#### mcarthur724

##### Member

1) “(6) A regression returns stock X on stock Y; intercept and slope coefficient not given. Betas given with regards to an Index for both stocks and risk-free rate. Question: What would the intercept most probably look like in the CAPM? I chose the risk-free rate but not sure if it is correct, I doubt it.”

- If I remember correctly, I think that I had narrowed it down to 2 choices that were the same number (approx. 3,000), but one choice was positive and one was negative. I selected the positive ~3,000 since the Y axis was “annual income”, so it didn’t seem possible for the intercept to be negative.

2) “(3) 1 question involving calculation probabilities from a binomial distribution: 10 bonds given with equal probability of default. What is the prob. of having 1 or 2 defaults in a year.”

- I tried to calculate this using the binomial formula but couldn’t get any of the answers choices, so just had to guess.

3) “(4) Given 3 assets all with equal variance and covariances all equal to 0.5 ==> calculate the minimum-variance portfolios variance ==> for me 2/3 (equal weight for all assets?)”

- I calculated 2/3 as well.

4) “- there was a graph about the basis risk and correlation and you had to answer how the basis was being affected …someone there remembers the question?”

I think this was that the variances of spot and futures was 1…and we had to find graph representing relationship between variance of hedge and correlation coefficient…i think i picked up one of the straight line graphs as the answer…since the values were satifying the equation that i derived…

- I think I also selected (a) which was the straight line graph that went down from left to right. Correlation of 0 was in the middle on X axis and to the left was negative correlation and to the right was positive correlation. Variance of basis was on the Y axis. This (a) answer of a straight line graph choice represented the variance of basis being at 0 when correlation is +1 and then going up as the correlation went down to 0 and then negative to -1. This seemed to make more since than the upside down semi-circle which was the other best choice as answer (b)

5) (2) Dnt remember exactly…but 1 question on bank has reserved economic capital based on VAR and taken insurance for other risks…what happens to risk…choices were like: (a) correlation risk increases, credit risk decreases (b) market risk decreases, credit risk increases ...something of this sort ...does someone remember the exact question?

- I thought the answer to this was (b) market risk decreases, credit risk increases because it seems that there would now be credit risk with the insurance company, even though market risk was lessened by insurance.

6.) question on which of these on its own is not a significant reason for risk mgmt

(a) Variable cash flows

(b) Tax rate

(c) Debt overhang

(d) Financial distress

was confused between (a) and (b)...and marked (a) i guess…i think i m wrong on this one…dnt knw what the right answer is…

- I had narrowed this down to (a) and (b) also and then selected (a). I remember this one being pretty ambiguous also, but (a) “variable cash flows” didn’t specify that this would lead to variability of income and therefore may not result in higher taxes that could be smoothed out, so that is why I thought that (a) was probably incorrect and (b) had a better chance of being correct since it could be referring to using tax loss carryforwards to get lower tax rates.

7) One other new question that I just remembered involved a company wanting to model their default probability based upon the average of companies with “AA+” credit ratings. I forget all of the answer choices, but the answer that I selected was “It would be difficult to do this due to the lack of available information for “AA+” rated companies. I selected this because it seems like the “+” makes it a very small % of companies that would have this rating, rather than broader “AA”. Anyone else remember this one?