Sample midterm 1a solution

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

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

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

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