FIN367 S07Quiz2ASolutions

FIN367 S07Quiz2ASolutions - FIN 397.1 Spring 2007 Quiz 2...

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Unformatted text preview: FIN 397.1: Spring 2007 Quiz # 2: Payoff Diagrams and Basic Statistics February 20, 2007 (SOLUTIONS) NAME: SECTION: Time allowed: 15 minutes. Maximum possible score: 20. NOTE: 0 If I cannot understand your calculations, I will not be able to give you full credit even if your final answer is correct. You cannot say “these calculations are obvious.” o If a problem is missing some key information that you think is necessary to solve the problem, please ask me to clarify the question or state your confusions clearly. Alternatively, please make appropriate assumptions, state them clearly and proceed. No credit will be awarded if you fail to state your confusions or assumptions explicitly even if the question is wrong. 0 Partial credits may be awarded if you show your calculations or provide arguments to support your answers. Mean, Variance, Covariance, and Correlation Suppose the economy can be in one of the following four states: Boom or “good” state, (ii) Neutral state, (iii) Recession or “bad” state, and (iv) “Terrible” state. Each of the first three states can occur with an equal probability of 0.30. At the beginning of a month, you can purchase the following two securities in the market: 0 Security 1: It is currently trading at $50. At the end of the month, the stock price is expected to increase by $10 in the good state, expected to remain unchanged in the neutral state, expected to decrease by $10 in the bad state, and expected to decrease by $40 in the “terrible” state. 0 Security 2: It is currently trading at $55. At the end of the month, the stock price is expected to increase by $11 in the good state, expected to remain unchanged in the neutral state, expected to decrease by $11 in the bad state, and expected to decrease by $44 in the “terrible” state. Compute the following: 1. (4 points) Draw the payoff trees for securities 1 and 2 if you purchase them at the beginning of the month and sell them at the end of the month. Please label the trees clearly. 2. (4 points) Compute the expected returns (not prices) of securities 1 and 2. 3. ( 6 points) Compute the standard deviations of returns for securities 1 and 2. 4. ( 6 points) Compute the covariance and the correlation between the returns of two securities. Show all your calculations clearly. SECURITY .1. W 4550 20 Z, Additional Space SECURITY 2 At +k€$ POEM; Shanta! have been obvious +0 use; “Hut ‘ch Lewd «Han = l- : -' 8 '/- Szmiln‘x, 21°“ 0" cm?“ W: P“ z “8% 2. 03 (“2M”) 1 '2. SM. dew, q :. [0.3(20+8) + mace”) + V2— + o-\ (~30‘l' gi] ‘/ 28-57 :v 2- :. m 70 Because +k¢ '/. Tdums -For Secmn‘fl 2. ave similar, 6'1: 6" : 32-7‘12 . . _ 8 Covamahce, 6}; -_-, 005(20i8) (201-3) 4- c.3(o+8)(o+2)+a fizz-2)) + 0.. L— 80+8)(—eo+g) :: m 3‘6 ? Conelai‘on, 6‘1 2 6:3. ‘3: “em = 1. ‘P—— 6) 62- 28.57x2357 ‘ ...
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This note was uploaded on 03/30/2010 for the course CH 369 taught by Professor Kbrowning during the Spring '07 term at University of Texas.

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FIN367 S07Quiz2ASolutions - FIN 397.1 Spring 2007 Quiz 2...

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