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fin1ans01spr09

# fin1ans01spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Solution Set 1: Market Efficiency and Time Value A Multiple Choice Warmup 1. If the present value of \$200 paid at the end of Year 1 is \$180, what is the one-year discount factor? None of the above: 180 200 = 0 . 90 2. If the one-year discount factor is 0.82, what is the present value of \$120 received at the end of Year1? \$ 98.40 3. What is the relationship between the two-year discount factor (i.e. DF 2 = 1 (1+ r 2 ) 2 ) and the one-year discount factor (i.e. DF 1 = 1 1+ r 1 )? DF 2 is never more than DF 1 [So, there is a limit on how much lower r 2 can be as compared with r 1 .] 4. If the 3-year rate of interest is 12% per annum, what is the 3-year discount factor? 0.712 5. Consider the following 2 questions: What is the present value of \$100 to be received in 10 years if r = 17%? How much would I have to invest now in order to receive \$100 after 10 years, given an interest rate of 17%? Are the answers to these 2 questions: Equivalent 6. Suppose that after conducting an analysis of past stock prices, you came up with the following obser- vations. Which would appear to contradict the weak form of the efficient market hypothesis? The correlation between the return one week and the return the next week is - 0 . 3 One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall 7. Which of the following statements are true of the efficient market hypothesis?

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fin1ans01spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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