Midterm #2 – Fall 2015 – Econ 134A
November 18, 2015
Test Form A
Name (Please Print) : ______
Seat:______
Has the person sitting to YOUR RIGHT given you a valid photo ID that matches the one written on the top of their cover sheet? If the seat to your right is empty, check the ID of the next person to the right.
____ Yes
____ No
____ There is no person to my right
Has the person sitting to YOUR LEFT given you a valid photo ID that matches the one written the top of their cover sheet? If the seat to your left is empty, check the ID of the next person to the left.
____ Yes
____ No
____ There is no person to my left
Name (Please print your name):______
Signature______
Econ 134A John Hartman
Test 2, Form A November 18, 2015
Instructions:
YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. BUBBLE IN YOUR TEST FORM, NAME, AND PERM NUMBER ON YOUR SCANTRON.
You have 40 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students.
Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue.
You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating.
Unless otherwise specified, you can assume the following:
· Negative internal rates of return are not possible.
· Equivalent annual cost problems are in real dollars.
You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test.
Your test should have 5 multiple choice questions (10 points) and 2 problems (13 points). The maximum possible point total is 24 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test.
For your reference, an example of a well-labeled graph is below:
MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest answer.
1. Mozie Moxy Mac Inc., will pay out its first annual dividend of $5 six months from today. The company will pay dividends on the same date each year forever, and each will be 10% higher than the previous one. What is the present value of one share of this company’s stock if the effective annual interest rate is 15%?
A. $107 B. $105 C. $100 D. $95 E. $93
2. In the fictional country of San Luis Diego, the average bond return was 6.7% in 1953, followed by 7.8% in 1954, and 10.5% in 1955. The average return on stocks in these years was 5.7%, 10.8%, and 14.5%, respectively. What was the average equity risk premium in San Luis Diego over this three-year period? Use the arithmetic mean.
A. 2.7% B. 2.3% C. 2.0% D. 1.7% E. 1.3%
3. You find two stocks that are perfectly negatively correlated on their returns. One stock’s returns have a standard deviation of 30% and the other has a standard deviation of 20%. If you can make a portfolio mixing these two stocks in any combination you want, the portfolio with the lowest possible standard deviation has a standard deviation of _____.
A. 0% B. 10% C. 15% D. 20% E. 25%
4. Three stocks have annual returns of 5%, 10%, and 15%. The standard deviation of this sample is
A. 4.0% B. 4.5% C. 5.0% D. 5.5% E. 6.0%
5. Zoe purchased a zero-coupon bond earlier today for $450. The bond will mature in two years, and will pay out $900. What is the yield to maturity for this bond? State as an effective annual rate.
A. 40% B. 50% C. 60% D. 80% E. 100%
Name______Perm #______Day/time/TA of section______
For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution. Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution.
6. (5 points) Blueberry Canyon Muffins, Inc. pays constant dividends every six months forever. The next dividend of $2 will be paid in 4 months. What is the present value of a share of this stock assuming a stated annual interest rate of 15%, compounded five times per year?
7. Marcel will invest in a portfolio, with ¼ of money invested in Flat Tire Airlines, and ¾ of money in a risk-free bond. Flat Tire Airlines could have a rate of return each year of 40% or 10%, each with 50% probability. The risk-free bond has a rate of return of 15%.
(a) (3 points) If Flat Tire Airlines has a beta value of 3, what is the expected return of a stock with the same beta value as the market portfolio?
(b) (5 points) What is the standard deviation of Marcel’s portfolio?
NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST.
Perpetuity
Annuity
Growing perpetuity
Growing annuity
Quadratic formula
ax2 + bx + c = 0 è
Logarithmic rule
ab = c è b = log c / log a
Variance of a sample
Variance of a distribution, with each outcome having the same probability of occurring
Covariance formula
Correlation of A and B
, where SD stands for standard deviation
Variance of a portfolio