practicemidterm2_sol - Tepper School of Business Finance...

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Unformatted text preview: Tepper School of Business Finance (70-391) Fall 2008 Professor Lars-A. Kuehn Your Name: Practice Midterm Exam II Instructions: 1. You have 50 minutes to complete this examination. 2. You are allowed to consult the provided formula sheet only. 3. Laptops are not permitted. 4. There are 3 questions on this examination worth 100 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. Please stop writing when time is called. Failure to stop writing when time is called will result in an immediate loss of 30 points. Good Luck! 1 Formula Sheet Net present value: NPV = C + T X t =1 C t (1 + r t ) t = T X t =0 C t (1 + r t ) t Discount Factor: DF t = 1 (1 + r t ) t Growing Perpetuity: PV = C r- g T-year growing annuity: PV = C r- g 1- 1 + g 1 + r T ! Gordon growth model: r = D 1 P + g g = b ROE P = D 1 r- g = (1- b ) E 1 r- g P = D T X t =1 (1 + g 1 ) t (1 + r ) t + D T (1 + g 2 ) ( r- g 2 )(1 + r ) T Bond price: P = T X t =1 C (1 + r t ) t + F (1 + r T ) T Bond yield: P = T X t =1 C (1 + y ) t + F (1 + y ) T Forward rates: f t = (1 + r t ) t (1 + r t- 1 ) t- 1- 1 = DF t- 1 DF t- 1 Real interest rates: (1 + R t ) t = (1 + r t ) t (1 + i t ) t Variance of return r i : 2 i = V ar ( r i ) = E [( r i- E [ r i ]) 2 ] Covariance of return r i and r j : i,j = Cov ( r i ,r j ) = E [( r i- E [ r i ])( r j- E [ r j ])] Correlation of return r i and r j : i,j = Corr ( r i ,r j ) = i,j i j Beta of return r i with respect to return r m : i,m = i,m 2 m 2 Expected return of a portfolio r p = w 1 r 1 + w 2 r 2 : E [ r p ] = w 1 E [ r 1 ] + w 2 E [ r 2 ] Variance of a portfolio r p = w 1 r 1 + w 2 r 2 : V ar ( r p ) = w 2 1 V ar ( r 1 ) + w 2 2 V ar ( r 2 ) + 2 w 1 w 2 Cov ( r 1 ,r 2 ) Capital market line: E ( r p ) = r f + E [ r m ]- r f m p CAPM: E ( r i ) = r f + i ( E [ r m ]- r f...
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practicemidterm2_sol - Tepper School of Business Finance...

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