Lecture 9 Practice Problem Suggested Solution
You own a stock portfolio invested 25 percent in stock Q, 20 percent in stock R, 15 percent in stock S, and 40
percent in stock T. The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively
Lecture 2 Practice Problems
1. How does a borrowing and saving market help individual achieve higher utility? Are there other financial markets
that can play the similar role this one? Name one using the specific financial assets that are traded on this f
Lecture 10 Practice Problem Suggested Solution
Suppose stock returns can be explained by the following three-factor model:
Assume there is no firm-specific risk. The information for each stock is presented here:
Lecture 3 Practice Problems Selected Solutions
1. If you have an investment opportunity A that yields a rate of return of r per year and another opportunity, B
that gives the same rate of return per year but compounded quarterly. Which project do you pref
Lecture 4 Practice Problems Selected Solution
1. If an investment opportunity is accepted under the Basic Principle of Investment, what can you say
about the net present value (NPV) of this investment?
If investment opportunity is accepted under the Basic
Lecture 6 Practice Problems Suggested Solution
Q1. What is capital gain/loss?
Is the net payoff from trading an asset.
Capital gain/loss = Sale Price(or value) Purchase Price (or value) of an Asset
Q2. What are the sources of income of holding a common st
Lecture 11 Practice Problem & Solution
Q1 The price of Ervin Corp. stock will be either $65 or $85 at the end of the year. Call options are available
with one year to expiration. T-bills currently yield 6 percent. Use the replicating portfolio approach to
Lecture 8 Practice Problems Suggested Solution
Q1. What are the portfolio weights for a portfolio that has 95 shares of stock A that sell for $53 per share
and 120 shares of stock B that sell for $29 per share?
The portfolio weight of an asset is total in
Lecture 1 Practice Problems Solutions on Selected Questions:
1. What are real assets, give an example for each type of real assets; explain the relationship between real
assets and financial assets.
2. How can financial markets enhance the efficiency of t
Lecture 5 Practice Problems and Solution
1. What is the spot rate?
The spot rate is the short-term and long-term interest rate implied by the yield to maturity of the bonds.
2. What is the forward rate?
The forward rate is the future short term rate impli
Lecture 7 Practice Problem Set
Q1. What is the IRR (Internal Rate of Return)
Is the rate of return (discount rate) that makes the NPV of a project zero.
Q2. What is the acceptance criterion of the IRR Rule if the NPV-Discount Rate Curve is Downward
ECO 358 Financial Economics I
Time Value of Money: Further Topics
Valuation of Bond
Bond Price, Bond Yield and Interest Rate
Given APR, as compounding
frequency increases, EAR will
If compounding freque