Review for Exam 2. Instructions: Please read carefully


 Jonah Ward
 4 years ago
 Views:
Transcription
1 Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions. The calculation questions will be similar to those in the homework and review. However, the concept questions will be related to any topic we have covered in the class. The concept questions in the review are only some sample questions. You should NOT study only topics in the review. For the work problems, you need to solve the problems without knowing the possible answers. The questions will be similar to those in the homework and the review except that the possible solutions are not given. You can bring a formula sheet to the exam. However, you should not write definitions/concepts on the sheet.
2 Chapter 5 1. Of the alternatives available, typically have the highest standard deviation of returns. A) commercial paper B) corporate bonds C) stocks D) treasury bills. The holding period return on a stock is equal to. A) the capital gain yield over the period plus the inflation rate B) the capital gain yield over the period plus the dividend yield C) the current yield plus the dividend yield D) the dividend yield plus the risk premium 3..Suppose you pay $9,800 for a Treasury bill maturing in two months. What is the annual percentage rate of return for this investment? A) % B) 1% C) 1.% D) 16.4% 4. The market risk premium is defined as. A) the difference between the return on an index fund and the return on Treasury bills B) the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500 index C) the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D) the difference between the return on the highest yielding asset and the lowest yielding asset. 5. The reward/variability ratio is given by. A) the slope of the capital allocation line B) the second derivative of the capital allocation line C) the point at which the second derivative of the investor's indifference curve reaches zero D) none of the above
3 6. A Treasury bill pays a 6% rate of return. A risk averse investor invest in a risky portfolio that pays 1% with a probability of 40% or % with a probability of 60% because. A) might; she is rewarded a risk premium B) would not; because she is not rewarded any risk premium C) would not; because the risk premium is small D) cannot be determined 7. The holding period return on a stock was 30%. Its ending price was $6 and its cash dividend was $1.50. Its beginning price must have been. A) $0.00 B) $1.15 C) $86.67 D) $ You have $500,000 available to invest. The riskfree rate as well as your borrowing rate is 8%. The return on the risky portfolio is 16%. If you wish to earn a % return, you should. A) invest $15,000 in the riskfree asset B) invest $375,000 in the riskfree asset C) borrow $15,000 D) borrow $375, The price of a stock is $55 at the beginning of the year and $53 at the end of the year. If the stock paid a $3 dividend what is the holding period return for the year? A) 1.8% B) 3.64% C) 5.45% D) 10.0%
4 Chapter Risk that can be eliminated through diversification is called risk. A) unique B) firmspecific C) diversifiable D) all of the above 11. The decision should take precedence over the decision. A) asset allocation, stock selection B) choice of fad, mutual fund selection C) stock selection, asset allocation D) stock selection, mutual fund selection 1. The risk that can be diversified away is. A) beta B) firm specific risk C) market risk D) systematic risk 13. is a true statement regarding the variance of risky portfolios. A) The higher the coefficient of correlation between securities, the greater will be the reduction in the portfolio variance B) There is a direct relationship between the securities coefficient of correlation and the portfolio variance C) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities D) none of the above 14. Expected returnstandard deviation combinations corresponding to any individual risky asset. A) will always end up on the efficient frontier B) will always end up on the efficient frontier or within the efficient frontier, but never outside the efficient frontier C) will always end up within the efficient frontier D) may end up anywhere in expected returnstandard deviation space 15. The optimal risky portfolio can be identified by finding. A) the minimum variance point on the efficient frontier B) the maximum return point on the efficient frontier C) the tangency point of the capital market line and the efficient frontier D) None of the above answers is correct
