Exam 1 Practice Alt

Exam 1 Practice Alt - Midterm Exam I 35 Questions SEE...

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Midterm Exam I 35 Questions SEE VERSION 1 OF SOLUTIONS FOR SOLUTION ANNOTATIONS When you are finished, PLACE THE ANSWER FORM INTO THE EXAM BOOKLET, and TURN IN YOUR EXAM BOOKLET. Formulas: P/E ratio = PRICE/EPS T P 0 = ∑[D t /(1+r) t ] + P T /(1+r) T t=1 P 0 = Div 1 /(r-g) P 0 = EPS 1 /r + PVGO per share [R m - R f ] = Market Risk Premium for equity Return = [dollar return on stocks – interest paid]/own money invested Return = (Div 1 + P 1 -P 0 )/P 0 r assets =WACC = (1-T c )D/(D+E) r D + E/(D+E) r E r assets = D/(D+E)r debt + E/(D+E)r equity Note: V = D+E β assets = D/(D+E) β D + E/(D+E) β E β i = ρ i,mkt x ( σ i / σ mkt ) OR β i = Cov i,mkt / σ 2 mkt variance of a 2-stock portfolio = σ p 2 = x 1 2 σ 1 2 + x 2 2 σ 2 2 + 2 (x 1 ) (x 2 ) ρ 12 ( σ 1 ) ( σ 2 ) where ρ 12 ( σ 1 ) ( σ 2 ) = covariance between stocks 1 and 2 and x 1 and x 2 = proportions invested in Standard deviation of the portfolio , ( σ ) = the square root of variance of the portfolio 1) ______ You hold a fully-diversified portfolio of stocks with a beta = 1. You are considering adding a new stock or bond to your portfolio. Which investment below would result in the greatest reduction in the standard deviation of returns of your aggregate holdings? a. A negative beta stock b. A corporate bond c. A one-month treasury bill d. e. Since the portfolio is already fully diversified, you can reduce total portfolio risk no further. 2) _______ Which of the following suggests that the current market risk premium for equities might be lower than its historical average? a. The availability of international equity investments that can reduce risk b. The higher variance of the market’s returns that has persisted since October 2008 c. The lower- than-average interest rates than have persisted since October 2008 d. The creation of hedge fund investment firms that rely on complex formulas to price investments

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e. Exactly two of the above answers are correct 3)_________Which of the following is true of firms with lower P-E ratios compared to other firms in the same industry? a. All else equal, low P-E firms are expected to have high growth and/or high risk b . All else equal, low P-E firms are expected to have low growth and/or high risk c. All else equal, low P-E firms are expected to have high growth and/or low risk d. Managers of the low P-E firms are viewed as high-quality managers. e. Exactly two of the above statements are true 4)________ You have computed 60 observations of monthly returns for Exxon and Ford for the past 5 years and recorded the data in an excel spreadsheet in columns A and B, respectively. You use the function “=correl(A1.A60,B1.B60)” in cell A61 to compute the correlation coefficient for these two columns of returns. To annualize this measure, you should… a. Do nothing. The correlation coefficient obtained using monthly returns need not be adjusted to annualize it. b. Multiply the value obtained in cell A61 by 12
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This document was uploaded on 10/26/2011 for the course FIN 302 at Miami University.

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Exam 1 Practice Alt - Midterm Exam I 35 Questions SEE...

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