Fall 08m Exam 1 A

Fall 08m Exam 1 A - !, Ft'n - -', r i;'l ,) tc t : !: fo...

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r i;'l ,) t Ft'n - !, tc -', Ii Version 14 Business 172a Fall 2008 ,o.\r',t'n. : !: (+ra fo bt'I f" '"', Name (please print) :- or Reza Jan Jose State University Midterm Examination I Instructions and notes: I. Please put your name on BOTH the scantron and this exam. lf 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. IIL 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, firms are tvpical of the industry in which they operate. There are 30 questions in this exam return on this stock. 1. You expect to eam 3o/o on your investment over the next year. The current inflation rate is l5Yobut you expect inflation to run at 5o/o duringthe next year. The real ratg of return you glpect on this investment is (approximately) p l& - Enf. .i|ur^ fol .'o'in l- o) t .11 l -7 - $ = -L't' &:ti,: Kl+rh\ = ,'- ,, 1 ,s - | -* ' oLto5?'o1;'"' 2. A non-dividend paying end-of-year stock's price has been as follows: $20 in 2003; $25 in 2004; $35 in2O05; and $35 in20O6. You bought this stock at year-end 2003 and sold it at year-end 2006. Consider the Arithmetic Mean (AlvI) and Geometric Mean (GM) rates of sooj # 2o o"l r uS D5 +js or $l r '15 = :f .7s 1 AttA = AJ/I:32.50% and GM: 0 % ANI:2I.67 o/o and GM:20jI% : 10.00% and GM:15.02% ofthe above ider the correlation between the rates of return of two securities. (a) If the retums are perfectly positively correlated (correlation coefficient : +1) you reduce - the risk of your portfolio. i' @).tf the returns are positively correlated, but not perfectly (0<correlation coefficient < +1), \J you get rid of some of the risk by buying the two securities. (c) Ifthe returns are negatively correlated, but not perfectly (O>conelation coefficient >-1), you get rid of some of the risk by buying the two securities. Both (b) and (c) Both (a) and (c)
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{ 6 u.r $N'\ vo-\rt 'F As saYS N k\ 7 -;|fu*,-c-ut5r,,,dtng : 4. A mutual fund had issued 1,000 shares last year with which proceeds it acquired 100 shares of IBM and 200 shares of INTC; the fund had paid $80 per share for IBM and $20 per share for NTC. In the meantime the fund has redeemed 600 shares; for this redemption the fund sold 50 shares of IBM and 50 shares of INTC. The IBM share s are now worth $ 1 10 each and INTC shares are worth $30 each. For this fund, currently @Nev: srz (b) NAV: $r0 dd\ NAV: $2s \{ Non. of the above -.t 3o){SC,-t-ll0U , ,r.'') [r(o i : l5oo 70bo/ NAV 17'c c, / t' c-' 5. You have $ 10,000 to invest in stocks. To diversiff your portfolio of stocks you probably need around 20-50 different stocks. You can buy the individual stocks or invest in a mutual fund.
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Fall 08m Exam 1 A - !, Ft'n - -', r i;'l ,) tc t : !: fo...

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