Midterm Exam Spring 2006 Key

Midterm Exam Spring 2006 Key - Finance 748 Professor Bill...

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Finance 748 Professor - Bill Reese Midterm Exam Spring, 2006 Instructions : The first five pages consist of four problems. The first two are worth 20 points each and the second two are worth 10 points each. You need to show your work for problems 1 and 4 as well as part 2 of problem 3. You may use Excel for any of these problems, but in each case, you must start with a blank workbook. If anything else appears on your screen, it will be considered a violation of the honor code. The next four pages contain eight short-answer questions. Each question is worth five points. You should be able to answer each question in a couple of paragraphs, but if you need extra space, continue working on the back of the page and leave me a note on the front that you are doing so. The formula for Bayes Rule as shown in class is: Pr (P H | buy) = . Pr (buy | P H ) Pr (P H ) . Pr (buy | P H ) Pr (P H ) + Pr (buy | P L ) Pr (P L ) Come to the front to see me if you have any questions. You have until 9:30 to complete this test. I will post your grade for this exam and the course on the website by your number as soon as I have them all graded. Good luck! Name : _____________________________________________
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1. Trading Models Problem (1,2,5: 4 pts. each; 3,4: 8 pts. each) You are the NYSE specialist for Time Warner Stock (ticker symbol TWX). Due to the possible implementation of some suggestions made by Carl Icahn, you believe that at this time next year, TWX will be worth either $30 per share, or $20 per share with equal probability. The risk-based required rate of return has already been included in the probabilities, so you can assume that the required return is
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