5 16. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 5% while stock B has a standard deviation of return of 5%. Stock A comprises 0% of the portfolio while stock B comprises 80% of the portfolio. If the variance of return on the portfolio is.0050, the correlation coefficient between the returns on A and B is. A) .5 B) C).474 D) A measure of the riskiness of an asset held in isolation is. A) beta B) standard deviation C) covariance D) semivariance 18. As additional securities are added to a portfolio, total risk will generally at a rate. A) rise; decreasing B) rise; increasing C) fall; decreasing D) fall; increasing 19. The security characteristic line is. A) the trend line representing the security's tendency to advance or decline in the market over some period of time B) the "best fit" line representing the regression of the security's excess returns on market excess returns over some period of time C) another term for the capital allocation line representing the set of complete portfolios that can be constructed by combining the security with Tbill holdings D) None of the above answers is correct 0. A security's beta coefficient will be negative if. A) its returns are negatively correlated with market index returns B) its returns are positively correlated with market index returns C) its stock price has historically been very stable D) market demand for the firm's shares is very low
6 1. Which of the following correlations coefficients will produce the least diversification benefit? A) 0.6 B) 1.5 C) 0.0 D) 0.8. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of %. Stock B has a standard deviation of 16%. The portfolio is equally weighted and the correlation coefficient between the two stocks is.35. A) 15.7% B) 16.0% C) 18.8% D).0% 3. The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 1.0%, what is the reward to variability ratio of the portfolio? A) 0.0 B) 0.45 C) 0.74 D) 1.35 Chapter 7 4. Consider the CAPM. The riskfree rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 1%? A).5 B).7 C) 1. D) is a true statement regarding the multifactor arbitrage pricing theory. A) Only the stock beta affects the stock price B) Only the stock unique risk affects the stock price C) Only the stock variance and beta affect the stock price D) Several systematic factors affect the stock price
7 6. The market portfolio has a beta of. A) 1.0 B) 0 C) 0.5 D) According to the capital asset pricing model, a welldiversified portfolio's rate of return is a function of. A) market risk B) unsystematic risk C) unique risk D) reinvestment risk 8. According to the capital asset pricing model, the expected rate of return on any security is equal to. A) [(the riskfree rate) + (beta of the security)] x (market risk premium) B) (the riskfree rate) + [(variance of the security's return) x (market risk premium)] C) (the riskfree rate) + [(security's beta) x (market risk premium)] D) (market rate of return) + (the riskfree rate) 9. According to the capital asset pricing model, fairly priced securities have. A) negative betas B) positive alphas C) positive betas D) zero alphas 30. The difference between a security's actual return and the return predicted by the characteristic line associated with the security's past returns is. A) alpha B) beta C) gamma D) residual 31. The beta, of a security is equal to. A) A) the covariance between the security and market returns divided by the variance of the market's returns B) the covariance between the security and market returns divided by the standard deviation of the market's returns C) the variance of the security's returns divided by the covariance between the security and market returns D) the variance of the security's returns divided by the variance of the market's returns
8 3. Security A has an expected rate of return of 1% and a beta of The market expected rate of return is 8% and the riskfree rate is 5%. The alpha of the stock is. A) 1.7% B) 3.7% C) 5.5% D) 8.7% 33. The riskfree rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of.8 to offer a rate of return of 1 percent, then you should. A) buy stock X because it is overpriced B) buy stock X because it is underpriced C) sell short stock X because it is overpriced D) sell short stock X because it is underpriced 34. According to capital asset pricing theory, the key determinant of portfolio returns is. A) the degree of diversification B) the systematic risk of the portfolio C) the firm specific risk of the portfolio D) economic factors 35. Assume that both X and Y are welldiversified portfolios and the riskfree rate is 8%. Portfolio X has an expected return of 14% and a beta of Portfolio Y has an expected return of 9.5% and a beta of 0.5. In this situation, you would conclude that portfolios X and Y. A) are in equilibrium B) offer an arbitrage opportunity C) are both underpriced D) are both fairly priced 36. You hold a diversified portfolio consisting of a $5,000 investment in each of 0 different common stocks. The portfolio beta is equal to 1.1. You have decided to sell a lead mining stock (b = 1.0) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b =.0). What is the new beta of the portfolio? a. 1.1 b c. 1. d e. 1.0
