Term Test 2 Fall 2005

Term Test 2 Fall 2005 - Your name Your student ID...

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ACT349H1F 2005 Test 2 v09 Privacy ID A Your name:__________________________ Your student ID:______________________ UNIVERSITY OF TORONTO ACT349H1F TERM TEST 2 4:00 pm November 23, 2005 Instructor: Keith Sharp PhD FSA NOTES: 1. Calculators allowed 2. Scrap paper is to be handed in with this book. It’s OK to write on book. 3. This is a closed book exam. 4. Multiple choice: only your letter answer on the last page will be graded. 5. 10 points correct, two if blank, zero points if wrong 6. So expectation if you guess is the same as leaving a blank. 7. Timing: 55 minutes 8. Make sure you’ve indicated your letter answers on answer sheet before time is called 9. Name and ID on this book, on answer sheet and on scrap please. 10. Please stay in your seats and don’t talk till all papers have been collected. 11. Photo ID on desk during exam please. 12. Good luck
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ACT349H1F 2005 Test 2 v09 Privacy ID A 0. Please code your Privacy ID as the answer to question 11 on your answer sheet. Your privacy ID is shown in the page footer at the foot of each page of this test. The Privacy ID is needed so that the correct order of correct answers can be used in grading your answer sheet.
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ACT349H1F 2005 Test 2 v09 Privacy ID A 1. (BMA 8 th . Ed. Ch. 8 Quiz 1(b) ) Here are the returns and standard deviations for two investments: Return Standard Deviation Stock Q 14.5 28 Stock R 21.0 20 Calculate to the nearest integer the standard deviation for the following portfolio: 50 percent each in Q and R, assuming that the shares have perfect negative correlation. (A) 1 (B) 2 (C) 3 (D) 4 (E) The correct answer is not given by (A), (B), (C) or (D) (D) Solution: SD(Portfolio) = (0.5 2 × 28 2 + 2 × 0.5 ×0.5 × 28 × 20 × (-1) + 0.5 2 × 20 2 ) 1/2 = 4 2. (BMA 8 th . Ed. Ch. 17 Quiz Q. 3) The common stock and debt of Toronto Slush are valued at $50 million and $30 million respectively. Investors currently require a 16 percent return on the common stock and an 8 percent return on the debt. If Toronto Slush issues an additional $20 million of common stock and uses this money to retire debt, what is the change in the expected return on the stock, to the nearest 0.1%? Assume that the capital structure does not affect the risk of the debt and that there are no taxes. (A) Down 2.3% (B) No change (C) Up 1.7% (D) Up 3.4% (E) The correct answer is not given by (A), (B), (C) or (D).
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ACT349H1F 2005 Test 2 v09 Privacy ID A (A) Solution: r E (previous) = 0.16 r A = (50 ×0.16 + 30 ×0.08)/(50+30) = 0.13 Hold r A constant 0.13 × 80= (70 × r E (new) + 10 × 0.08) ; hence r E (new)= 0.1371 3. (SoA C2 2003 May Q 28) You are given the following information about a firm: Proportion of the firm’s book value related to debt:
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Term Test 2 Fall 2005 - Your name Your student ID...

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