Question

Which of the following Industries is a good investment if the stage of the business cycle is “Trough”?

Question 13 options:

A)	Pharmaceuticals.

B)	Luxury goods or consumer durables. Luxury goods or consumer durables.

C)	Natural resource.

D)	Transportation and construction.

If the bond’s YTM remains constant, then in one year, which of the following bond’s price will be drifting downward to a lower price level?

Question 14 options:

A)	A bond with Coupon rate = 6.00% and YTM = 6.00%

B)	A bond with Coupon rate = 5.25% and YTM = 6.25%

C)	A bond with Coupon rate = 0% and YTM = 6.20%

D)	A bond with Coupon rate = 6.75% and YTM = 6.15%

E)	A bond with Coupon rate = 5.65% and YTM = 6.00%

Are the following two statement true?

     (i) Suppose investors believe that the standard deviation of the market-index portfolio has increased by 25%. Assume that beta of Google’s stock is 1.15 and remains unchanged, and risk-free rate of return remains at 3%. The CAPM model implies that the required rate of return on Google’s stock should increase.

     (ii) If two assets, A and B, have a correlation coefficient equal to 1 (perfectly and positively correlated), then there is not diversification benefit when we hold both of them.

Question 15 options:

A)	(i) False; (ii) True

B)	(i) False; (ii) False

C)	(i) True; (ii) True

D)	(i) True; (ii) False

Answer 1

1. Pharmaceutical have low beta. Hence they are least affected by downward cycle or trough.
Option a is correct option.

2. Premium bonds decrease in price as bond decreases with maturity. When Coupon rate is more than YTM then it is premium bond. Option d is correct option Coupon rate =6.75% and YTM =6.15%.

3. With increase in standard deviation of market it has no effect of expected Return using CAPM.
Higher the correlation there is less benefit of diversification.
Option a is correct option.