Practice Final solution - 70-391 Finance Summer 2009 Tepper...

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70-391 Finance Summer 2009 1 Tepper School of Business Final Exam Instructions 1. You have xxx minutes to complete this examination. 2. You are only allowed to consult the formula sheet provided at the end of the exam. 3. Laptops are not permitted. 4. There are 4 parts on this examination worth xxx points total. 5. Please answer the questions in the space provided. Write your full name legibly at the bottom of this page. 6. Please show all work to ensure full credit. Partial credit is extensive and a function of the work shown. 7. All interest rates are quoted as annual effective rates (an annual rate with annual compounding) unless otherwise stated. 8. Please stop writing when time is called. Failure to stop writing when time is called will result in an immediate loss of 30 points. Do not make me enforce this rule. GOOD LUCK ! Name:__________________________________________________________
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70-391 Finance Summer 2009 2 Formula Sheet Net Present Value 0 1 (1 ) T t t t t C NPV C r = = + + Perpetuity C PV r = Growing Perpetuity C PV r g = T-year annuity 1 1 (1 ) T C PV r r = + T-year growing annuity 1 1 1 T C g PV r g r + = + Constant growth formula 1 1 1 0 0 (1 ) * D D k E r g g k ROE P P r g r g = + = = = Bond price 1 (1 ) (1 ) T t t T t t t C F P r r = = + + + Bond yield 1 (1 ) (1 ) T t t T t C F P y y = = + + + Forward rate 1 1 1 (1 ) 1 1 (1 ) t t t t t t t r DF f DF r + = = + Real interest rate (1 ) (1 ) (1 ) t t t t t t r R i + + = + Variance of return i r 2 2 ( ) [( [ ]) ] i i i i Var r E r E r σ = = Covariance of return i r and j r , ( , ) [( [ ])( [ ])] i j i j i i j j Cov r r E r E r r E r σ = = Correlation of return i r and j r , , i j i j i j σ ρ σ σ = Beta of return i r with respect to m r , , 2 i m i j m σ β σ =
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70-391 Finance Summer 2009 3 Expected return of a portfolio of 2 assets with weight 1 w and 2 w : 1 1 2 2 [ ] [ ] [ ] p E r w E r w E r = + Variance of a portfolio of 2 assets with weight 1 w and 2 w : 2 2 1 1 2 2 1 2 1 2 ( ) ( ) ( ) 2 ( , ) p Var r w Var r w Var r w w Cov r r = + + Expected return of a portfolio of N assets: 1 [ ] [ ] N p i i i E r
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