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101w07-practice quiz 3-with answers

# 101w07-practice quiz 3-with answers - Economics 101-300...

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Economics 101-300 INSTRUCTIONS: Please make sure to fill in your name on the line below. Answer all of the questions in this quiz. Point values for each question are listed with the question. Write your answers directly on this document. If the question is multiple choice, circle the letter of the answer you believe is correct. For analytical questions, work out your answer on the paper in the space given. We can give partial credit even if the answer is incorrect if we see the work and can figure out where the problem is. Turn in this entire document when you are finished. Take your time, and good luck. Your name___________________________________________ 1) Suppose you are trying to decide whether to buy Google stock. The current price of the stock is \$350. Let’s assume that the company doesn’t pay any dividends, so you earn a return only if the stock price increases. But the future price is uncertain. You believe there are three possible outcomes: Your Belief Outcome Price per share after one year Probability of outcome 1 \$325 25% 2 \$350 35% 3 \$400 40% a) (2 points) What is the expected return of the stock if you buy one share of the stock? Expected return = -\$25*.25 + \$0*.35 + \$50*.4 = \$13.75 b) (2 points) The annual yield on all savings bonds is 5%. Given the expected rate of return on Google stock from Your Belief, would you rather purchase the stock or a savings bond? Rate of return on Google= \$13.75/\$350 = 0.04 = 4% You’d rather have the savings bond. Remember to ignore numbers and letters. I have collated a bunch of questions from past quizzes, but the schedule was different last year so these are not from the same quizzes and there are more problems than are in a typical quiz. Use to get a sense of the “look and feel” of the problems in the third quiz.

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