"egna" frågor tentament

Question 1

What are the 4 basic pirncipes of investment ethics? Short answer

Answer 1

1. Ethic of understanding
2. Ethical use of information
3. Responsible investments
4. Trust and fariness

Question 2

Describe the principle of investment “ethic of understand”

Answer 2

Investment and finance is complicated. Therefore it is important to have an understanding of what one is doing before acting, since a non-understanding act could lead to unwanted results

Question 3

Describe the principle of investment “ethical use of information”

Answer 3

Information should always tend to be transparent, and both parts of a transaction should get all the information needed to understand what is going on. Avoid assymetric inforaiton!

Question 4

Describe the principle of investment “responsible investments”

Answer 4

Investments results in allocation of resources. This means that an investment should not be made if it will cause harm to someone.

Question 5

Describe the principle of investment “trust and fairness”

Answer 5

Investment and finance is a busiess which should be based on trust, therefore it is important to avoid principle-agency problems and as a proffesional always act in the interest of your client (and protect the client), not in own interest!

Question 6

How do you calculate the expected return of a hedge fund?

Answer 6

Step 1. Calculate portfolio weights.
Remember that a short position means that a portfolio will have this number subtracted from the total portfolio amount, leading to that e.g one stock weights 1.5 and the other 0.5 (not adding up to 1 as usual!)
Step 2. Formula (Rp)= xiRbar i + xj Rbar j, where xi and xj are the weights.

Question 7

How do you calculate the volatility of a hedge fund?

Answer 7

You need the weights and correlation. Formula:
Var(p) = X^2iSDi^2 + X^2jSDj^2 + 2XiXjCOV(RiRj)
Cov RiRj= Corr(RiRj) * SD(Ri) * SD(Rj)

Question 8

Explain inefficient portfolios

Answer 8

The ones under the lowest variance point is inefficient portfolio (imagine the graph).
Since it is possible to obtain portfolios with higher E(R) and also with lower volatility

Question 9

Describe assumption 1 in CAPM:

Answer 9

All investors can buy securities at competetive market prices and can take loans at the risk-free rate.

Question 10

Describe assumption 2 in CAPM:

Answer 10

All the investors in the market will hold only efficient portfolios. This means that under the CAPM, we assume i.e the inefficient portfolios wont be held by any investor.

Question 11

Describe assumption 3 in CAPM:

Answer 11

Alls investors are homogenous in their expectations. This means that all investors will have the same expectations on E(R) as well as on the volatility / risk of stocks.

Question 12

Describe reason 1 why fulfilling a fiduciary relationship can be difficult in investments?

Answer 12

Dilemma regarding that the professional wants to make profit, and is not always having the clients best interest in mind.

Question 13

Describe reason 2 why fulfilling a fiduciary relationship can be difficult in investments?

Answer 13

The client and the fiduciary usually have different time horizons regarding returns and risk.

Question 14

Describe reason 3 why fulfilling a fiduciary relationship can be difficult in investments?

Answer 14

It is difficult for the client to know if the fiduciary gives good or bad advices sin he lacks expertise, and the might be lucky with returns and interest rate.
There is a discrepancy regarding inforation, the fiduciary can say things that are not true.

Question 15

Say some short examples of how corporations can utföra “social responsiblity”

Answer 15

1. Is the industry ethical? (e.g marijuana. weapons etc)
2. Treatment of employees, and especially suppliers
3. Actively working with CSR
4. Is the board trustworthy?
5. ISO-9000 etc. Working for the environment?

Question 16

Whats the difference between a fiduciary and an agent?

Answer 16

Fiduciary is a preson acting in the interest of another person, and the relationship IS BASED ON TRUST. The fiduciary should have the clients best interest in mind when investing and the same time horizon.

An agency relationship is two parties of interest. When the agency usually wants to make profit and take fees, they want many transactions and usually has a shorter time horizon. There is somewhat a conflict of interest.

Question 17

Describe how accounting bonuses can be more effective than stock-based compensations?

Answer 17

Accounting bonuses are similar to princip-agent problem. Different interests!
A bonus on the other hand gives a long-term thinking to the managers, you have to earn up to a certain point to earn the bonus.
Bonuses makes managers stay longer in the company and grow
Stocks gives short term thinking, boosting the next quarter to sell.
Bosnus is also made on accounting earnings which gives incentives to increase profits, instead of the short term stock volatility.
C.E.O cant control the markets, so they cant contrl the stocks

Question 18

How do you calclulate C for the formulas? Important!!

Answer 18

C = CF / (1/r) * (1+r) ^t - 1))

Question 19

What can investors use CML and SML for?

Answer 19

Those lines can be used to get their most efficient and preferred portfolios, and can use these lines to find their best alternatives depending on their attitude towards risks.