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Econ 134 A Test 2

Econ 134 A Test 2. Spring 2016. Based on Form A. Change of beta of 1.25, and change in rate of return of 10%. So change in beta of 1 yields change in rate of return of 10/1.25= 8%. Beta of 1.5, rate of return is 22%. Beta of 1, return of return is 18% (22%-0.5×8%). Q1.

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Econ 134 A Test 2

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  1. Econ 134 A Test 2 Spring 2016 Based on Form A

  2. Change of beta of 1.25, and change in rate of return of 10%. • So change in beta of 1 yields change in rate of return of 10/1.25= 8%. • Beta of 1.5, rate of return is 22%. • Beta of 1, return of return is 18% (22%-0.5×8%). Q1 Stock X has a beta of 1.5 and a rate of return of 22%. Stock Y has a beta of 0.25 and a rate of return of 12%. What is the market rate of return?

  3. Q2 On Apr.1,2015, the Dow Jones was at 17,840.52. On Apr. 1,2005, the Dow Jones was at 10,192.51. What is the geometric average rate of return over this period? 17,840.52/10,192.51=1.750356

  4. Q3 What is the arithmetic average rate of return over this 10-year period? Need year-by-year rates of return to answer, so not enough information to answer

  5. Q4 Little Man Super Blues, Inc. has a known distribution, with a rate of return of 18% two-thirds of the time, and 48% one-third of the time. A risk-free bon always has a 21% rate of return. What is the standard deviation of a portfolio with 50% of each asset?

  6. Q4 s.d of LMSB: Mean=(2/3)×18%+(1/3)×48%=28%. Variance= (1/3)[2(.18-.28)^2+(.48-.28)^2]=.02 s.d= =.141421 Variance of portfolio: (0.5^2)×(.02)+0+(0.5^2)×(0)=0.005 (bond is risk-free, so the covariance is 0) s.d of portfolio: =7.07107%

  7. Q5 A zero-coupon bond will mature in years. The bond currently sells for $500, and will pay the bondholder $1000 on the date of maturity. What is the effective annual rate of return for this bond?

  8. Q6 Blueberry Canyon Muffins, Inc. pays constant dividends every six months forever. The next dividend of $3 will be paid in 9 months. Each subsequent dividend will be 3% higher than the previous dividend. What is the present value of a share of this stock assuming a stated annual interest rate for company is 15%, compounded six times per year? Rate every six months: (1.025^3)-1=7.68906% PV=(1/(1.025^1.5))×(3/(.0768906-0.03)) 

  9. Q7 Secret Silly Sleuth Airlines specializes in transporting celebrities without the press having any knowledge of where the client is. In anticipation of a new set of clients, the executives decide to sell bonds to help fund the purchase of an extra jet. Bonds sell for $100 today, but the face value of the bond is $110. A 5% coupon of the face value is promised twice: One year from today and two years form today. What is the yield to maturity, expressed as an effective annual interest rate?

  10. Q7 100=5.5/(1+r)+115.5/(1+r)^2 Let 1+r=x 100=5.5/x+115.5/x^2 20x^2-1.1x-231=0 X= X=1.102561, -1.0475610(rule out) r=10.2561%

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