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Test 2

Test 2. Spring 2014, 9 am Class. Multiple Choice #1.

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Test 2

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  1. Test 2 Spring 2014, 9 am Class

  2. Multiple Choice #1 Stephanie owns stock in CF134AA, Inc. The stock pays a $10 dividend every year forever, beginning six months from now. Each dividend is 8% higher than the previous one, and the effective annual interest rate is 12%. What is the present value of this stock?

  3. Multiple Choice #2 Stock X and Stock Y are perfectly positively correlated. Stock X has an expected return of 12% and a standard deviation of 14%. Stock Y has an expected return of 18% and a standard deviation of 16%. If a portfolio has a positive % of both stocks, which of the following could be the portfolio standard deviation – 12%, 14%, 15%, 16%, or 18%?

  4. Multiple Choice #2 Any combination of the two stocks must be strictly between the two endpoints, which denote Stock X and Stock Y. This means the portfolio standard deviation, , must fall within . The only option satisfying this is 15%.

  5. Multiple Choice #3 In 2012 the nominal return for large-company stocks was 16% and the Consumer Price Index (CPI) increased by 1.74%. Assuming the CPI represents the inflation rate, what was the real rate of return for large-company stocks in 2012?

  6. Multiple Choice #4 & #5 Badda Star Books stock is currently valued at $50 and acts as a random walk. The value of the stock either goes up by $2 or down by $3 every day. The probability that the value increases is 60%. 4. What is the probability that Badda Star Books will be exactly $49 two days from today? Only two possible outcomes can produce $49 in two days: • the stock goes up, then down; • the stock goes down, then up. ; The total probability of either event occurring:

  7. Multiple Choice #4 & #5 Badda Star Books stock is currently valued at $50 and acts as a random walk. The value of the stock either goes up by $2 or down by $3 every day. The probability that the value increases is 60%. 5. What is the probability that Badda Star Books stock will be higher 3 days from today? Only 4 outcomes produce a higher stock value: 1) Up, Up, Up; 2) Up, Up, Down; 3) Up, Down, Up; 4) Down, Up, Up Individual Probabilities: ; The total probability of any of these events occurring:

  8. Free Response #6 Windy Tree Pizza paid out its annual dividend of $10 earlier today. The annual dividend increases by 15% each of the next 6 years and then remains constant forever. If the effective annual discount rate is 16%, what will be the price of the stock 4 years from today?

  9. Free Response #7 San Hearst Swimming Supplies, Inc. has stock issued with a beta value of 2 and pays dividends of $6 per year forever, starting one year from today. The risk-free rate is 5%, and the rate of return to the market is 8%. What is the present value of this stock? Present Value:

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