Econ 134A Test 2 Fall 2015 Based on Form A.

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Econ 134A Test 2 Fall 2015 Based on Form A

Q1 Mozie Moxy Mac Inc. will pay out its first annual dividend of $5 six months from today. The company will pay dividends forever, and each will be 10% higher than the previous one. What is the present value of this company if the effect annual interest rate is 15%?

Q2 In the fictional country of San Luis Diego, the average bond return was 7.6% in 1953, followed by 7.8% in 1954, and 10.5% in 1955. The average return on stocks in theses 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.

Q3 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 lowest possible standard deviation portfolio possible has a standard deviation of ?

Q4 Three stocks have annual returns of 5%, 10%, and 15%. The standard deviation of this sample is ?

Q5 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?

Q6 Blueberry Canyon muffins, Inc. pays dividends every six months forever. The next dividend will be paid in 4 months. What is the present value of this stock assuming a stated annual interest rate of 15%, compounded five times per year?

Q7 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) 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?

Q7 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%. b) What is the standard deviation of Marcel’s portfolio?