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Unformatted text preview: Econ 333 - Financial Economics Spring 08 Prelim II: Answer key Multiple choice: (3 points each) 1- A company owning gold mines will probably have a inflation beta because an increase in inflation is usually associated with an increase in gold prices. a. negative; anticipated b. positive; anticipated c. negative; unanticipated d. positive; unanticipated e. None of the above. 2 - If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, I , would result in a change in any security return of I . a. 9.2. b. 3.2. c.-3.2. d. 3. e. 6.2. 3 - For a diversified portfolio including a large number of stocks, the: a. weighted average expected return goes to zero. b. weighted average of the betas goes to zero. c. weighted average of the unsystematic risk goes to zero. d. return of the portfolio goes to zero. e. return on the portfolio equals the risk-free rate. 4 - The amount of systematic risk present in a particular risky asset, relative to the system- atic risk present in an average risky asset, is called the particular assets: a. beta coefficient. b. reward-to-risk ratio. c. total risk. d. diversifiable risk. e. Treynor index. 5 - The slope of an assets security market line is the: a. reward-to-risk ratio. b. portfolio weight. c. beta coefficient. d. risk-free interest rate. e. market risk premium 6 - Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%? Stock Beta Expected Return A .68 8.2% B 1.42 13.9% C 1.23 11.8% D 1.31 12.6% E .94 9.7% a. A b. B c. C d. D e. E Exercise 1: (20 points) Assume that the following two-factor model describes returns: e r i = i + i 1 e F 1 + i 2 e F 2 + e i . Assume that the following three portfolio are observed: Portfolio Expected returns i 1 i 2 A 12.0 1 0.5 B 13.4 3 0.2 C 12.0 3-0.5 a - Find , 1 and 2 so that we can write the expected return of any asset as E ( r i ) = + i 1 1 + i 2 2 Answer: 12 . 0 = E ( r...
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