9 Chapter The weak form EMH states that must be reflected in the stock price. A) all market trading data B) all publicly available information C) all information including inside information D) none of the above 38.Proponents of the EMH typically advocate. A) a conservative investment strategy B) a liberal investment strategy C) a passive investment strategy D) an aggressive investment strategy 39. A chartist is likely to believe in the value of doing. A) fundamental analysis B) technical analysis C) both a and b D) neither a nor b 40. is the return on a stock beyond what would be predicted from market movements alone. A) a normal return B) a subliminal return C) an abnormal return D) none of the above 41. If you believe in the form of the EMH, you believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. A) semistrong B) strong C) weak D) any of the above 4. Which of the following have not been considered market anomalies? A) the smallfirm January effect B) the reversal effect C) the booktomarket effect D) All of the above have been considered market anomalies
10 43. Proponents of the EMH think technical analysts. A) should focus on relative strength B) should focus on resistance levels C) should focus on support levels D) are wasting their time 44. When stock returns exhibit positive serial correlation, this means that returns tend to follow returns. A) positive; positive B) positive ; negative C) negative; positive D) None of the above 45. Basu found that firms with high P/E ratios. A) earned higher average returns than firms with low P/E ratios B) earned the same average returns as firms with low P/E ratios C) earned lower average returns than firms with low P/E ratios D) had higher dividend yields than firms with low P/E ratios 46.According to the semistrong form of the efficient markets hypothesis. A) stock prices do not rapidly adjust to new information B) future changes in stock prices cannot be predicted from any information that is publicly available C) corporate insiders should have no better investment performance than other investors D) arbitrage between futures and cash markets should not produce extraordinary profits 47. The semistrong form of the efficient market hypothesis contradicts. A) technical analysis, but supports fundamental analysis as valid B) fundamental analysis, but supports technical analysis as valid C) both fundamental analysis and technical analysis D) technical analysis, but is silent on the possibility of successful fundamental analysis
11 Answers 1. Answer: C. Answer: B 3. Answer: C 4. Answer: A 5. Answer: A 6. Answer: B 7. Answer: B 10, 000 9, 800 HPR = 9, 800 =. 04% Thus,the nominal annual return is. 04% 6 = 1. % P = = Answer: D.. 08 y = = Borrowing = 500, Answer: A HPR = ( ) / 55 = Answer: D 11. Answer: A 1. Answer: B 13. Answer: C 14. Answer: C 15. Answer: C 16. Answer: D.0050 = (.) (.5) + (.8) Corr = Answer: B 18. Answer: C 19. Answer: B 0. Answer: A 1. Answer: D. Answer: A ( ) = 375,000 (.05) + (.)(.8)(.5)(.05)Corr
12 σ = (.50) (.) + (.50) (.16) 3. Answer: B Reward to variability ratio = ( ) /.1 = Answer: B 5. Answer: D 6. Answer: D 7. Answer: A 8. Answer: C 9. Answer: D 30. Answer: D 31. Answer: A 3. Answer: B + (.35)(.)(.16)(.50)(.50) =. 157 α =. 1[ (08.05)] = Answer: B 34. Answer: B 35. Answer: A 36.B Before: 1.1 = 0.95(b R ) (1.0); 0.95(b R ) = 1.07; b R = After: b P = 0.95(b R ) (.0) = = Answer: A 38. Answer: C 39. Answer: B 40. Answer: C 41. Answer: D 4. Answer: D 43. Answer: D 44. Answer: A 45. Answer: C 46. Answer: B 47. Answer: C
Review for Exam 2. Instructions: Please read carefully
Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note
More informationFIN 432 Investment Analysis and Management Review Notes for Midterm Exam
FIN 432 Investment Analysis and Management Review Notes for Midterm Exam Chapter 1 1. Investment vs. investments 2. Real assets vs. financial assets 3. Investment process Investment policy, asset allocation,
More informationChapter 7 Risk, Return, and the Capital Asset Pricing Model
Chapter 7 Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE 1. Suppose Sarah can borrow and lend at the risk freerate of 3%. Which of the following four risky portfolios should she hold
More informationChapter 11, Risk and Return
Chapter 11, Risk and Return 1. A portfolio is. A) a group of assets, such as stocks and bonds, held as a collective unit by an investor B) the expected return on a risky asset C) the expected return on
More informationSolution: The optimal position for an investor with a coefficient of risk aversion A = 5 in the risky asset is y*:
Problem 1. Consider a risky asset. Suppose the expected rate of return on the risky asset is 15%, the standard deviation of the asset return is 22%, and the riskfree rate is 6%. What is your optimal position
More informationSAMPLE MIDTERM QUESTIONS
SAMPLE MIDTERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,
More informationChapter 5. Risk and Return. Copyright 2009 Pearson Prentice Hall. All rights reserved.
