Test 2 – Winter 2017 – Econ 134A (10 am)
March 8, 2017
Test Form C
Name (Please Print) : ______
Seat:______
By signing below, I acknowledge that I have checked photo identification to the people to my immediate left and right, and that the name matches what is listed on the test and scantron. (Students do not need to go across an aisle to check identification.) If a student does not have a photo identification, I will report it to the instructor before the test starts.
I am also aware that I need to bubble in the form letter and my name and perm number on my scantron, and include my name, perm number, and section time on the open response sheet. I am aware that failure to do any of these or not having a photo identification will result in a loss of one point on this test.
Finally, by signing below, I acknowledge that this test will count as part of my course grade. If I fail to turn in the test, a score of zero will be entered.
Name (Please Print):______
Signature______
Econ 134A (10 am lecture)John Hartman
Test 2, Form CMarch 8, 2017
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. An inflation-indexed bond has a real par value of $500. It pays out real coupons of 2% every year, starting one year from today. The bond will mature and pay the final coupon and par value three years from today. If inflation over the next year will be 3%, 7% in the following year, and 6% in the final year before the bond matures, how much will the nominal coupon payment be three years from today?
A. $10B. $11C. $11.30D. $11.70E. $12
2. A bond makes annual coupon payments of $100 one year from today and two years from today. (No other coupon payments will be made.) The bond has a face value of $900 that will be paid two years from today. What is the effective annual yield on the bond if the bond current trades for $800?
A. 8%B. 11%C. 14%D. 18%E. 25%
, where
3. Currently, a company is expected to pay out its next dividend in 5 years, of $2 per share, with annual dividends thereafter. The expected growth rate is 5% per year forever. How much will the value of the stock increase by if the growth rate changes to 8%. Assume an effective annual discount rate of 15%.
A. $9B. $8C. $7D. $6E. $5
Before:
After:
4. Over a ten-year period, the average return on stocks was 10%, the average return on safe (risk-free) assets was 8%, and the standard deviation of stock ownership was 5%. What was the Sharpe ratio over this ten-year period?
A. 2B. 1.6C. 0.8D. 0.4E. 0.2
5. Two stocks (X and Y) have no correlation between their rates of return. Stock X has an expected rate of return of 5% and a standard deviation of 2%. Stock Y has an expected rate of return of 25% and a standard deviation of 10%. The minimum variance point must have a standard deviation of ______.
A. Exactly 0%
B. More than 0% but less than 2%
C. At least 2% but less than 10%
D. At least 10% but less than 25%
E. At least 25%
Must be less than each stock’s SD, but greater than zero. (B)
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. There are 3 known states of the world, A, B, and C. States A and B occur with 40% probability each, and State C occurs with 20% probability. When State A occurs, Stock P has a rate of return of 50% and Stock Q has a rate of return of 0%. When State B occurs, Stock P has a rate of return of –30% and Stock Q has a rate of return of 10%. When State C occurs, Stock P has a rate of return of 20% and Stock Q has a rate of return of 25%.
(a) (3 points) What is the variance of Stock P’s return?
(b) (4 points) What is the covariance of the two stocks? (Hint: You can use the covariance formula as stated but you will need to change the problem to having 5 states of the world, each with 20% probability. An alternative approach is to alter the covariance formula to take weighted averages.)
7. (6 points) Upside Down Country Jackets, Inc. (UDCJ), has stock issued with beta value of 2.5. Currently, the risk-free rate is 8% and the rate of return to the market (as defined in class) is 14%. Dividends of $2 per year will be paid forever by UDCJ, starting later today. What is the present value of the stock?
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
Logarithmic rule
ab= c 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