Question 1

Describe:
a. the transactions a grain elevator operator would make in using March corn futures to hedge a silo full of corn from October through February.
b. how the price on a futures contract is related to the price for the underlying commodity.
c. how futures prices are expected to move over time.

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a. the transactions a grain elevator operator...

Question 2

You can form a portfolio from the following assets: T-bill futures,T-bond futures,stock index futures,and IBM stock.Given the following predictions,indicate which of these assets you would hold and whether you'd be long or short in the asset,so that you will profit if your prediction is correct.(You don't have to give numbers.)
a. While the total sales of computers will depend on the overall state of the economy and the stock market (about which you have no strong beliefs), you firmly believe that IBM is going to lose market share.
b. The yield curve is currently upward sloping. You don't have any idea where interest rates on average are headed, but at the end of this year, you firmly believe that the yield curve will be downward sloping.
c. You believe that the stock market is driven by corporate profits and (inversely) by interest rates. You think that corporate profits are due for a big surge next year, but you aren't sure about interest rates.
d. You believe that stocks are going to go up next year, unless there is a spectacular short crash like the one that occurred in October 1987. If there is a crash, you believe that there will be a "flight to safety", i.e., that investors will dump stocks and buy government bonds.

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Question 3

Discuss (in list form)the risks associated with the following investment strategies.
a. exact matching
b. immunization
c. portfolio insurance
d. timing
e. sector selection
 f. selecting mispriced options using the Black-Scholes formula

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Question 4

Steve is a Los-Angeles based software developer for one of the leading firms in the United States.His entire portfolio of equity investments consists of stocks in the companies based in California.Explain this kind of investor behavior.

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Question 5

Your company,Solid State Gizmo,Inc.(SSG)has just been spun off by its parent firm,Octopus Industries,into a separate firm.SSG's pension fund,currently amounting to $250 million of assets,has also been spun off.SSG's board of directors has asked you to study proposals from a number of investment management firms,each offering to manage the pension fund.You are to give the board a report discussing the different styles of management that are available and making recommendations about which firms should be seriously considered and how SSG should instruct them to manage the pension fund if they are hired.Carefully describe the following:
a. What is "passive" investment management? What kinds of things does a passive manager do?
b. What factors would you look at to judge if one passive manager is better than another?
c. If passive management is chosen, what instructions might you want to give the fund manager to tailor the optimal passive strategy for SSG's pension fund?
d. What is "active" investment management? What kinds of things does an active manager do?
e. How would you judge if one active manager is better than another?
f. If active management is chosen, what instructions might you want to give the fund manager?

Accepted Answer

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Quiz 4: Security Analysis and Portfolio Theory

Discuss (in list form)the risks associated with the following investment strategies. a. exact matching b. immunization c. portfolio insurance d. timing e. sector selection f. selecting mispriced options using the Black-Scholes formula

Steve is a Los-Angeles based software developer for one of the leading firms in the United States.His entire portfolio of equity investments consists of stocks in the companies based in California.Explain this kind of investor behavior.