Some exercises mix of short answer and MCQ
do in class
1000/(1.10)^3 is WRONG
ch 16 answers to ch 16 assign 1
5. The required return is 9 percent. k
0.05 .09 9%
6. The Gordon DDM uses the dividend for period (t + 1), which would be 1.05.
r .08 8%
7. The PVGO is $.56:
2Million dollar payments/year
YTM All bonds 16%
Duration of 5 year bonds is 4 years
Duration of 20 year bonds is 11 years
Present Value of the obligation
PV = 2(cash flow)/ .16 (interest rate) = 12.5M (PV = CF/r)
Arbitrage Pricing Theory (APT) Assumptions
There are sufficient # of securities to diversity away idiosyncratic
The return on securities is a function of K different risk factors
No arbitrage opportunties
APT & Well-Diversified Portfolios
CAPM EXERCISE - Ta ken from ch. 7 in the text. CAPM
Are the following scenarios valid? Why or why not?
Higher beta and lower return so no
A Er should be higher than b
Expected return Standar
Ch 6 exercises for review
12 Suppose that there are many stocks in the market and that the characteristics of stocks A and B are as
Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate?
aSSIGNMENT CH 7 -16
16. In problems 1719, assume that the risk-free rate of interest is 6 percent and the expected rate of return on
the market is 16 percent.
17. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of t