Chapter 5 Risk and Return Learning Goals 1. Understand the meaning and fundamentals of risk, return, and risk aversion. 2. Describe procedures for assessing and measuring the risk of a single asset. 3.
More informationEcon 422 Summer 2006 Final Exam Solutions
Econ 422 Summer 2006 Final Exam Solutions This is a closed book exam. However, you are allowed one page of notes (doublesided). Answer all questions. For the numerical problems, if you make a computational
More informationModels of Risk and Return
Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for
More informationPractice Questions for Midterm II
Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. 1. d. 0.5. By definition, the beta of the market portfolio is
More information1. a. (iv) b. (ii) [6.75/(1.34) = 10.2] c. (i) Writing a call entails unlimited potential losses as the stock price rises.
1. Solutions to PS 1: 1. a. (iv) b. (ii) [6.75/(1.34) = 10.2] c. (i) Writing a call entails unlimited potential losses as the stock price rises. 7. The bill has a maturity of onehalf year, and an annualized
More informationChapter 5 Risk and Return ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 5 Risk and Return ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 51 a. Standalone risk is only a part of total risk and pertains to the risk an investor takes by holding only one asset. Risk is
More informationMarket Efficiency and Behavioral Finance. Chapter 12
Market Efficiency and Behavioral Finance Chapter 12 Market Efficiency if stock prices reflect firm performance, should we be able to predict them? if prices were to be predictable, that would create the
More informationPractice Set #4 and Solutions.
FIN469 Investments Analysis Professor Michel A. Robe Practice Set #4 and Solutions. What to do with this practice set? To help students prepare for the assignment and the exams, practice sets with solutions
More informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More informationAFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang
AFM 472 Midterm Examination Monday Oct. 24, 2011 A. Huang Name: Answer Key Student Number: Section (circle one): 10:00am 1:00pm 2:30pm Instructions: 1. Answer all questions in the space provided. If space
More informationChapter 13 Composition of the Market Portfolio 1. Capital markets in Flatland exhibit trade in four securities, the stocks X, Y and Z,
Chapter 13 Composition of the arket Portfolio 1. Capital markets in Flatland exhibit trade in four securities, the stocks X, Y and Z, and a riskless government security. Evaluated at current prices in
More informationCHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question.
More informationCHAPTER 7: OPTIMAL RISKY PORTFOLIOS
CHAPTER 7: OPTIMAL RIKY PORTFOLIO PROLEM ET 1. (a) and (e).. (a) and (c). After real estate is added to the portfolio, there are four asset classes in the portfolio: stocks, bonds, cash and real estate.
More informationWel Dlp Portfolio And Risk Management
1. In case of perfect diversification, the systematic risk is nil. Wel Dlp Portfolio And Risk Management 2. The objectives of investors while putting money in various avenues are: (a) Safety (b) Capital
More informationAnswers to Concepts in Review
Answers to Concepts in Review 1. A portfolio is simply a collection of investments assembled to meet a common investment goal. An efficient portfolio is a portfolio offering the highest expected return
More informationThe CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule
The CAPM (Capital Asset Pricing Model) Massachusetts Institute of Technology CAPM Slide 1 of NPV Dependent on Discount Rate Schedule Discussed NPV and time value of money Choice of discount rate influences
More informationCost of Capital Presentation for ERRA Tariff Committee Dr. Konstantin Petrov / Waisum Cheng / Dr. Daniel Grote April 2009 Experience you can trust.
Cost of Capital Presentation for ERRA Tariff Committee Dr. Konstantin Petrov / Waisum Cheng / Dr. Daniel Grote April 2009 Experience you can trust. Agenda 1.Definition of Cost of Capital a) Concept and
More informationChapter 5. Conditional CAPM. 5.1 Conditional CAPM: Theory. 5.1.1 Risk According to the CAPM. The CAPM is not a perfect model of expected returns.
