Practice Final_sum07

# Practice Final_sum07 - E120 Principles of Engineering...

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E120 Principles of Engineering Economics Summer 2007 Practice Final Problem 1 You believe that one month from now the XYZ Company will pay a dividend of \$2 on its common stock. Thereafter you expect to receive dividends every quarter . The dividends are expected to grow at a rate of 1% per quarter in perpetuity. If you require an effective rate of return of 12% per year on your investment, how much should you be prepared to pay for the stock now? Explain. Problem 2 Consider a family of call option on a non-dividend paying stock, each option being identical except its strike price. The price of the call with a strike price K is denoted by C(K). Find an arbitrage opportunity if 1 2 K K < , but ) ( ) ( 2 1 K C K C . Problem 3 The covariance between assets A and B is 0.005. The expected returns and standard deviations are as given below: Asse t Expected Return Standard Deviation A 12% 20% B 15% 25% (a) Find the weights of A and B that define a portfolio with the minimum standard deviation.

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## This note was uploaded on 08/15/2011 for the course ENGR 120 taught by Professor Alder during the Summer '11 term at Berkeley.

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Practice Final_sum07 - E120 Principles of Engineering...

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