Sample midterm 1

Sample midterm 1 - Economics 136. Financial Economics...

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Economics 136. Financial Economics Sample midterm 1A, Fall 2009 Read through the entire exam carefully, and then do all questions. Please explain your work as you will be graded on the quality of your explanations as well as the numerical accuracy of your answers. Be sure to write your name and section time on your blue book. You may use a calculator and one double sided sheet of handwritten notes. 1. True or false. (18 points, 6 each) Are the following statements true or false? Explain your answer in no more than two sentences. You will be graded on the quality of your explanation. (i) You have initial wealth $500. You borrow an extra $300 at a 5% annual rate, and invest all of this in Vitamin stock. If Vitamin earns a net simple return of -8% during the next year, then your net simple portfolio return (after paying o/ the debt) is -20%. (ii) The price of Goland stock is $33, the price of a one-year put option on Goland with strike $35 is $2.50, and the price of a call option for the same strike and expiration is $3. If the annual riskfree return is 5%, there is an arbitrage opportunity. (Note: Goland does not pay dividends during the next year). (iii) The price of a bond is always less than its face value. 2. Portfolios.
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Sample midterm 1 - Economics 136. Financial Economics...

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