Chapter 5 Conditional CAPM 5.1 Conditional CAPM: Theory 5.1.1 Risk According to the CAPM The CAPM is not a perfect model of expected returns. In the 40+ years of its history, many systematic deviations
More informationMBA 8230 Corporation Finance (Part II) Practice Final Exam #2
MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's
More informationChapter 6 The Tradeoff Between Risk and Return
Chapter 6 The Tradeoff Between Risk and Return MULTIPLE CHOICE 1. Which of the following is an example of systematic risk? a. IBM posts lower than expected earnings. b. Intel announces record earnings.
More informationCHAPTER 11: ARBITRAGE PRICING THEORY
CHAPTER 11: ARBITRAGE PRICING THEORY 1. The revised estimate of the expected rate of return on the stock would be the old estimate plus the sum of the products of the unexpected change in each factor times
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
More informationPortfolio Performance Measures
Portfolio Performance Measures Objective: Evaluation of active portfolio management. A performance measure is useful, for example, in ranking the performance of mutual funds. Active portfolio managers
More informationReview for Exam 1. Instructions: Please read carefully
Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationKey Concepts and Skills
Chapter 10 Some Lessons from Capital Market History Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand
More informationTest3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs 2520 15
Test3 1. The market value of Charcoal Corporation's common stock is $20 million, and the market value of its riskfree debt is $5 million. The beta of the company's common stock is 1.25, and the market
More informationCFA Examination PORTFOLIO MANAGEMENT Page 1 of 6
PORTFOLIO MANAGEMENT A. INTRODUCTION RETURN AS A RANDOM VARIABLE E(R) = the return around which the probability distribution is centered: the expected value or mean of the probability distribution of possible
More informationThe Tangent or Efficient Portfolio
The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of rewardtovolatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r
More informationM.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary
M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.
More informationt = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3
MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate
More information1. CFI Holdings is a conglomerate listed on the Zimbabwe Stock Exchange (ZSE) and has three operating divisions as follows:
NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY FACULTY OF COMMERCE DEPARTMENT OF FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN FINANCE PART II 2 ND SEMESTER FINAL EXAMINATION MAY 2005 CORPORATE FINANCE
More informationCHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two nonoverlapping periods should be zero. If not, one could use returns from one period
More information15.433 Investments. Assignment 1: Securities, Markets & Capital Market Theory. Each question is worth 0.2 points, the max points is 3 points
Assignment 1: Securities, Markets & Capital Market Theory Each question is worth 0.2 points, the max points is 3 points 1. The interest rate charged by banks with excess reserves at a Federal Reserve Bank
More informationCertified Personal Financial Advisor (CPFA) for Examination
NATIONAL INSTITUTE OF SECURITIES MARKETS Certified Personal Financial Advisor (CPFA) for Examination Test Objectives 1. Concept of Financial Planning 1.1 Understand what financial planning constitutes
More informationPaper F9. Financial Management. Friday 6 June 2014. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.
