172a_final_A - Name (please print) :_ Version A Business...

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Name (please print ) :________________________________________ 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 closed-book, closed-notes 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 Put-Call 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 risk-free 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 risk-free rate is 4.6%. This stock sells for $72 now. Is this a good investment? (a) Yes, because its current price is lower than next year’s price (b) We cannot decide since we don’t know what the actual price will be next year (c) No, because the present value of next year’s price is higher than the current price (d) Yes, because the present value of next year’s price is lower than the current price (e) No, because the rate of return on this investment is lower than required (or expected) 3. Two stocks A and B are characterized by the information provided below. You have a well-diversified 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 4. Yield to maturity is the same as (a) coupon rate (b) the bond’s internal rate of return (c) that rate of return on the bond which makes NPV=0 (d) current yield (e) both (b) and (c) 5. Consider two stocks A and Z. The portfolio consisting of the two stocks’ curve/line can take different shapes depending on the correlation (Corr) between their returns. Restricting yourself to Corr of -1, 0 , and +1, in the diagram below indicate which correlation results in which curve/line. Expected Return
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172a_final_A - Name (please print) :_ Version A Business...

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