Exam 2 Solutions

# Exam 2 Solutions - Summer 2002 Exam 2 1. Which of the...

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Summer 2002 Exam 2 1. Which of the following statements is not (or least) correct? A. The coefficient of variation is a measure of a distribution’s degree of dispersion per unit of expected value. * B. Although the beta of a diversified portfolio represents that risk which cannot be diversified away, the beta of a single security, since it is not diversified, is a measure of its total or stand-alone risk. C. Beta can be defined either as [(COV JM ) / ( σ 2 M )] or as [(COR JM )( σ J ) / ( σ M )]. This indicates that when comparing securities, a security that has a higher correlation with the market may not necessarily also have the higher beta. D. The beta of a portfolio comprised of 100 stocks will not necessarily be less than the beta of a portfolio comprised of only 50 stocks. E. The standard deviation (or stand-alone risk) of a portfolio comprised of 100 stocks will not necessarily be less than the standard deviation of a portfolio comprised of only 50 stocks. 2. Which of the following statements is not (or least) correct? A. Time value of money calculations allow us to convert values at one point in time to their equivalent values at another point in time. B. For single or lump sum cash flows, present value interest factors and future value interest factors are reciprocal functions of each other. C. The present value, as of Period 0, of an annuity with payments in Periods 1 through N can be found as the difference between the present value of a perpetuity with payments in Periods 1 through infinity, and the present value of another perpetuity with payments in Periods N+1 through infinity, where both of the perpetuities are evaluated as of Period 0. * D. Except under continuous compounding/discounting, effective annual rates will always be greater than nominal/stated/quoted rates. E. If risk and payments were the same for both, you would not be indifferent between a perpetuity starting in Year 6 and a perpetuity starting in Year 11, even though they might appear to have the same value if you used the equation for the value of a perpetuity (V = D/K). 3. Which of the following statements is not (or least) correct? A. If two bonds have the same coupon rate and maturity value, but one bond matures in 5 years while the other bond matures in 20 years, then the 20-year bond will have more interest rate (maturity) risk than the 5-year bond. B. You are said to be immunized against changes in interest rates when the duration of a bond is equal to your investment horizon (holding period). This is because if interest rates go up, the extra interest you earn from reinvesting your coupons at this higher rate is exactly offset by the capital loss when you sell the bond. On the FIN 3403 - 2002 Summer Term – Exam 2 Page 1 of 12

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other hand, if interest rates go down, the interest that you lose from reinvesting your coupons at a lower rate is exactly offset by the capital gain when you sell the bond. * C.
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## This note was uploaded on 02/10/2011 for the course FIN 3403 taught by Professor Tapley during the Summer '06 term at University of Florida.

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Exam 2 Solutions - Summer 2002 Exam 2 1. Which of the...

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