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    Financial Markets: Diversified Portfolio, Correlation, Interest and Inflation, and Straddle

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

    2) What macroeconomic variable do you believe has the greatest impact on interest rates? Inflation? Briefly explain.

    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?

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

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

    6) Are the financial markets efficient, and if so, under what form of the Efficient Market Hypothesis model?

    7) What is the Bid price for a stock? What is the Ask price for a stock? What is a Stop Loss for a stock?

    8) Briefly compare and contrast the primary market and the secondary markets. What types of investors participate in each market? Briefly describe the investment banking process.

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    Solution Preview

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

    In order to structure a negative correlation portfolio it's required add negatively correlated stocks with a weight more than of the positively 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 microeconomic variable such as money supply has a greatest impact over the interest rate and inflation. Increase in money supply lead to increase in inflation and to control inflation the interest rates is altered. So its money supply that has a greatest impact over interest rates and inflation.

    3) Compare and ...

    Solution Summary

    This solution provides answers for the finance quiz questions in 400 words. Diversified portfolio, correlation, interest and inflation are examined.

    $2.19

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