Format:  20 Multiple Choice, 4 problems;  chapters 13, 14, 16
Bring:  pencil, calculator (not programmed); NO PHONES OR PDAs!

Formulas/equations you should know:
• the equation for the CAPM
• how to calculate the discount yield and yield to maturity for zero coupon Treasuries
• calculating returns and expected returns

13  Risk/Return and Asset Pricing
• terms:  return, risk, efficient/optimal portfolio, market portfolio, expected return, variance, standard deviation
• actual returns vs. expected returns ? how are they different?
• why is standard deviation a measure of risk?
• what does it mean when investors are risk averse?

• what does the assumption of risk aversion tell us about the optimal portfolio?

• which type of risk can be eliminated through diversification?

• what does it mean when beta = 0 ?   or   = 1?  or < 1?  or >1?
• what is the difference between ? and ?  as measures of risk?
• why is this difference important in portfolio formation?
• what problems are associated with estimating beta?

• what are the assumptions of the CAPM?
• what are the implications about the risk premium of a portfolio?  about expected return?
• given the market risk premium and ? how would you find the risk premium of a that portfolio? how would you find expected return?
• how has the CAPM held up to testing? what are the problems with testing the CAPM?

• how does this theory differ from the CAPM? how are they related?
• what problems are associated with the use of this theory?

14  Primary Markets
• what is the primary market?
• terms:   IPOs, SEOs, underwriting, investment banks, primary vs. secondary markets, syndicates, lead underwriter, selling group, gross spread, underwriter discount, red herring, prospectus, tombstone
• role of investment banks

• role in advising
• what is the difference between underwriting and best effort?
• what determines the size of the underwriter’s discount?
• what types of firms underwrite?
• why are IPOs typically underpriced?  (what do we mean when we say IPOs are underpriced?
• why/how does the role of investment banks continue in the secondary market?

• what does it mean to register a security? what does it mean when registration is effective?
• what is the shelf registration rule?  when if this allowed?
• what types of securities are exempt from registration?

• what is a bought deal?
• what is competitive bidding?

• why is it required for public utilities/municipalities in some cases?

• what is a preemptive rights offering?

• what is the purpose?

• what is a private placement?

• what is the advantage of a private placement?  the disadvantage?
• what is rule 144A and how does it affect the popularity of private placements?

16  Treasury & Agency Securities
• Treasury securities:  Tbills, Tnotes, and Tbonds,

• which are coupon?  which are zero coupon?
• current maturities auctioned?

• what is the purpose?  how do they work?
• tax treatment?
• how does the yield compared to a regular Tnote?  why the difference?

• frequency of auction:  what securities are auctioned weekly?
• what is the general relationship between the frequency of auction and the maturity of the security?
• who issues Treasury securities (which part of the federal government?)  who runs the Treasury auction?
• what is the difference between competitive bids and noncompetitive bids?

• who can place each type of bid?
• what are the quantity limits?
• what are the tradeoffs between the two types of bids?

• how are the treasury securities awarded?

• what is the stop yield? what is the tail?  what does the tail tell us about the auction?
• single price vs. multiple price auction—which is used today?  was that always the case?
• how does a single price auction avoid the "winner's curse"?
 --how does this result in lower-yield bids than in a multiple price auction?

• what do we mean by primary dealers?

• what is the role of dealers?
• what is an “off-the run” security?  what is an “on-the-run” security? which type is more liquid?
• what is the wi market?
• calculating the discount yield and yield to maturity for Tbills--what’s the difference?
• interpreting prices quotes for Treasury notes and bonds

• what are stripped treasury securities?
• why did they evolve? how are they made?
• what were the problems with the early privately issued trademarked securities?

• how did the Treasury address these problems with STRIPs?