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
/(rg)
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 = (1T
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 2stock 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
fullydiversified
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 onemonth treasury bill
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
d.
A welldiversified 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 PE 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.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 KellyBrunarski
 Net Present Value, market risk premium, business risk

Click to edit the document details