practice2f

# practice2f - Econ 333 Financial Economics Spring 08...

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Econ 333 - Financial Economics Spring 08 Practice Prelim II: Exercise 1: Multiple choice. (3 points each) 1- You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock? a. 5.00% b. 6.45% c. 7.30% d. 7.65% e. 8.30% 2 - Suppose that we have identified three important systematic risk factors given by ex- ports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turn out to be 1%, 2%, and 2%. The factor betas are given by β EX = 1 . 8, β I = 0 . 7, and β IP = 1 . 0 . What would the stock’s total return be if the ac- tual growth in each of the facts was equal to growth expected? Assume no unexpected news on the patent.

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