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Unformatted text preview: CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70391 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 oneyear discount factor? None of the above: 180 200 = 0 . 90 2. If the oneyear 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 twoyear discount factor (i.e. DF 2 = 1 (1+ r 2 ) 2 ) and the oneyear 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 3year rate of interest is 12% per annum, what is the 3year 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 . 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? It implies that prices reflect all available information 1 It results from keen competition between investors 8. Which of the following observations provide evidence against the strong form of the efficient market8....
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This note was uploaded on 01/20/2012 for the course FINANCE 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.
 Spring '08
 unknown
 Finance

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