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Unformatted text preview: BUS 172A — Investment Analvsis Spring 2009 Exam 2 + g / Last Nanak—First Noriega Class Time: @103 PM Instructions: There are 13 questions. Questions 1—5 are multiple—choice questions. Questions
6—12 are problems for which computations are necessary. Finally, question 13 is
an open question. For each question you deed to report the correct ﬁnal answer in the space
provided. For questions 6—12, in addition to reporting the ﬁnal answer. you must also report
the complete and correct solution With clear computations. When reporting the solutions to the questions 612 you must label all the
amounts you use in the computations. Your computations and solutions to the
questions 612 must be clear and easy to understand. For question 13 you must report a concise and clearly understandable answer. Grading: Each multiplechoice question is worth 5 points. No partial credit is granted for
questions 15. For the problems 612 you can onlyr receive the maximum points allowed if you
record the correct ﬁnal answer along with the complete and correct solution
for the problem. If you report the correct ﬁnal answer, but you do not provide a complete and
consistent solution‘for the problems, you will not receive any points. Partial credit is granted for questions 6—13. Section I — Multi le Choice uestions: 5 oints each uestion 1. An individual investor‘s investment objectives should be expressed in terms of: @1131: and return. . ii. Capital market expectations.
c. Liquidity needs and time horizon.
d. Tax factors and legal and regulatory constraints.
e. Riskfree rate of return. ANSWER: 70V 2. Which of the foilowing would provide evidence against the semistrong form of the
efﬁcient market theory?
21. About 50% of pension funds outperform the market in any year.
. Aﬁer a manager exercises his/her stock options, the stock experiences no excess
returns.
c. All investors have learned to exploit signals about future performance.
(1 Trend analysis is worthless in determining stock prices.
a) Low PricetoEamings (PIE) stocks tend to have positive abnormal returns over the long run.
/ ANSWER: 1; 3. l‘rice—toEamings Ratio [P."EJ. A company‘s return on equity (ROE) is greater than its
required return on equity (1:). The eamings multiplier (PIE) for that company’s stock
is most likely to be positively related to the
a. Riskfree rate. fdf ; .10
b. Market risk premium. /c/Dividend payout ratio. ? J;
,d/ ing‘s retention ratio.
/ Stock‘s ca ital asset pricing model beta.
. P _ ANSWER: 4. Which one of the following portfolios cannot lie on the efﬁcient frontier as described
by Markowitz‘.’ Portfolio Expected return ("/10 Standard Deviation (“/u)
a. W 15 36 K
b. X 12 ,  15 '
e. Z 5 7
\/ d. Y 9 21
e. Not enough infonnation to be able to decide. ANSWER: D U: After lengthy trial and error, you discover a trading system that would have doubled
the value of your investment every six months if applied over the last three years.
Which of the following EIOblems make it difﬁcult to conclude that this is an example
of market inefﬁciency? '. Riskadjustment problem.
_ b. Relevant information problem.
c. Dumb luck problem; d. Data snooping problem.
e. Time value of money problem. ANSWER: l 2 La) .4. Section II — Problems “Vb? ‘yﬂ’ 6. Fortuna Inc. just paid $1.00 in dividends. The company expects to pay in one year a
dividend of $2.00 (t=1). After this ﬁrst payment, the dividends are expected to grow
at a rate of 11% per year (annual compounding) and will be paid at the end of each
year for the foreseeable future {t=2, t=3,...). In addition to these “normal“ endof—
year dividends, the company expects to pay some “extraordinary” dividends for a few
years. In particular, Fortune expects to pay $1.50 at the end of each quarter for 5
years. starting in two years. Hence, the ﬁrst extraordinary quarterly dividend will be
paid in two years and three months (t=2.25). If the required rate of return for the
shares of Fort   ' 15% with monthly compounding, what is the current stock price? Do:l ’ $/\{P’Mr r9; graze: 49k '2
Dr :1 7m?
U} 3 (2'9“ Chiba/mg I! . V 1 L50 “0 + ”D {15: :r 1r
1 M14513} If? ' ‘ ‘21 id 4:5 r. ' K t
a}. “(W3 16 u; 3"; “(3371. +T§a%’ $17!; 4“: {Ii/532'; us” 1. r
4' far 4' +14; M' 11.1.1
. L Ir/f‘? “Sis”, +5??? 73ng Ink??? 4' Iii:2; '5. #q' :30 C ‘_ ( 3L gL'ﬂ,
7,50 m ' 7,36 in __~__. —
u = m ' + «mg—r Jr  '1. 9’ r '
‘ H [‘70 5.. t 11 l. [.5— ’I—Q: 7‘. '1
 2Q> .1, '50 d r lﬂa *L'Tm * W k 1.15%? * W‘fkmrﬂ” Vi , it" .t e
In.
1. Lima" 4, tr 4 L5 yr 1,; Lyngarb? 1L LS’ ,r
___,_._——’_'_—‘ ‘1 .../ ——— _z____
Hf; $751, '47 %' “fl!" 4/ U5, hrs?" 4’“; 2.
