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Unformatted text preview: 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 . . 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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This note was uploaded on 04/01/2008 for the course ECON 3330 taught by Professor Mbiekop during the Spring '08 term at Cornell.
 Spring '08
 MBIEKOP
 Economics

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