Fundamentals Level Skills Module Financial Management Friday 6 June 2014 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationChapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 36)
Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required
More informationLecture 15: Final Topics on CAPM
Lecture 15: Final Topics on CAPM Final topics on estimating and using beta: the market risk premium putting it all together Final topics on CAPM: Examples of firm and market risk Shorting Stocks and other
More information3. You have been given this probability distribution for the holding period return for XYZ stock:
Fin 85 Sample Final Solution Name: Date: Part I ultiple Choice 1. Which of the following is true of the Dow Jones Industrial Average? A) It is a valueweighted average of 30 large industrial stocks. )
More informationRisk and Return Models: Equity and Debt. Aswath Damodaran 1
Risk and Return Models: Equity and Debt Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for
More informationHow To Invest In Stocks And Bonds
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationCHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two nonoverlapping periods should be zero. If not, one could use returns from one period
More information1. Portfolio Returns and Portfolio Risk
Chapter 8 Risk and Return: Capital Market Theory Chapter 8 Contents Learning Objectives 1. Portfolio Returns and Portfolio Risk 1. Calculate the expected rate of return and volatility for a portfolio of
More informationPaper 2. Derivatives Investment Consultant Examination. Thailand Securities Institute November 2014
Derivatives Investment Consultant Examination Paper 2 Thailand Securities Institute November 2014 Copyright 2014, All right reserve Thailand Securities Institute (TSI) The Stock Exchange of Thailand Page
More informationMGT201 Solved MCQs(500) By
MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because
More informationRate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period
Rate of Return Reading: Veronesi, Chapter 7 Investment over a Holding Period Consider an investment in any asset over a holding period from time 0 to time T. Suppose the amount invested at time 0 is P
More informationFinance Homework p. 65 (3, 4), p. 6669 (1, 2, 3, 4, 5, 12, 14), p. 107 (2), p. 109 (3,4)
Finance Homework p. 65 (3, 4), p. 6669 (1, 2, 3, 4, 5, 12, 14), p. 107 (2), p. 109 (3,4) Julian Vu 23: Given: Security A Security B r = 7% r = 12% σ (standard deviation) = 35% σ (standard deviation)
More informationStock Valuation and Risk
11 Stock Valuation and Risk CHAPTER OBJECTIVES The specific objectives of this chapter are to: explain methods of valuing stocks, explain how to determine the required rate of return on stocks, identify
More informationLesson 5. Risky assets
Lesson 5. Risky assets Prof. Beatriz de Blas May 2006 5. Risky assets 2 Introduction How stock markets serve to allocate risk. Plan of the lesson: 8 >< >: 1. Risk and risk aversion 2. Portfolio risk 3.
More informationCost of equity estimation
MSc in Finance & International Business Authors: Anna Kwiatkowska Magdalena Mazuga Academic Advisor: Frank Pedersen Cost of equity estimation Application of the Capital Asset Pricing Model on the Warsaw
More informationCAPM, Arbitrage, and Linear Factor Models
CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose meanvariance e cient portfolios. By equating these investors
More informationCapital Allocation Between The Risky And The Risk Free Asset. Chapter 7
Capital Allocation Between The Risky And The Risk Free Asset Chapter 7 Investment Decisions capital allocation decision = choice of proportion to be invested in riskfree versus risky assets asset allocation
More informationExecutive Summary of Finance 430 Professor VissingJørgensen Finance 43062/63/64, Winter 2011
Executive Summary of Finance 430 Professor VissingJørgensen Finance 43062/63/64, Winter 2011 Weekly Topics: 1. Present and Future Values, Annuities and Perpetuities 2. More on NPV 3. Capital Budgeting
More informationRISKS IN MUTUAL FUND INVESTMENTS
RISKS IN MUTUAL FUND INVESTMENTS Classification of Investors Investors can be classified based on their Risk Tolerance Levels : Low Risk Tolerance Moderate Risk Tolerance High Risk Tolerance Fund Classification
More information15.401 Finance Theory
Finance Theory MIT Sloan MBA Program Andrew W. Lo Harris & Harris Group Professor, MIT Sloan School Lecture 13 14 14: : Risk Analytics and Critical Concepts Motivation Measuring Risk and Reward MeanVariance
More informationBonds, Preferred Stock, and Common Stock
Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1year discount bond with a $100 face value. What is the most the investor would pay for 2. An
More informationNote: There are fewer problems in the actual Final Exam!
HEC Paris Practice Final Exam Questions Version with Solutions Financial Markets Fall 2013 Note: There are fewer problems in the actual Final Exam! Problem 1. Are the following statements True, False or
More informationA Basic Introduction to the Methodology Used to Determine a Discount Rate
A Basic Introduction to the Methodology Used to Determine a Discount Rate By Dubravka Tosic, Ph.D. The term discount rate is one of the most fundamental, widely used terms in finance and economics. Whether
More informationMakeup Exam MØA 155 Financial Economics February 2010 Permitted Material: Calculator, Norwegian/English Dictionary
University of Stavanger (UiS) Stavanger Masters Program Makeup Exam MØA 155 Financial Economics February 2010 Permitted Material: Calculator, Norwegian/English Dictionary The number in brackets is the
More informationHolding Period Return. Return, Risk, and Risk Aversion. Percentage Return or Dollar Return? An Example. Percentage Return or Dollar Return? 10% or 10?
