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

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Economics 136. Financial Economics Sample Midterm 2B, Suggested solution, Fall 2009 1. True or false. (25 points, 5 each) (i) False. High dividend-price ratios predicted essentially no subsequent dividend growth, and high (positive) subsequent price growth. (ii) False. The dividend/price ratio in the Gordon model is D=P = R G , and even if G is the same, R G can di±er across companies if the expected rate of return R di±ers, perhaps because one company is riskier than the other. (iii) True. The proposed strategy only makes use of information incorporated in prices. The weak form of the EMH says that you should not be able to earn positive abnormal returns by trading on information contained in prices. (iv) True. The optimal share of stocks is ( E R stocks R f ) 2 and this is positive even if 2 (v) False. This is typically bad news, because the investor now has to re-invest the prepaid amount, which used to be in the high-yield pass-through, at the current, lower, interest rate. This reduces the investor²s overall return. 2. Stock valuation
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sample midterm 2b solution - Economics 136. Financial...

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