Answer each question that is asked, paying attention to the multiple components to many of the questions.
The following Questions link to their respective textbook Chapters. For example, Question 1 is linked to
Chapter 1 in the text. Answer each question that is asked, paying attention to the multiple components to many
of the questions. The due dates – in four installments – are provided on the syllabus.
1) What is an investment? What is real versus a financial asset? Explain the “informational role” of financial
markets. Use the oil market as the basis of your embedded expectations analysis and informational
commentary. Conceptually and with respect to investments, explain the importance of consumption timing,
separation of ownership & management, and allocation of risk?
2) Explain the basis of an Asset / Liability based funding strategy. What is the difference between the money
markets and the capital markets? Explain ownership with respect to fixed income and equity instruments. With
respect to equities, what do residual claims and limited liability imply? What is a derivative market? What is
the role of a stock market index?
3) What is an IPO? What is the performance record of IPOs generally, specifically short and long term? What is
a price contingent versus market order? What is a “stop-loss” and why does it matter to an investor? How does
the path of the effective bid-ask spread look? What is algorithmic trading? Explain. What is buying on margin?
What is a short sale?
4) What is the difference between a limited liability partnership (LLP), a mutual fund, and an ETF (what is an
ETF)? What is the performance record of an S&P500 ETF? What are the long-term performance records of
equity mutual funds relative to benchmarks, linking your answer to the AUM growth of passive investing?
Explain the fee structure and operating expense trends of mutual funds.
5) What is the difference between real and nominal rates of interest? Explain the four moments with respect to
investing and specifically, to risk-return. How does this link to normality assumptions? What information does
each contain? Which of the four risky portfolios outlined at the chapter’s close should longer-term investors
bias their portfolios? Why? What is a risk premium (on equities)? What is risk aversion? What is the difference
between arithmetic and geometric average returns?
6) What is the Capital Allocation Line (CAL)? How do indifference curves inform positioning along with the CAL?
What is the utility equation? What is the indifference curve? Explain the risk aversion metric employed in utility
modeling? What is the (approximate) range?
7) What is the difference between systematic and unsystematic risk? Which one can be diversified away?
Which one is priced? What is the efficient frontier? Define and link the Sharpe Ratio, the Efficient Frontier, and
the CAL to the focus of portfolio theory. What is the separation property (first noted by Tobin)? Explain.
8) Explain the components of the single index model, linking diversifiable and systematic risk to your answer.
What is the Security Characteristic Line and what information does it convey? What is the information ratio and
what important information does it convey? Is the full covariance efficient frontier or the index model efficient
frontier better?

Sample Solution

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