midterm 2 solution - Economics 136. Financial Economics...

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Economics 136. Financial Economics Suggested solution, Midterm 2, Fall 2009 1. True or false. (25 points, 5 each) (i) False. Historically, low dividend-price ratios predicted low (negative) subsequent price growth and no changes in dividends. (ii) False. The semi-strong form claims that prices incorporate public information; but before the public announcement, information is still private, and hence it need not be fully incorporated in the price. (iii) False. Stocks with high price earnings ratios, called growth stocks, have historically underperformed stocks with low price earnings ratios, called value stocks. (iv) False. A call option is typically riskier than the underlying stock, since you may lose your entire investment if the stock price S T <X. Hence the expected return on a call is generally higher than on the underlying stock. (v) False, in our opinion. The Golden Gate is more beautiful. [All students get full score for this question.] 2. CAL and portfolio choice (25 points, 5 each) (a) See the figure. (b) See the figure. A portfolio that has 50% stocks and 50% riskfree has an expected return of
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midterm 2 solution - Economics 136. Financial Economics...

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