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Unformatted text preview: CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 1: Market Efficiency and Time Value to be discussed as needed in recitation NOTE: List all contributing group members legibly on the first page of your submission. A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. If the present value of $200 paid at the end of Year 1 is $180, what is the one-year discount factor? (a) 0.22 (b) 0.82 (c) 1.22 (d) None of the above 2. If the one-year discount factor is 0.82, what is the present value of $120 received at the end of Year1? (a) $ 82.80 (b) $ 98.40 (c) $144.58 (d) None of the above 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 )? (a) DF 2 is never less than DF 1 (b) DF 2 is never more than DF 1 (c) DF 2 could be either more or less than DF 1 4. If the 3-year rate of interest is 12% per annum, what is the 3-year discount factor? (a) 0.712 (b) 1.405 (c) 0.564 (d) None of the above 1 5. Consider the following 2 questions: • What is the present value of $100 to be received in 10 years if r 10 = 17% per year? • How much would I have to invest now in order to receive $100 after 10 years, given an interest rate of 17% per year? Are the answers to these 2 questions: (a) Different (b) 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? (a) The average return is significantly greater than zero (b) The correlation between the return one week and the return the next week is- . 3 (c) One could have made consistently superior returns by buying stocks after a 10% rise in price and selling after a 10% fall (d) One could have made consistently abnormal capital gains by buying shares with low dividend yields 7. Which of the following statements are true of the efficient market hypothesis? (a) It implies perfect forecasting ability (b) It implies that prices reflect all available information (c) It results from keen competition between investors (d) It implies that the market is irrational (e) It implies that prices do not fluctuate 8. Which of the following observations provide evidence against the strong form of the efficient market theory? (a) Mutual fund managers do not on average make superior returns (b) You can not make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in earnings (c) By buying stocks before the announcement of an abnormal rise in earnings, one would generally make superior profits (d) Managers who trade in their own stocks make superior returns (e) In any year approximately 50% of pension funds outperform the market before expenses 9. Suppose you find that you can beat the market after adjusting for risk by using information from the9....
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- Spring '08
- Finance, Stock exchange, stock markets