Return, Risk, and Risk Aversion Holding Period Return Ending Price  Beginning Price + Intermediate Income Return = Beginning Price R P t+ t+ = Pt + Dt P t An Example You bought IBM stock at $40 last month.
More informationChapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting
Chapter 11 Risk, Return, and Capital Budgeting Topics Covered Measuring Market Risk Portfolio Betas Risk and Return CAPM and Expected Return Security Market Line CAPM and Stock Valuation Chapter 11 Objectives
More informationBasic Financial Tools: A Review. 3 n 1 n. PV FV 1 FV 2 FV 3 FV n 1 FV n 1 (1 i)
Chapter 28 Basic Financial Tools: A Review The building blocks of finance include the time value of money, risk and its relationship with rates of return, and stock and bond valuation models. These topics
More informationNorthCoast Investment Advisory Team 203.532.7000 info@northcoastam.com
NorthCoast Investment Advisory Team 203.532.7000 info@northcoastam.com NORTHCOAST ASSET MANAGEMENT An established leader in the field of tactical investment management, specializing in quantitative research
More informationChapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting
Chapter 11 Risk, Return, and Capital Budgeting Topics Covered Measuring Market Risk Portfolio Betas Risk and Return CAPM and Expected Return Security Market Line CAPM and Stock Valuation Chapter 11 Objectives
More informationChapter 1 The Investment Setting
Chapter 1 he Investment Setting rue/false Questions F 1. In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk. Answer: rue
More informationFinancial Market Efficiency and Its Implications
Financial Market Efficiency: The Efficient Market Hypothesis (EMH) Financial Market Efficiency and Its Implications Financial markets are efficient if current asset prices fully reflect all currently available
More informationInstructor s Manual Chapter 12 Page 144
Chapter 12 1. Suppose that your 58yearold father works for the Ruffy Stuffed Toy Company and has contributed regularly to his companymatched savings plan for the past 15 years. Ruffy contributes $0.50
More information2: ASSET CLASSES AND FINANCIAL INSTRUMENTS MONEY MARKET SECURITIES
2: ASSET CLASSES AND FINANCIAL INSTRUMENTS MONEY MARKET SECURITIES Characteristics. Shortterm IOUs. Highly Liquid (Like Cash). Nearly free of defaultrisk. Denomination. Issuers Types Treasury Bills Negotiable
More informationCHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS
CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS PROBLEM SETS 1. (e). (b) A higher borrowing is a consequence of the risk of the borrowers default. In perfect markets with no additional
More informationActual Returns. Large LongTerm Company Government Treasury Year Stocks Bonds Bills
408 PART FIVE Risk and Return 1. Risky assets, on average, earn a risk premium. There is a reward for bearing risk. 2. The greater the potential reward from a risky investment, the greater is the risk.
More informationNature and Purpose of the Valuation of Business and Financial Assets
G. BUSINESS VALUATIONS 1. Nature and Purpose of the Valuation of Business and Financial Assets 2. Models for the Valuation of Shares 3. The Valuation of Debt and Other Financial Assets 4. Efficient Market
More informationMODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS
MODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS EIGHTH EDITION INTERNATIONAL STUDENT VERSION EDWIN J. ELTON Leonard N. Stern School of Business New York University MARTIN J. GRUBER Leonard N. Stern School
More informationAN OVERVIEW OF FINANCIAL MANAGEMENT
CHAPTER 1 Review Questions AN OVERVIEW OF FINANCIAL MANAGEMENT 1. Management s basic, overriding goal is to create for 2. The same actions that maximize also benefits society 3. If businesses are successful
More informationMidTerm Spring 2003
MidTerm Spring 2003 1. (1 point) You want to purchase XYZ stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3000 to invest, how many shares
More informationFINANCIAL PLANNING ASSOCIATION OF MALAYSIA
FINANCIAL PLANNING ASSOCIATION OF MALAYSIA MODULE 4 INVESTMENT PLANNING Course Objectives To understand the concepts of risk and return, the financial markets and the various financial instruments available,
More informationWEB APPENDIX. Calculating Beta Coefficients. b Beta Rise Run Y 7.1 1 8.92 X 10.0 0.0 16.0 10.0 1.6
