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problems, reference materials, practice exams, textbook help and tutor support. 13 CHAPTER REAL OPTIONS True/False Easy: 1 . (13.1) Real options Answer: a EASY Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project's cash flows. a. True b. False (13.1) Real options Answer: b EASY Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds. a. True b. False (13.1) Real options Answer: a EASY The option to abandon a project is a real option, but a call option on a stock is not a real option. a. True b. False (13.2) Real options Answer: b EASY Real options are most valuable when the underlying source of risk is very low. a. True b. False (13.2) Real options Answer: b EASY Real options affect the size, but not the risk, of a project's expected cash flows. a. True b. False 2 . 3 . 4 . 5 . Chapter 13: Real Options True/False Page 187 Multiple Choice: Conceptual Easy: 6 . (13.2) Investment timing option Answer: e EASY Commodore Corporation is deciding whether to invest in a project today or to postpone the decision until next year. The project has a positive expected NPV, but its cash flows could be less than expected, in which case the NPV could be negative. No competitors are likely to invest in a similar project if Commodore decides to wait. Which of the following statements best describes the issues that Commodore faces when considering this investment timing option? a. The investment timing option does not affect the cash flows and will therefore have no impact on the project's risk. b. The more uncertainty about the future cash flows, the more logical it is for Commodore to go ahead with this project today. c. Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if it chooses to wait a year. d. Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV. e. Waiting would probably reduce the project's risk. (Comp: 13.1-13.4) Real options Answer: c EASY Which one of the following is an example of a "flexibility" option? a. A company has an option to invest in a project today or to wait a year. b. A company has an option to close down an operation if it turns out to be unprofitable. c. A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change. d. A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date. e. A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial. 7 . Medium (13.2) Real options Answer: d MEDIUM Which of the following will NOT increase the value of a real option? a. b. c. d. e. Lengthening the time in which a real An increase in the volatility of the An increase in the risk-free rate. An increase in the cost of obtaining A decrease in the probability that a market of the project in question. option must be exercised. underlying source of risk. the real option. competitor will enter the Answer: c MEDIUM 10 . (13.2) Real options Which of the following is most CORRECT? a. Real options change the size, but not the risk, of projects' expected cash flows. b. Real options change the risk, but not the size, of projects' expected cash flows. c. Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows. d. Very few projects actually have real options. e. Real options are less valuable when there is a lot of uncertainty about the true values future sales and costs. (13.4) Real options Answer: a MEDIUM Lighthouse Corporation uses the NPV method for selecting projects, and it does a reasonably good job of estimating projects' sales and costs. However, it never considers real options that might be associated with projects. Which of the following statements is most likely to describe its

situation? a. Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account. b. Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options. c. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget. d. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget. e. Real options should not have any effect on the size of the optimal capital budget. 11 . Chapter 13: Real Options Conceptual Questions Page 189 Multiple Choice: Problems Medium: (Problems 12 and 13 must be kept together. 12 Use 13 only if 12 is also used.) . (13.3) Decision tree: expected NPV Answer: d MEDIUM Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, and then selling the successful ones to major oil refining companies. TWI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. t = 0. A $400 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t = 1. If the feasibility study indicates good potential, the firm would spend $1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. t = 2. If the exploratory wells test positive, TWI would go ahead and spend $10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. t = 3. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then only receiving a $10,000 inflow. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? a. b. c. d. e. $336.15 $373.50 $415.00 $461.11 $507.22 13 . (13.3) Decision tree: SD and CV Answer: c MEDIUM In the previous problem you were asked to find the expected NPV of a project TWI is considering. Use the same data to calculate the project's coefficient of variation. (Hint: Use the expected NPV as found in Problem 12.) a. b. c. d. e. 5.87 6.52 7.25 7.97 8.77 Problems Chapter 13: Real Options Page 190 (Problems 14 and 15 must be kept together. 14 Use 15 only if 14 is also used.) . (13.3) Investment timing option, decision trees Answer: d MEDIUM Nebraska Pharmaceuticals Company (NPC) is considering a project that has an up-front cost at t = 0 of $1,500. (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved. NPC is considering whether to make the investment today or to wait a year to find out about the FDA's

