Mock Test 1, S2, 2019/2020
FIN3102A/FIN3702A Semester 2, 2019/2020
February 25, 2020
Prepared by Dr. Zhang
1. You want to purchase GM stock at $10 from your broker using as little of your own
money as possible. If initial margin is 60% and you have $2400 to invest, how many
shares can you buy?
A. 200 shares
B. 300 shares
C. 400 shares
D. 600 shares
E. 800 shares
2. Assume you sold short 100 shares of common stock at $40 per share. The initial
margin is 50%. What would be the maintenance margin if a margin call is made at a
stock price of $50?
A. 40%
B. 20%
C. 35%
D. 25%
E. None of the above.
3. You are evaluating two investment alternative. One is a passive market portfolio with
an expected return of 8% and a standard deviation of 12%. The other is a fund that is
actively managed by your broker. This fund has an expected return of 15% and a
standard deviation of 16%. The risk-free rate currently is 5%. What is the maximum
fee your broker could charge and still leave you as well off as if you had invested in
the passive market fund?
A. 4.00%
B. 4.33%
C. 6.00%
D. 7.00%
E. none of the above
The following statement is used for answer Q4 and Q5.
Assume an investor with the following utility function: U = E(r) - 3/2(σ2), where E(r) is
the return and σ is the standard deviation.
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, Mock Test 1, S1, 2019/2020
4. To maximize her expected utility, she would choose the asset with an expected rate
of return of _______ and a standard deviation of ________, respectively.
A. 12%; 20%
B. 10%; 15%
C. 10%; 10%
D. 8%; 10%
E. 10%; 12%
5. To maximize her expected utility, which one of the following investment alternatives
would she choose?
A. A portfolio that pays 10% with a 60% probability or 5% with 40% probability.
B. A portfolio that pays 10% with a 40% probability or 5% with 60% probability.
C. A portfolio that pays 12% with a 60% probability or 5% with 40% probability.
D. A portfolio that pays 12% with a 40% probability or 5% with 60% probability.
E. A portfolio that pays 12% with a 20% probability or 5% with 80% probability.
The following statement is used for answer Q6 and Q7.
Below is the probability distribution for the holding-period return for a stock:
State of the Economy Probability HPR
Boom 0.40 22%
Normal growth 0.35 11%
Recession 0.25 -9%
6. What is the expected holding-period return for the stock?
A. 11.67%
B. 8.33%
C. 9.56%
D. 12.4%
E. 10.4%
7. What is the expected standard deviation for the stock?
A. 2.07%
B. 9.96%
C. 7.04%
D. 1.44%
E. 12.17%
Page | 2
FIN3102A/FIN3702A Semester 2, 2019/2020
February 25, 2020
Prepared by Dr. Zhang
1. You want to purchase GM stock at $10 from your broker using as little of your own
money as possible. If initial margin is 60% and you have $2400 to invest, how many
shares can you buy?
A. 200 shares
B. 300 shares
C. 400 shares
D. 600 shares
E. 800 shares
2. Assume you sold short 100 shares of common stock at $40 per share. The initial
margin is 50%. What would be the maintenance margin if a margin call is made at a
stock price of $50?
A. 40%
B. 20%
C. 35%
D. 25%
E. None of the above.
3. You are evaluating two investment alternative. One is a passive market portfolio with
an expected return of 8% and a standard deviation of 12%. The other is a fund that is
actively managed by your broker. This fund has an expected return of 15% and a
standard deviation of 16%. The risk-free rate currently is 5%. What is the maximum
fee your broker could charge and still leave you as well off as if you had invested in
the passive market fund?
A. 4.00%
B. 4.33%
C. 6.00%
D. 7.00%
E. none of the above
The following statement is used for answer Q4 and Q5.
Assume an investor with the following utility function: U = E(r) - 3/2(σ2), where E(r) is
the return and σ is the standard deviation.
Page | 1
, Mock Test 1, S1, 2019/2020
4. To maximize her expected utility, she would choose the asset with an expected rate
of return of _______ and a standard deviation of ________, respectively.
A. 12%; 20%
B. 10%; 15%
C. 10%; 10%
D. 8%; 10%
E. 10%; 12%
5. To maximize her expected utility, which one of the following investment alternatives
would she choose?
A. A portfolio that pays 10% with a 60% probability or 5% with 40% probability.
B. A portfolio that pays 10% with a 40% probability or 5% with 60% probability.
C. A portfolio that pays 12% with a 60% probability or 5% with 40% probability.
D. A portfolio that pays 12% with a 40% probability or 5% with 60% probability.
E. A portfolio that pays 12% with a 20% probability or 5% with 80% probability.
The following statement is used for answer Q6 and Q7.
Below is the probability distribution for the holding-period return for a stock:
State of the Economy Probability HPR
Boom 0.40 22%
Normal growth 0.35 11%
Recession 0.25 -9%
6. What is the expected holding-period return for the stock?
A. 11.67%
B. 8.33%
C. 9.56%
D. 12.4%
E. 10.4%
7. What is the expected standard deviation for the stock?
A. 2.07%
B. 9.96%
C. 7.04%
D. 1.44%
E. 12.17%
Page | 2
