Investment Risk and Portfolio Management Paper 6

1

An automobile company that uses the futures market to set the price of steel to protect a profit against price increases is an example of






2

An optimal portfolio of investments is






3

Redimaker, Inc., a small but growing product assembler, has been able to profitably ride the ups and downs of several economic cycles, largely due to its low level of long-term assets. The firm relies more heavily on labor than its competitors and contracts for needed facilities only on a short-term lease basis. Working capital is largely provided through short-term loans. Although Redimaker’s variable costs are much higher than its competitors’ variable costs, its income is much less volatile. All of the above factors are consistent with Redimaker having a lower level of financial and operating






4

On April 1, year 1, Saxe, Inc. purchased $200,000 face value, 9% US Treasury Notes for $198,500, including accrued interest of $4,500. The notes mature July 1, year 2, and pay interest semiannually on January 1 and July 1. Saxe uses the straight-line method of amortization and intends to hold the notes to maturity. Saxe does not elect the fair value option for recording the securities. In its October 31, year 1 balance sheet, the carrying amount of this investment should be






5

Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale does not elect the fair value option for the bonds. Kale should account for these bonds at






6

For a marketable debt securities portfolio classified as heldto- maturity, which of the following amounts should be included in the period’s net income, assuming the fair value option is not elected.
I. Unrealized temporary losses during the period.
II. Realized gains during the period.
III. Changes in the valuation allowance during the period.






7

Bing Corporation purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Assume that Bing elects the fair value option. Bing should account for these bonds at






8

For a marketable debt securities portfolio classified as heldto- maturity, which of the following amounts should be included in the period’s net income, assuming the company elects the fair value option of reporting all of its financial instruments in the portfolio?
I. Unrealized temporary losses during the period.
II. Realized gains during the period.
III. Changes in the valuation allowance during the period.
IV. Unrealized gains during the period.






9

Stone does not use the fair value option to account for available- for-sale securities. Information regarding Stone Co.’s portfolio of available-for-sale securities is as follows:
Aggregate cost as of 12/31/Y2 $170,000
Unrealized gains as of 12/31/Y2 4,000
Unrealized losses as of 12/31/Y2 26,000
Net realized gains during year 2 30,000
At December 31, year 1, Stone reported an unrealized loss of $1,500 in other comprehensive income to reduce these securities to fair value. Under the accumulated other comprehensive income in stockholders’ equity section of its December 31, year 2 balance sheet, what amount should Stone report?






10

Information regarding Shelton Co.’s portfolio of availablefor- sale securities is as follows:
Aggregate cost as of 12/31/Y1 $150,000
Unrealized gains as of 12/31/Y1 14,000
Unrealized losses as of 12/31/Y1 26,000
Net realized gains during year 1 30,000
Shelton elects to use the fair value option for reporting all available- for-sale securities. At December 31, year 1, what total amount should Shelton report on its income statement?






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