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FIN 302- Exam #1 Fall '10

# FIN 302- Exam #1 Fall '10 - 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 stocks 1 & 2 (respectively) 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 1

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d. A well-diversified mutual fund consisting of S&P 500 stocks 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? 3)_________Which of the following is true of firms with lower P-E ratios compared to other firms in the same industry? 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.
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