FIn 302- Exam #1 Fall '10*

FIn 302- Exam #1 Fall '10* - Sample Exam I KEY (Note: There...

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Sample Exam I KEY (Note: There were multiple versions of the exam where the answers appeared in a different order.) YOUR NAME:__________________________________________________________________ Scan form must include your first and last name, as well as your unique ID (part before the “@” in your MU Ohio email.) Fill in the bubbles under your unique ID. Answer all of the exam questions by filling in the appropriate circle on the answer form. I recommend you also answer in the exam booklet, in the event there is a problem with your scan form. 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 1
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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 corporate bond b. A one-month treasury bill c. d. A negative beta stock e. Since the portfolio is already fully diversified, you can reduce total portfolio risk no further. A negative beta stock provides the greatest reduction in risk to your portfolio which, by virtue of being “fully-diversified” has variability ONLY due to market risk. A negative beta stock will reduce this variability (at a cost of lower portfolio returns.) 2) _______ Which of the following suggests that the current market risk premium for equities might be lower than its historical average? a. The higher variance of the market’s returns that has persisted since October 2008 b. The lower- than-average interest rates than have persisted since October 2008 c. The availability of international equity investments that can reduce risk d. The creation of hedge fund investment firms that rely on complex formulas to price investments e. Exactly two of the above answers are correct Choice “a” suggests a higher market risk premium. (The other factor that suggests a lower market risk premium is the reduction in transaction costs related to buying and selling securities.) 3)_________Which of the following is
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This note was uploaded on 11/15/2011 for the course FIN 302 taught by Professor Kellybrunarski during the Spring '11 term at Miami University.

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FIn 302- Exam #1 Fall '10* - Sample Exam I KEY (Note: There...

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