Princeton University
Department of Economics
Economics 362
Problem Set 6 - Valuation
1.
Using the following data, find the expected rate of return for an investment in
SBC, Corporation.
SBCs dividend (for next year)
SBCs price
Security analysts expected L
ECO 362: Financial Markets Solutions for Fall 2008 Final Exam
INSTRUCTIONS You have 3 hours to complete this exam. This exam is closed book and closed notes, except for one 8x11 cheat sheet. Calculators are allowed. There are 21 questions for a total of 1
>
& with
&
Additionally,
>Net present Value:
The IRR:
may have a lower IRR but higher NPV).
>Equivalent annualized cost: A(asset price, discount rate, number of periods)
. G=growth rate of C, k=discount rate
. Use NPV to rank across projects, not IRR (pro
Precept 4
ECO 362 Financial Investments
Chapter 7
Problem 7
The following information is given and necessary for computations for questions 7.4 - 7.10.
A pension fund manager is considering investing three mutual funds. The first is a stock fund and
the s
Princeton University Department of Economics
Economics 362 Problem Set 8 Multi-Factor Models
Fall Term 2009-2010
Use the following to answer questions 1-2: Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free
ECO 362 Fall 2015
Homework 5: Performance Evaluation
A. You read the following in The Wall Street Journal:
A.1. Imagine a portoflio-theory world where all the risky assets are a bunch of
stocks, and where a riskfree money marlet account (cash) is also ava
ECO 362 Fall 2015
Homework 2: Risk and Return
Use the Excel worksheet named STOCKS.XLS. The file contains monthly returns for:
2 indices: The S&P500 (with dividends: S&P500D and without: S&P500).
The U.S. 3-Month Treasury Bills (TBILL).
5 stocks: Ford,
Princeton University
Department of Economics
Economics 362
Problem Set 7 Market Efficiency
1) Discuss the various forms of market efficiency. Include in your discussion the information
sets involved in each form and the relationships across information se
Princeton University
Department of Economics
Economics 362
Problem Set 10 Option Pricing
Use the put-call parity relationship to solve problems 1 and 2.
1. a) Show how one can replicate a one-year pure discount Treasury bill with a face
value of $100 usin
1.) If the annual interest rate is 10 percent, how long would you have to wait before a
$17,500 investment doubles in value?
2.) You can invest $10,000 in a CD offered by your bank. The CD matures in 5 years and
the bank quotes you a rate of 4.5%. How muc
Problem 1
For a given initial invest C and an eective annual rate of 10%, we have:
F V = C (1.10)T .
We want to nd T that solves
2C
=
C (1.10)T
2
=
(1.10)
log (2)
=
T
T log (1.10)
log (2)
=
log (1.10)
= 7.27.
T
T
So, 8 years.
Problem 2
Remember, the EAR (
ECO 362
Precept 3 Questions (sourced from BKM)
6.4
Consider a risky portfolio. The end-of-year cash ow derived from the portfolio will be either $70,000 or
$200,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% pe
ECO 362
Fall 2015
Precept 2 Solutions
Problem 1
We know that the one-period rate of return on a stock is computed as the combined dividend and price
change over that time, as a percentage of the initial price:
rt+1 =
dt+1 + (pt+1 pt )
.
pt
From this, we c
ECO 362
Precept 3 Solutions
6.4
(a)
This means you require
E [rs ] rf = .08,
(1)
where rf is .06. Assuming that the return from the risky portfolio consists only of capital gains,
E [rs ] =
E [W1 ] W0
.
W0
(2)
First compute
=
0.5 70000 + 0.5 200000
=
E [W
Problem Set 4
Foundations of Finance
Problem Set 4: CAPM.
I.
SML and the CAPM:
A.
In a CAPM world, what is the beta (with respect to the market portfolio M) of a
portfolio with E[Rp]=20%, if Rf=5% and E[RM]=15%?
B.
In 1994, the rate of return on short-ter
ECO 362 #1
Kyle Xiao
Question 1
(a) V alue = A(1 +
r 1052
)
52
(b)
r
V alue
= 2 = (1 + )yearsm
A
m
log2 (2) = years m log2 (1 +
1
log2 (1 +
years =
Daily m = 365
r = 1% 69.32
r = 2% 34.66
r = 12% 5.78
(c)
r
)
m
r
)
m
= years m
1
m log2 (1 +
r
)
m
semi-ann
ECO 362 #5
Kyle Xiao
Question 1
Q.1.1
See Excel Sheet Q1 Coeff Coor -0.3
The efficient frontier is the top half of the risk vs return curve.
Q.1.2
See Excel Sheet Q1 Coeff Corr 0
The efficient frontier is the top half of the risk vs return curve.
Yes ther
ECO 362
October 11, 2007
PROBLEM SET 2
FINANCIAL INVESTMENTS Professor: Burt Malkiel
Exercise 1
(a) Gordons model states P0 = D0 (1 + g) , rg
and we know that D1 = D0 (1 + g) = 2.16, P0 = 51.43 and g = 0.068. So, what we have to do is to nd r, sa
ECO 362
October 18, 2007
PROBLEM SET 4
FINANCIAL INVESTMENTS Professor: Burt Malkiel
Exercise 1
(a) Let X and Y denote the return on AT&T and Microsoft, respectively. We have the following information about the random variables X and Y : E[X] = X
ECO 362
December 6, 2007
PROBLEM SET 71
FINANCIAL INVESTMENTS Professor: Burt Malkiel
Exercise 1
The approximate percentage price change due to a change y is P 1 = D y = D y. P 1+y where D and D denote Macaulay and modied duration, respectively
ECO 362
November 6, 2007
PROBLEM SET 5
FINANCIAL INVESTMENTS Professor: Burt Malkiel
Exercise 1
(a) FALSE. if i = 1, then E[Ri ] = rf (E[Rm ] rf ) = 2rf E[Rm ] which is in general dierent from zero (unless rf = 1 E[Rm ]). 2 (b) FALSE. One can
ECO 362
December 13, 2007
PROBLEM SET 81
FINANCIAL INVESTMENTS Professor: Burt Malkiel
Exercise 1
(a) The Put-Call parity states C0 = S0 + P0 1 1 + rf T X
where S0 is the current price of the stock, C0 and P0 are the current value of European c
Princeton University Department of Economics Economics 362 Answers to Problem Set 9 1. The percentage bond price change will be: Duration y .005 = 7.194 = .0327 or a 3.27% decline. 1+ y 1.10 Fall Term 2009
2. Computation of duration: a) YTM = 6% (1) Time
Princeton University Department of Economics Economics 362 Answers to Problem Set 10 1. a) To replicate a one-year pure discount bond with a face value of $100, buy a share of stock, and a European put with an exercise price of $100, and sell a European c
Princeton University Department of Economics Economics 362 Financial Investments Fall Term 2009-2010 Lectures: M&W 10-10:50 Location: McCosh Hall 50 Professor Harrison Hong Bendheim Center for Finance 210 Office Hours: Monday 4-5:30pm Emails: Harrison Hon
ECO 362: Financial Markets Solutions for Fall 2008 Final Exam
INSTRUCTIONS You have 3 hours to complete this exam. This exam is closed book and closed notes, except for one 8x11 cheat sheet. Calculators are allowed. There are 21 questions for a total of 1
Princeton University Department of Economics Economics 362 Problem Set 9 Bond Market Term Structure 1. A nine-year bond has a yield of 10% and a duration of 7.194 years. If the market yield rises by 50 basis points, what is the percentage change in the bo