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

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Economics 136. Financial Economics Sample Midterm 2B, 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) Historically, high dividend/price ratios predicted low (negative) subsequent dividend growth and essentially no subsequent changes in prices. (ii) In the Gordon model, if two companies have the same dividend growth, they must have the same dividend/price ratios. (iii) Consider a trading strategy where you buy a stock if it had positive price growth during the past week and sell it if it had negative price growth during the past week. If the weak form of the e¢ cient markets hypothesis holds, on average you should not be able to earn positive abnormal returns using this strategy. (iv) If the expected return on stocks is higher than the return on the riskfree asset, a risk-averse mean-variance investor will choose to hold some stocks even if stocks returns have a very high (but ±nite) variance. (v) For an investor holding a mortgage pass-through, a fall in interest rates is generally good news, because it means that more homeowners prepay their debt and hence the money is returned to the investor earlier. 2. Stock valuation
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sample midterm 2b - Economics 136. Financial Economics...

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