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4L 4r ”4 10'”  +,.—?—_' :
+ IJYW?’ Hf; ""5 4 — *"‘ new “law  new '3
,mur 1‘ 1 Irv. 1' “genetic“ (.053 441°“ ' '
rim/i4 W 6618 + .“Jriw Jr m 1144. MR» 4’3? 1215?: ﬁlm 7. The stocks of Tamien Co. are currentiy trading at $35.50 in the market. The company
has just paid a dividend of $1.20 and next dividend is expected to be $1.80. The . shares of Tamien are expected to be trading at $141.00 in exactly 10 years.
« Assuming that the dividends are pain : the end of each year forever, and their growth rate of return for the shares of Tamien. [5 points) 5:63 W SEEK :3“
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8. Joe‘s Restaurant has current earnings per share of $625. The current book value is . . . . . or [m1
$4.70 per share. The appropriate discount rate for J oe's Restaurant 15 12%. Calcuiate the share price for Joe‘s Restaurant if the earnings grow at a constant rate of 4%
fnrever. (5 points) ANSWER: “19]??? ~70 gym 3, WNW 1.5% H1:[email protected]®'° ' UI 9. Use the following information to calculate the expected return and standard deviation
of a portfolio that is 40% invested in stock A and 60% invested in stock B. {5 points) I —.———H—_—_——_'——————_._—, Stock A Stock B
Expected Retum E{Ri] 0.14 0.]
Standard deviation, o, 0.42 0.31
Correlation coefﬁcient. pkg 0.15
ANSWERS: lamp H: 6 7, fég) :: “AZ =
\—/”'/ fig: .LiﬁmJtiy' 4’ .é(.I.Hé>hL gr.) 1 .6083»! rf' , obolg3é, m 10. = 3'5;_.'_ Tym hdlding'pe'riod
Show the account's balm: ce‘ sheer when you enter .e  maﬁa/(85% ”r CW®> 2376 .‘EZ ll. Assume the Clean Surplus Relationship and that dividends, earnings. and book values
of equity all increase at a constant perpetual growth rate of g%. Under these
conditipns, Show that the Dividend Discount Model (Len, Gordon Model) is
equivalent to the Residual Income Model. (5 points) Clean Surplus Relationship." BPS,  D, = B, — BM 12. 011 March 14, Kosko Inc. announced a merger with Walrnark inc. Given the
information below, calculate the cumulative abnormal return (CAR) around the
announcement_date [[5 days, + 5. days]]. Assume the company has an expected rate
of return equal to the market return. Graph and interpret your results. Do you
support market efﬁciency? (6 points} Date Market Kosko Return Return
0310'? 0.5 0.4
03308 0.3 0.4
03:09 41.2 0.3
03/10 0.6 0.5
D3r'11 1.3 1.1
03:14 0.1 1.8
03:15 0.1 0.1
03K16 0.9 0.?
03M? " 0.2 0.3
03;”18 —0.2 0.0
03:19 0.3 0.2 Daily Cumulative
Days from Abnormal Abnormal Announcement Return Return 5 I: r i
4 _ .I e ,__._. *' H
J ’3 1
12 *1 a ‘
l U _ 1 .11“ *
.._ﬂ——1  I u Tha amP‘h ZUWJG Mark/V eggxdlcnv Q5 H~4L CHI basin 444. quwuawzi T5 SH; ("3 “L 59%; 3n he $67 6&1 +1.1 gummwfv‘.‘ L Sﬁwﬁ m‘u‘k‘wrl? QM”
(1% “Vi VGHRBOAJEWA'P‘ ﬁprwn‘hvg WM kﬁﬁwt 13. Mark Hulbert in his article “I t 's not the Manager it is the Liquidity", presents a study
by Alexander, Gibson, and Cici that focuses on the underperformance of mutual
funds. The researchers argue. that ﬁmd managers are unfairly blamed for the poor
performance of their funds. In fact, the underperformance of mutual funds compared
to a simple buyand—hold strategy is motivated by the fact that mutual fund managers
are forced by the buyand—sell decisions of shareholders in unproﬁtable transactions.
Basically, it is the liquidity provision feature of mutual funds that generates the
underperformance. a The authors try to study the performance of liquiditymotivated trades and
valuationmotivated trades. How do they differentiate the two types of u‘ades'?
What is the performance of the two types of trades? (4 points) 44%» dudes L; tilt; Make; dubs "9 rﬂfrgenw '97
WW; :2) WVAL ilﬁ'utA’AT 3h) imm‘l’bﬁ hi” ”dwéju‘i:
m suns. “elonF‘m/MVW an»: m w a’w‘hn Mlkﬂs u/écruelut’é‘; 63: Agile; “4" WM}! sang). a «lawn. ~Hu'l’ H“— W'MJQ C5} > ww b. Given the negative effect of the liquidity feature on mutual funds’ performance,
What is the advice that Professor Gibson gives to investors? (2 points) mm a at; AM he an ant tea é}
21. {X 3’9 W’i KI) {timing—é \m’i a 44“”
Mmi Lame, kin of ALF JrD (oxfr % loses ”QM tutti31. “ a
i \/ ...
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