WEB APPENDIX 8A Calculating Beta Coefficients The CAPM is an ex ante model, which means that all of the variables represent beforethefact, expected values. In particular, the beta coefficient used in
More informationExam 1 Sample Questions
Exam 1 Sample Questions 1. Asset allocation refers to. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets
More informationCorporate Finance Sample Exam 2A Dr. A. Frank Thompson
Corporate Finance Sample Exam 2A Dr. A. Frank Thompson True/False Indicate whether the statement is true or false. 1. The market value of any real or financial asset, including stocks, bonds, CDs, coins,
More informationChapter 8 Risk and Return
Chapter 8 Risk and Return LEARNING OBJECTIVES (Slides 82 & 83) 1. Calculate profits and returns on an investment and convert holding period returns to annual returns. 2. Define risk and explain how uncertainty
More informationMoney and Banking Prof. Yamin Ahmad ECON 354 Spring 2006
Money and Banking Prof. Yamin Ahmad ECON 354 Spring 2006 Final Exam Name Id # Instructions: There are 30 questions on this exam. Please circle the correct solution on the exam paper and fill in the relevant
More informationEstimating Risk free Rates. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012. Adamodar@stern.nyu.
Estimating Risk free Rates Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 Adamodar@stern.nyu.edu Estimating Risk free Rates Models of risk and return in finance start
More informationany any assistance on on this this examination.
I I ledge on on my honor that I have not given or received any any assistance on on this this examination. Signed: Name: Perm #: TA: This quiz consists of 11 questions and has a total of 6 ages, including
More informationRisk, Return and Market Efficiency
Risk, Return and Market Efficiency For 9.220, Term 1, 2002/03 02_Lecture16.ppt Student Version Outline 1. Introduction 2. Types of Efficiency 3. Informational Efficiency 4. Forms of Informational Efficiency
More informationUse the table for the questions 18 and 19 below.
Use the table for the questions 18 and 19 below. The following table summarizes prices of various defaultfree zerocoupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price
More informationEcon 202 Section H01 Midterm 2
, Spring 2010 March 16, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section H01 Midterm 2 Multiple Choice. 2.5 points each. 1. What would
More informationValueBased Management
ValueBased Management Lecture 5: Calculating the Cost of Capital Prof. Dr. Gunther Friedl Lehrstuhl für Controlling Technische Universität München Email: gunther.friedl@tum.de Overview 1. Value Maximization
More informationCAS Exam 8 Notes  Parts A&B Portfolio Theory and Equilibrium in Capital Markets Fixed Income Securities
CAS Exam 8 Notes  Parts A&B Portfolio Theory and Equilibrium in Capital Markets Fixed Income Securities Part I Table of Contents A Portfolio Theory and Equilibrium in Capital Markets 1 BKM  Ch. 6: Risk
More informationEquity Risk Premium Article Michael Annin, CFA and Dominic Falaschetti, CFA
Equity Risk Premium Article Michael Annin, CFA and Dominic Falaschetti, CFA This article appears in the January/February 1998 issue of Valuation Strategies. Executive Summary This article explores one
More informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More informationChapter 9 Interest Rates
Chapter 9 Interest Rates Concept Questions 1. Shortterm rates have ranged between zero and 14 percent. Longterm rates have fluctuated between about two and 13 percent. Longterm rates, which are less
More informationJournal of Exclusive Management Science May 2015 Vol 4 Issue 5  ISSN 2277 5684
Journal of Exclusive Management Science May 2015 Vol 4 Issue 5 ISSN 2277 5684 A Study on the Emprical Testing Of Capital Asset Pricing Model on Selected Energy Sector Companies Listed In NSE Abstract *S.A.
More informationCash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 5,670 6,808 5,788 6,928 Variable
More informationSOLUTIONS EXAM 20131025 WRITE AS CLEARLY AND DISTINCTLY AS POSSIBLE!
SOLUTIONS EXAM 20131025 Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder must be handed in before you leave
More informationChapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 39)
Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required
More information