Question

In: Finance

1) The beta of a portfolio is: a. Less than the weighted beta of the portfolio....

1) The beta of a portfolio is:

a. Less than the weighted beta of the portfolio.

b. Equal to the weighted beta of the portfolio.

c. Less than or equal to the weighted beta of the portfolio.

d. Greater than the weighted beta of the portfolio.

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2) An insurance company invests in equity securities as part of its surplus strategy. It uses the historical method to estimate the value at risk of the portfolio. Which is most accurate regarding the problems facing the insurance company when estimating potential losses?

a. Any conclusions will depend on equity returns being normally distributed.

b. The collection of all data points will be prohibitively costly.

c. The method ignores the impact of inflation on historical returns.

d. Historical patterns are assumed to be good estimates of future patterns.

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3) Which would most likely be classified as a primary market transaction?

a. An MBS purchased from an institution that originates the mortgage loans.

b. Equity shares purchased on the floor of the New York Stock Exchange.

c. A corporate bond purchased from an endowment fund that is liquidating.

d. Shares of preferred stock that are purchased from a primary dealer.

Solutions

Expert Solution

1)

b. Equal to the weighted beta of the portfolio

The portfolio beta is simply the weighted average of the beta of individual securities.

2)

d. Historical patterns are assumed to be good estimates of future patterns.

While taking historical data as a base, the flawed assumption is taken into consideration that historical data is a good estimate of future patterns since historical data would not exactly repeat itself. a) is correct and is an accurate assumption. b) is not a big problem as data points can be obtained relatively cheaply. c) is not a problem since inflation is taken into account in historical data too.

3)

a. An MBS purchased from an institution that originates the mortgage loans.

Primary market transaction refers to a transaction where the security is created. Here, the MBS is purchased directly from the institution which originates, hence is a primary market transaction. b) is a secondary market transaction since the stocks purchased are sold by some other investor who was hitherto holding it. c) is incorrect as the corporate bond is not directly purchased from the originator. d) is incorrect as shares are purchased from a dealer who acts as a middleman, and hence the transaction is a secondary market transaction.


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