Question

1. Consider the following statements:

Statement 1: The Sharpe ratio for commodities as an asset class has historically been higher than bonds but lower than stocks.

Statement 2: The volatility of commodity prices tends to be higher than the volatility for reported price inflation.

A. Only Statement 1 is incorrect.

B. Only Statement 2 is incorrect.

C. Both statements are correct.

2.

An analyst collects the following information about an investment's return over the last 24 months:

• Mean return = 18%
• Standard deviation of returns = 12%

Given a risk-free rate of 5%, the Sharpe ratio for this investment is closest to

A. 2.6

B. 0.92

C. 1.083

3. A drag on liquidity is most likely to occur when:

A. There is a delay in cash coming into the company.

B. Cash leaves the company too quickly.

C. The company loses creditworthiness.

4. Henry sold a call option with an exercise price of $75 for $4. Henry's profit if the stock trades at $81 at option expiration is closest to:

A. $6 loss.

B. $10 profit

C. $2 loss

5. If economic data suggest that the economy is undergoing an expansion by an increase in aggregate demand, investors should least likely increase their investments in:

A. Cyclical companies

B. Commodity companies.

C. Defensive companies.

6. A corporate insider is consistently able to earn abnormal returns. This fact most likely:

A. Supports the case for weak-form efficiency of markets.

B. Weakens the case for strong-form efficiency of markets.
C. Weakens the case for semi-strong-form efficiency of markets.

7. Which of the following ratios is most likely lower in the early years of an asset's like if the company uses the straight-line method instead of the double declining balance method for depreciations?

A. Operating profit margin.

B. Operating return on assets.
C. Asset turnover.

8. Consider the following statements:

Statement 1: The drawback of credit-linked bonds is that they can contribute to further downgrades or eventual default of the issuer.

Statement 2: TIPS offer investors a fixed real return that is protected from inflation risk.

Which of the following is most likely?

A. Only Statement 1 is correct.

B. Only Statement 2 is correct.

C. Both statements are correct.

Answer 1

Answering The First Four Options

Answer 1) Option C) Both Statements are correct

The sharpe ratio is calculated as (Return - Risk Free Rate) / Standard Deviation of Asset class

It has been observed that sharpe ratio of commodities have been higher than bonds but lower than equities. Hence, Statement 1 is correct.

Volatility of commodity prices have been higher than reported price inflation. This is due to many reasons such as seasonality. During various seasons, prices of agricultural products shoot up more than reported price inflation resulting in higher volatility. Hence, Statement 2 is correct.

Answer 2) Option C) 1.083

Sharpe Ratio = ( Mean Return - Risk Free Rate ) / Standard Deviation

Sharpe Ratio = (.18-.05) / .12

Sharpe Ratio = .13/.12 =1.0833

Answer 3) Option A) There is a delay in cash coming into the company.

Drag in Liquidity occurs when cash inflows are delayed. Example: Delay in receiving amounts from debtors results in a drag in liquidity.

Option B) is the incorrect occurence for Drag in Liquidity.

Option C) would result in a more default probable outcome rather than drag in liquidity.

Answer 4) Option C) -2$

Henry sell a call option means that he has an obligation to sell the asset at 75$ . Since the stock is trading at 81$, the buyer of call option will exercise it and buy the stock at 75$.

This will result in a loss of 6$.

However, he gains an option premium from the buyer worth 4$ which offsets his loss position

Profit / Loss on short call = Gain/Loss on Call + Premium Received = -6 + 4 = -2 $

Option A and B are incorrect based on the above mentioned calculation