COMM 374: Applied Financial Markets
Practice Midterm Exam
1. The table below reports capital gains and dividend yields of the Equity over one
‐
year periods ending
last day in December each year.
One year period ending
Dec 31 1992
Dec 31 1993
Dec 31 1994
Capital gain (P
t+1
/P
t
)
1.2200
0.8525
1.0865
Dividend yield (D
t+1
/P
t
)
0.0500
0.1393
0.1250
a)
Calculate the simple gross returns on the Equity for each year.
b)
Calculate the simple net return on the Equity for each year.
c)
Calculate the arithmetic average of annual gross returns. How does it relate to the geometric
average of annual gross returns?
You want to track the performance of Equity using an index that has level set to 100 as of Dec 31 1991.
d)
Calculate the level of the index with dividends (total return index) for each year.
e)
Calculate the level of the index without dividends (price index) for each year.
f)
Use the index level on Dec 31 1994 to compute the three
‐
year gross return including dividends.
2. You are analyzing monthly log return data on the S&P 500 index. Specifically, you calculated the 6, 12,
18, and 24 month variance ratios for the S&P 500 index log return series. The results are summarized in
the table below.
S&P 500 Returns
1
period
6
periods
12
periods
18
periods
24
periods
Variance
0.00178
0.01231
0.02610
0.03914
0.04977
Variance ratio statistic
1.15329
1.22265
1.22234
1.16557
Standard deviation
11.10%
16.16%
19.78%
22.31%
a)
Why are variance ratio statistics useful?
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 Spring '08
 Lazrak
 Orange fund, French three‐factor model

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