sample midterm 2a

sample midterm 2a - Economics 136. Financial Economics...

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Economics 136. Financial Economics Sample midterm 2A, Fall 2009 use a calculator and two double sided sheets of handwritten notes. 1. True or false. (25 points, 5 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) The e¢ cient market hypothesis predicts that the expected return of a call option on Google stock should be the same as the expected return of a put option on Microsoft. (ii) For a company whose ROE is higher than the discount rate R interest to retain earnings in the company. (iii) Historically, high dividend-price ratios have predicted low (negative) subsequent price growth and essentially no subsequent change in dividends. (iv) The average return during 1996-2005 of all mutual funds in existence in 2005 was higher than the return of the S±P500 during the same period. This shows that some fund managers can pick stocks that consistently beat the index. (v) The variance of the return of a single stock is typically higher than the variance of the return of the S±P500. 2. Stock valuation (25 points, 5 each) (a) Company ABC is expected to pay dividends D 1 = $10 next year, and has annual dividend growth G = 5% . The discount rate for ABC is
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sample midterm 2a - Economics 136. Financial Economics...

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