CLASS / COURSE: Finance
1. (15 Points) Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 3.4 percent. Given this information,
What are the average rates of return on large-company stocks and Treasury bills?
What are the standard deviation for large-company stocks and Treasury bills?
2. (20 Points) The risk-free rate is 3.5 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.1 and an expected return of 12 percent. Stock B has a beta of .92 and an expected return of 10.25 percent. Are these stocks correctly priced? Why or why not?
3. (25 Points) A portfolio is invested 40 percent in stock A, 30 percent in stock B, and 30 percent in stock C. What is the expected return and standard deviation of this portfolio?
State of Probability of Rate of Return if State Occurs
Economy State of Economy Stock A Stock B Stock C
Boom .10 .05 .16 .23
Normal .70 .08 .09 .11
Recession .20 .15 -.03 -.25
4. (10 points) You have a portfolio comprised of the following. If the portfolio beta is 1.15, what is the beta of stock C?
Stock Value Beta
A $3,000 1.4
B $4,000 .8
C $2,000 ?
D $1,000 .9
5. (15 points) KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $2 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent?
6. (15 points) Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $0.12 a share. The following dividends will be $0.15, $0.20, $0.50, and $0.60 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent?
Brain-Teaser Questions (extra Credit Questions)
1. You have 8 marbles, 7 of them weigh the same and one of them weighs different. You also have a balance scale. Within 2 weighings, how do you figure out which one is the weird one and whether it is heavier or lighter than one of the other 7? (5 points)
2. You have a string-like fuse that burns in exactly one minute. The fuse is inhomogeneous, and it may burn slowly at first, then quickly, then slowly, and so on. You have a match, and NO watch. How do you measure exactly 30 seconds? (5 points)
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SUBJECTS / CATEGORIES:
2. Financial Management
3. Corporate Finance
4. Investment and Portfolio Management