Question

1) If a portfolio had a return of 8%, the risk free return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be __.

A) 0.25

B) 0.08

C) 0.03

D) 0.2

2) You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? ignore interest on margin.

A) 0.43

B) 0.25

C) 0.55

D) 0.33

3) If the compounding period is less that 1 year, the effective annual rate is greater than the annual percentage return.

A) True

B) Fales

4) Dividend yield is not a component of the holding period return.

A) True

B) False

Answer 1

1)

Sharpe ratio = (Expected return of Portfolio - Risk free rate) / Standard deviation of portfolio

Sharpe ratio = (8% - 3%) / 20%

Sharpe ratio = 0.25

2)

Margin call price = Stock price * (1 - Initial margin) / (1 - Maintenance margin)

$30 = $45 * (1 - 50%) / (1 - Maintenance margin)

(1 - Maintenance margin) = ($45 / $30) * (1 - 50%)

(1 - Maintenance margin) = 75%

Maintenance margin = 25% or 0.25

3)

True

Effective annual rate = (1 + (Annual percentage rate / Compounding frequency)^{compounding frequency}

Higher the Compounding frequency the more the Effective annual rate i.e, shorter the compounding period the higher the effective annual rate

4)

False

Holding period return = Capital gains yield + Dividend yield