FIN 420 - Exam 2.docx - FIN 420 Exam 2 Q You bought shares in a company at \$92.50 on January 2nd and during the year it paid dividends of \$1.75 per

# FIN 420 - Exam 2.docx - FIN 420 Exam 2 Q You bought shares...

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FIN 420 - Exam 2 Q: You bought shares in a company at \$92.50 on January 2nd and during the year it paid dividends of \$1.75 per share. At the end of the year, it was trading at \$96.25. If inflation is 2%, then what was your real return on this investment? A: The first step is to find the holding period return (HPR) (96.25-92.50+1.75)/92.50 = 5.95% Then adjust this nominal return into real terms using the Fisher Effect 1.0595 = (1+r) x 1.02 1.0595/1.02 = 1.0387 so, the real rate of return is 3.87% Q: A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____________. A: (15-4.5)/25 = .42 Q: Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. (HINT: How can you test for equilibrium using the data provided?) A: A; B (13-10)/.2 > (15-10)/.4 Q: A stock has returns of 12%, 4%, 8.75%, 5.1%, -12%, and 9.15% over the last 6 years. What is a 95% confidence interval for this stock? A: -12.68% to 21.68% Q: Conceptually, the Value at Risk model is an attempt to measure __________________. A: the dollar amount at risk in an extreme lower tail risk event. Q: Market risk is called either______________ or _______________. A: systematic risk; nondiversifiable risk Q: You invest \$1,000 in a portfolio, which is composed of a risky asset with an expected rate of return of 16% and a Treasury bill with a rate of return of 6%. If your goal is to have \$1,100 at the end of one year, then you would need to invest _________ in the risky asset and _____________in the Treasury bill. (HINT: How can you use what you know about HPRs to get

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