The initial margin requirement is 40 percent.

Which of the following is an appropriate statement regarding the margin

requirement that Rogers is subject to on this short sale?

• She will need to contribute €3,760 as margin.

• She will need to contribute €5,640 as margin.

• She will only need to leave the proceeds from the short sale as deposit and does not need to contribute any additional funds.

Consider the following limit order book for a stock. The bid and ask sizes are number of shares in hundreds.

A new buy limit order is placed for 300 shares at ¥123.40. This limit order is said to:

• take the market.

• make the market.

• make a new market.

You own shares of a company that are currently trading at $30 a share. Your

technical analysis of the shares indicates a support level of $27.50. That is, if the

price of the shares is going down, it is more likely to stay above this level rather

than fall below it. If the price does fall below this level, however, you believe

that the price may continue to decline. You have no immediate intent to sell the shares but are concerned about the possibility of a huge loss if the share price

declines below the support level. Which of the following types of orders could

you place to most appropriately address your concern?

• Short sell order.

• Good-till-cancelled

  stop sell order.

• Good-till-cancelled stop buy order.

One month after inception, the price return version and total return version of

a single index (consisting of identical securities and weights) will be equal if:

• market prices have not changed.

• capital gains are offset by capital losses.

• the securities do not pay dividends or interest.

An analyst gathers the following information for a market-capitalization-

weighted index comprised of securities MNO, QRS, and XYZ:

The total return of the index is:

• 1.04%.

• –5.35%.

• –10.23%.