Sample midterm 1a solution

# Sample midterm 1a solution - Economics 136 Financial...

This preview shows pages 1–2. Sign up to view the full content.

Economics 136. Financial Economics Sample midterm 1A, Fall 2009, Suggested solutions 1. True or false. (18 points, 6 each) (i) False. The value of Vitamin stocks next year is \$800 & 0 : 92 = \$736 , but you owe \$315 to the bank, so your wealth is \$736-\$315=\$421. Your gross return is then 421/500=0.84 and hence your net return is ± 0 : 16 or -16%. (ii) True. By put call parity, we should have C 0 + X= (1 + R f ) = P 0 + S 0 , but C 0 + X= (1 + R f ) = 3 + 35 = 1 : 05 = 36 : 33 , while P 0 + S 0 = 2 : 5 + 33 = 35 : 5 . Since there are no the second. (iii) False. Consider a one-year coupon bond with face value F = 10 ; 000 and a single coupon payment of C = \$1000 on maturity. If the yield of this bond is R = 5% then it±s price today equals ( F + C ) = (1 + R ) = 11000 = 1 : 05 = 10 ; 476 : 19 > 10 ; 000 . [More generally, the price is higher than the face value if the yield is lower than the coupon rate.] 2. Portfolios. (18 points, 6 each) a) An equal-weighted portfolio has 1 = 2 weight in company 1 and 1 = 2 weight in company 2. Since you have \$10,000, you would invest \$5,000 in company 1 and \$5,000 in company 2. You buy 5 ; 000 = 100 = 50 shares of company 1. Similarly, buy 5 ; 000 = 50 = 100 shares of company 2. Value-weighted portfolio . The value of company 1 is 10 ; 000 100 = \$1 M . The value of company 2 is 60 ; 000 50 = \$3 M . So the weight of company 1 in the portfolio is 1 M= (1 M + 3 M ) = 1 = 4 and the weight of company 2 is 3 = 4 . You would invest \$2,500 in company 1 and \$7,500 in company 2, which means buying 2 ; 500 = 100 = 25 shares of company 1 and 7 ; 500 = 50 = 150 shares of company 2. b) The simple net return on company 1 is

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at Berkeley.

### Page1 / 4

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online