Solutions - Midterm II

Solutions - Midterm II - 1 PID N AME U NIVERSITY OF N ORTH...

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Unformatted text preview: 1 PID#: N AME : U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN-F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE M IDTERM E XAM #2 (11 pages) P ROF . A RZU O ZOGUZ F ALL 2008 ¾ Put your PID number on top of each page and your name on this sheet. ¾ The Honor System is in effect. After you have finished, sign the pledge on this sheet. ¾ SHOW ALL WORK and clearly mark answers. When appropriate, use a timeline to ensure maximum partial credit in the event of an error. ¾ This exam is CLOSED BOOK, and CLOSED NOTES. You may only use the formula sheet attached to this exam; any other formula sheet is not allowed. ¾ Make, but state clearly, all the assumptions that you feel are necessary to answer any particular question. ¾ You have 1 hour and 15 minutes to complete the exam. ¾ The maximum score is 100 points. Bonus Question (4 points): On a scale from 1(easy) to 5(difficult), how difficult did you find this exam? I have neither given nor received any aid on this examination.________________ Part 1 Part 2 Question 1 Question 2 Question 3 Bonus TOTAL 2 HELPFUL FORMULAS ( ) ( ) ( ) ( ) ( ) ( ) [ ] ( ) ( ) ( ) ( ) [ ] ( ) ( ) ( ) ( ) m m i i N i N j j i j i P B Bi A Ai m i i B A A Ai m i i A A Y X T ann T ann R R R R R R R E R R E R p R R R E R p R Y X Y X corr g r g g r C PV r r C PV var , cov , cov var ) , cov( var , cov , investment on return rate retention 1 1 1 1 1 1 1 1 1 2 1 2 = = − − = − = = = × = ⎥ ⎥ ⎦ ⎤ ⎢ ⎢ ⎣ ⎡ ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + + − − = ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ + − = ∑∑ ∑ ∑ = = = = β ω ω σ σ σ 3 Part 1: Multiple Choice Questions (4 points per question for a total of 36 points) 1. A risky security cannot have an expected return that is less than the risk-free rate because no risk-averse investor would be willing to hold this asset in equilibrium. a. True b. False 2. Security X has a standard deviation of returns of 35 percent and a beta of 1.45. Security Y has a standard deviation of returns of 28 percent and a beta of 1.06. Security Z has a standard deviation of returns of 44 percent and a beta of 1.22. Given this information, which one of the following statements is correct? a. Security Z has the greatest total risk because it has the largest standard deviation. b. Security X has the greatest total risk because it has the largest beta....
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Solutions - Midterm II - 1 PID N AME U NIVERSITY OF N ORTH...

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