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samplefinalwithanswersericsson

samplefinalwithanswersericsson - Sample final Finance 1...

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Sample fi nal Finance 1 MGCR 341 2007 Jan Ericsson Desautels Faculty of Management April 9, 2007 Abstract Note that this sample fi nal is not formatted to fi t the allotted time of the actual fi nal exam. Nor is it, like the actual, cumulative. The questions are nonetheless as representative as possible of an exam that was not written at the time that this was. 1. Which of the following statements is false? (a) The variance increases with the magnitude of the deviations from the mean. (b) The variance is the expected squared deviation from the mean. (c) Two common measures of the risk of a probability distribution are its variance and standard deviation. (d) If the return is riskless and never deviates from its mean, the variance is equal to one. The variance is zero. 2. 3) Which of the following is false 3. Suppose an investment is equally likely to have a 35% return or a - 20% return. The expected return for this investment is closest to: 1
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4. Suppose an investment is equally likely to have a 35% return or a -20% return. The standard deviation on the return for this investment is closest to: 5. Which of the following statements is false? (a) Investments with higher volatility have rewarded investors with higher average returns. (b) Investments with higher volatility should have a higher risk premium and therefore higher returns. (c) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities . Not for individual securities (d) Riskier investments must o ff er investors higher average returns to compensate them for the extra risk they are taking on. 6. Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential ”blockbuster” drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure’s block- buster drug will produce $1 billion in net income for Big Cure. Little Cure has 10 separate less important drugs before the FDA waiting for approval. If approved, each of Little Cure’s drugs would produce $100 million in net income for Little Cure. The probability of the FDA approving a drug is 50%. What is the expected payo ff for Big Cure’s Blockbuster drug? 0 . 5 × 1 B = 500 M What is the expected payo ff for Little Cure’s ten drugs? 10 × 0 . 5 × 0 . 1 B = 500 M What is the standard deviation of Big Cure’s average net income for their new blockbuster drug? q 0 . 5 × (1000 500) 2 + 0 . 5 × (0 500) 2 = 500 2
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What is the standard deviation of Little Cure’s average net income for their ten new drugs? SD ( one drug ) = q 0 . 5 × (100 50) 2 + 0 . 5 × (0 50) 2 = 50 SD (10 drugs ) = 50 10 = 15 . 81 Which pharmaceutical company faces less risk? little cure - lower SD 7. Which of the following is not a systematic risk?
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