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1
UGBA 103 – Midterm Exam 2
October 30, 2006
name
:
section #
:
SID#
:
This is a closed book and closed note exam, though you may refer to notes on one side of a 3” x 5” index
card.
You may use a calculator, but no computers/PDAs/manuals are allowed.
Show all your work
, and
write down any equations you use and/or your calculator steps, to allow us to provide as much credit as
possible.
This test contains 6 pages.
The last question is #3.
All answers should be written in the space
provided.
Points are roughly proportional to the suggested number of minutes for each question.
This
midterm is rated for 1 hour and 20 minutes.
To get credit for this exam, please fill in your SID# on the
top right corner of every page AND on the back of this exam.
Please do this now.
Grading (for official use only)
question 1
_________
out of
30 points
20 min
question 2
_________
out of
40 points
25 min
question 3
_________
out of
50 points
35 min
total
out of
120 points
expected exam
time: 1 hr 20
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1.
Short answer questions
Please put answers on right
30 points (6 each),
20 minutes
A) Stock X has an expected return of 5%. Stock Y has an expected
A:
_________
return of 10%. If a portfolio contains $50 worth of X, and $150
worth of Y, what is the expected return on the portfolio?
Weights: w
X
= 50 / 200 = 25%, and w
Y
= 150 / 200 = 75%
So the expected return on the portfolio is
E[R] = w
X
E[R
X
] + w
Y
E[R
Y
] = (.25)(.05) + (.75)(.10) = 8.75%
B) An investment requires you to invest $1,000 today, and will pay you
B:
_________
$1,350 in one year. What is its IRR?
The IRR is the discount rate that sets the NPV of the investment to zero:
0 = 1000 + 1,350 / (1+ IRR)
So the IRR = 1,350 / 1000  1 = 35% (for a one period investment, IRR = rate of return)
C)
The riskfree rate is 5% and the expected return on the market is
C:
_________
11%. If a stock has a beta of 1.3, and the CAPM holds, what is the
stock’s expected return?
E[R] = R
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 Fall '07
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