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Version A
Business 172a
Professor Reza
Fall 2006
San Jose State University
Final Examination
Instructions and notes
:
I.
Please put your name on BOTH the scantron and this exam. If your name is missing from either, you will
receive ZERO on the final exam – no exception and no changes afterwards.
II.
This is a closedbook, closednotes exam. Do not consult others. You may use a calculator.
III.
There is one correct answer to each problem. Multiple answers receive zero point.
IV.
Unless specified otherwise, approximations should be rounded to 2 digits after the decimal.
V.
Unless specified otherwise, assume that
a.
investors maximize their net worth (i.e., they are “rational”) and firms maximize their common
shareholders’ net worth.
b.
all
markets are efficient.
c.
firms are typical of the industry in which they operate.
d.
projects are typical for the firms.
e.
the par value (principal) of a bond is $1,000.
f.
YTM = yield to maturity
The PutCall Parity:
P = C – S
+
t
f
r
X
)
1
(
+
where
P
is the price of a put,
C
is the price of a call,
S
is the price of the stock,
X
is the exercise price,
r
f
is
the riskfree rate, and
t
is time to expiration
1.
A company’s stock has a negative Beta = 0.5, the riskfree rate = 0.07, and the market risk premium =
0.08. This means that the expected return of this stock is negative.
(a) True
(b) False
2.
You forecast a stock to reach the price of $79.10 per share in 1 year. The stock pays no dividends and
has beta = 1.2. The market risk premium is 7% and the riskfree rate is 4.6%. This stock sells for $72
now. Is this a good investment?
3.
Two stocks A and B are characterized by the information provided below. You have a welldiversified
portfolio and are considering adding one (not both) of the stocks to your portfolio. Which would you
choose under the CAPM?
Stock
Expected Return
Stand Deviation
Beta
A
16%
22%
1.2
B
16%
15%
1.5
(a)
B because it has the lower standard deviation
(b) A because its has the lower Beta
1
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(c)
Cannot decide without additional information
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 '09
 Pagani,Marco
 Business, Standard Deviation, Corr

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