Name: _
Student ID: _
Exam 2 Chapters 4-6.
Fall 2014
Finance 6360
Professor Cooper
The exam has a total of 100 points.
ANSWERS
1. Assume the 6360 class portfolio results are:
Class mean return = 8.86
Class standard deviation = 6.16
N=40
Dartboard mean ret
Name: _
Student ID: _
Exam 1
Fall 2014
Finance 6360
Professor Cooper
The exam has a total of 130 points.
ANSWERS
1) Assume a US Government Treasury bill has 111 days until it matures, and there are
365 days in the year. Assume a par value of $10,000.00.
A
First Three Letters
of Last Name
Name:
Hmk-6B
#1 A 5-year 6% annual coupon bond yields 5%. Compute the Macaulay duration of the bond. Do this by
filling in the following table.
(1)
Time until
Payment
(Years)
1
2
3
4
5
(2)
(3)
(4)
Payment
Payment Discount
Module 6A Bonds II Duration and Practical Applications
What you will learn:
The modified duration of a bond is equal to the percentage change in the bonds value divided by
the change in the interest rate (yield). It is the most fundamental and widely used
First Three Letters
of Last Name
Name:
Hmk-8B
#1 The margin requirements are : Initial 50/Maintenance 40. Ignore interest.
ABC shares trade at $80. You buy 300 shares for $80 per share in your margin account .
The value of shares is $ The margin is $.
A.
Module 8 Limit-Order Book, Margin, and Shorting
What you will learn:
Stock market trading is organized into limit-order books. Limit orders provide liquidity and depth to
the market, while market orders take away liquidity.
Stocks can be bought, sold, and
First Three Letters
of Last Name
Name:
Hmk-9B
#1 The market consensus is that Analog Electronic Corporation has an ROE = 9% and a beta of
1.25. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3
per shar
First Three Letters
of Last Name
Name: SOLUTION Hmk-9B
#1 The market consensus is that Analog Electronic Corporation has an ROE = 9% and a beta of
1.25. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3
Module 9A Discounted Free Cash Flow Valuation of Stocks
What you will learn:
The fundamental value of a stock is equal to the present value of future cash flows. We can define
the cash flow (the numerator variable) in three ways: dividends, free cash flow
Name:
Hmk-10A
Please research the following topics prior to coming to class.
#1 Define the following terms and provide examples:
Open-end fund
NAV
Closed-end fund
12-b fee, expense ratio
Balanced Fund
Index fund, passive fund
Active fund
Bond fund
Money-
Name:
#1
Hmk-11B
Options basics. Figure out the payoff and the profit per share in A-C:
A. You sell a 46 put for 4. Stock ends at $47.
Payoff=0. Profit=4.00.
B. You sell a 55 put for 4. Stock ends at $47.
Payoff=-8.00. Profit=-4.00.
C. You sell a 50 put
First Three Letters
of Last Name
#1
Name:
Hmk-11B
Options basics. Figure out the payoff and the profit per share in A-C:
A. You sell a 46 put for 4. Stock ends at $47.
Payoff=. Profit=.
B. You sell a 55 put for 4. Stock ends at $47.
Payoff=. Profit=.
C.
Module 11A Options I Terminology, Payoffs
What you will learn:
Options have their own specific terminology largely borrowed from insurance: Call/Put,
European/American, intrinsic value, in/at/out-of-the-money, exercise, premium, payoff, profit
Options are
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of Last Name
Module 12A Options II Binomial Option Pricing
What you will learn:
Insurance products are written on unhedgeable risks. Options are written on prices of securities that
can be traded. Options can be priced precisely relati
First Three Letters
of Last Name
Name:
Hmk-6B
#1 A 5-year 6% annual coupon bond yields 5%. Compute the Macaulay duration of the bond. Do this by
filling in the following table.
(1)
Time until
Payment
(Years)
1
2
3
4
5
(2)
(3)
(4)
Payment
Payment Discount
Name:
Hmk-6C
4 A bond currently sells for $1,050, which gives it a yield to maturity of 6%. Suppose that if the
. yield increases by 25 basis points, the price of the bond falls to $1,025. What is the Macaulay
duration of this bond?
8 Find the duration o
Module 5A Bonds I Price and Yield Calculations
What you will learn:
Bonds are credit instruments with a fixed repayment schedule (coupon and principal) payment . The
interest rates (yields) on and the prices of bonds change minute by minute
The concepts o
Module 1A Measuring Stock Returns
What you will learn:
Sources of stock returns: capital gains and dividends
Definitions of arithmetic, geometric and continuous returns
Calculations of means and standard deviations; the definition of a risk premium
Why yo
Name:
Hmk-1C
5. Suppose your expectations regarding the stock market are as follows:
Use Equations 5.65.8 to compute the mean and standard deviation of the HPR on stocks.
6. The stock of Business Adventures sells for $40 a share. Its likely dividend payo
18. What is the relationship of the portfolio standard deviation to the weighted average of the
standard deviations of the component assets?
19. A project has a .7 chance of doubling your investment in a year and a .3 chance of halving your
investment in
Module 2A Diversification: Combining risky and riskless assets into portfolios
What you will learn:
The reward-to-risk tradeoff (Capital Allocation Line) of risky-risky combinations
The reward-to-risk tradeoff (Capital Allocation Line) of risky-riskless c
First Three Letters
of Last Name
Name:
Hmk-2B
#1 You consider two stocks: A and B. You form portfolios composed of A and B with varying weights.
Expected Return (mean)
Standard Deviation
Correlation =0.15
A
15%
32%
B
9%
23%
Fill in the means and standard
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of Last Name
Name:
Hmk-3B
#1 The risk-free rate rF is 4%. The market risk premium (E[rM]-rF) is 6%. According to the CAPM,
the Expected Return
on Stock
A
B
with the beta of
is
1.20
E[rA] = %
0.70
E[rB] = %
In order to construct a port
Module 3A CAPM: Expected equity returns depend only on systematic risk
What you will learn:
That in CAPM, only systematic risk is priced, i.e. produces return to investors and is the equity cost
capital to a corporation
How the return on the systematic ri
Name:
Hmk-3C
4. What must be the beta of a portfolio with E(rP) = 20%, if rf = 5% and E(rM) = 15%?
5. The market price of a security is $40. Its expected rate of return is 13%. The risk-free rate is 7%,
and the market risk premium is 8%. What will the ma
Name:
Hmk-4C
28. Suppose two factors are identified for the U.S. economy: the growth rate of industrial
production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a
beta of 1.0 on IP and .4 on IR currently is expected to
Comment on 4A (since we did not finish the discussion):
In class we argued:
#2. One-factor APT. The risk-free rate is 8%. Here is the info on two stocks.
Stock Price Div1 g
Expected Return
Beta
X
$35
4.20 4%
16%
1.00
Y
$71
6.39 3%
12%
0.25
The exp return
First Three Letters
of Last Name
Name:
Hmk-4B
#1. Consider a three-factor model.
You are in charge of a $100 million Centurion Super Select Fund. You are considering investing all your money into a
particular stock. Consider the following multifactor mod