2012 Mock Questions Incorrect? 2012, concerned, following, actually

torontoanalyst

Just taken the AM of this and I’m concerned that the following questions are geuninely wrong in the answer book, any thoughts?
22 - The question explicitly states to use ‘Sharpe Ratio’ to make your decision, no mention is made of correlations. Based on the Sharpe ratio alone, A is the correct answer.
24 - This is clearly wrong, in the answer book they have actually calculated the expected return from the CAPM wrongly, the correct answer is B since required return is 14% and stock is only expected to return 12%, hence overvalued.
38 - Ok, not sure about this one so maybe I just don’t understand it, but how does a -ve balance sheet accruals ratio imply that cash earnings are greater than accounting earnings? Surely it’s the Cash accruals ratio we should be looking at in this question.

ninja1024

22 - it is ok, look at page 409 in book 6. The question asks about mean-variance effect on the result portfolio and you have to know you count it using also correlation
24 - you are right
38 - yep, I am not sure either. I can imagine the situation where for example you have BS accruals down because of going down the value of some non operating security held available-for-sale and for instance no earnings in IS nor CF. Now I am not confident there is such a link between earnings and BS accruals…

ishfaque

I still dont get 22 anyone can help.

orang3eph

BTW I can answer 38… High level thinking. NI is the earnings for accounting method (Earnings/Share = NI/Share). The physical cashflow we get is CFO from operations plus CFI = your cash earning for the period (Don’t need to worry about financing, since getting money from stock isn’t really earning). Therefore if the ratio is negative (NI -CFO - CFi)/(NOAaverage), then it means cash earnings (CFO+CFI) is greating than accounting earnings (NI)

strikethree

kys916 wrote:
BTW I can answer 38… High level thinking. NI is the earnings for accounting method (Earnings/Share = NI/Share). The physical cashflow we get is CFO from operations plus CFI = your cash earning for the period (Don’t need to worry about financing, since getting money from stock isn’t really earning). Therefore if the ratio is negative (NI -CFO - CFi)/(NOAaverage), then it means cash earnings (CFO+CFI) is greating than accounting earnings (NI)
I entirely agree with your logic there. However the Cash Flow accruals ratio was +ve in 2010, which is the period the question is asking about. Therefore accounting earnings  cash earnings and A is not the correct answer.