Due Week 5 - Day 7

Complete the following exam and post it to the Assignment section.

All Students

FINAL EXAM

1) A portfolio with a correlation of +1 is not a well-diversified portfolio. What must you as an investor do to structure a portfolio with negative correlation?

To structure a negative correlation portfolio one must add more negative correlated stocks to the portfolio, thus outweighing the positive correlated stocks. This will help to bring the positively correlated stocks into negatively correlated stocks.
2) What macroeconomic variable do you believe has the greatest impact on interest rates? Inflation? Briefly explain.

The greatest macroeconomic variable to impact both interest and inflation is money supply. An increase in money supply causes inflation and to try and control inflation the Federal Reserve raises or losers the interest rate.
3) Compare and contrast the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT)? Which model is appropriate for calculating a stock's required rate of return? What is the Securities Market Line and which of the above models is it a product of?

Capital Asset Pricing Model and Arbitrage Pricing Theory both stress on the fact that expected return depends on risk originating from economic influence and is not affected by the unique risk.
Market portfolio has a great importance in the CAPM but it does not feature in the APT. APT does not speak about the underlying factors as compared to the CAPM that collapses all microeconomic risks into a single factor called return on market portfolio.

4) How would you determine if a public corporation's financial statements are reliable?

Public corporation's financial statements are reliable if it adheres to all the requirements of the IFRS and SEC

5) What is a straddle? Would you use it when buying/writing options? Why?

Straddle is