decision. If it waits a year, the project's up-front cost at t = 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today? a. b. c. d. e. $77.23 $85.81 $95.34 $105.94 $116.53 15 . (13.3) Timing option, effect of delay on CV Answer: a MEDIUM In the previous problem you found the benefit from delaying an investment decision. Now use the same data to calculate the effect of waiting on the project's risk. By how much will delaying reduce the project's coefficient of variation? (Hint: Use the expected NPV as found in Problem 14.) a. b. c. d. e. 2.23 2.46 2.70 2.97 3.27 Chapter 13: Real Options Problems Page 191 Multi-part: (The following data apply to Problems 16 and 17. together.) The problems MUST be kept Diplomat.com is considering a project that has an up-front cost $3 of million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project's cost of capital is 10%. (13.3) Project NPV-nonalgorithmic Answer: b Based on the above data, what is the project's net present value? a. b. c. d. e. -$1,312,456 -$1,104,607 -$875,203 $105,999 $321,788 EASY 16 . 17 . (13.3) Growth option--nonalgorithmic Answer: c MEDIUM If Diplomat goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a net present value of -$6 million at t = 5. Diplomat.com does not have to decide today whether it wants to pursue the additional opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project, after consideration of the potential future opportunity? a. b. c. d. e. $1,104,607 -$875,203 $199,328 $561,947 $898,205 The problems MUST be kept (The following data apply to Problems 18 and 19. together.) Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%. Page 192 Problems Chapter 13: Real Options 18 . (13.3) Project NPV--nonalgorithmic Answer: a Based on the above information, what is the F200's expected net present value? a. b. c. d. e. -$6,678 -$3,251 $15,303 $20,004 $45,965 EASY 19 . (13.3) Abandonment option--nonalgorithmic Answer: e MEDIUM Now assume that one year from now OI will know if the F-100 has become the industry standard. Also assume that after receiving the cash flows at t = 1, OI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option? a. b. c. d. e. $0 $2,075 $4,067 $8,945 $10,745 Chapter 13: Real Options Problems Page 193 CHAPTER 13 ANSWERS AND SOLUTIONS Page 194 Answers Chapter 13: Real Options 1 2. 3. 4. 5. 6. .

(13.1) Real options (13.1) Real options (13.2) Real options (13.2) Real options (13.2) Investment timing option (13.1) Real options Answer: a EASY Answer: b Answer: a Answer: b Answer: b Answer: e EASY EASY EASY EASY EASY By having the ability to wait and see you reduce the risk of the project. Therefore, statement a is false. The greater the uncertainty, the more value there is in waiting for additional information before going on with a project. Therefore, statement b is false. Statements c and d are not necessarily true. By waiting to do a project you may lose strategic advantages associated with being the first competitor to enter a new line of business, which may alter the cash flows. Since statements a, b, c, and d are false, the correct choice is statement e. 7. (Comp: 13.1-13.4) Real options Answer: c EASY Statements a, b, c, and d are all examples of different types of real options. A flexibility option permits the firm to alter operations depending on how conditions change during the life of the project. Typically, either inputs or outputs, or both, can be changed. Statement a is an example of an investment timing option, while statement b is an example of an abandonment option. Statement c is an example of a flexibility option, statement d is an example of a growth option, and statement e is not really a real option at all. Therefore, statement c is the correct choice. 8 9 10 . . . 11. (13.4) Real options (13.1) Real options Answer: b MEDIUM (13.2) Real options Answer: d MEDIUM (13.2) Real options Answer: c MEDIUM Answer: a MEDIUM By failing to consider real options, the firm's capital budget would probably be too small. The firm might well reject projects that would be seen to have positive expected NPVs if real options had been considered. Therefore, the correct choice is statement a. 12. (13.3) Decision tree: expected NPV Answer: d MEDIUM Cost of capital: 20% Invest this period: 0 80% -$400 20% Invest this period: 1 -$1,000 40% $0 Invest this period: 2 50% 60% -$10,000 50% $0 CF this period: 3 $25,000 $10,000 Possible NPVs* 6,289.81 Joint Prob.** Product 24% $1,509.56 -$573.78 -$394.67 -$80.00 $461.11 -2,390.74 24% -1,233.33 32% -400.00 20% Expected NPV = *Here are the cash flows of the four potential outcomes. Find the potential outcomes' NPVs as the PVs of these cash flows, discounted at the 20% cost of capital: 0 1 2 3 NPV NPV-1 = -$400 -$1,000 -$10,000 $25,000 $6,289.81 NPV-2 = -$400 -$1,000 -$10,000 $10,000 -$2,390.74 NPV-3 = -$400 -$1,000 $0 $0 -$1,233.33 NPV-4 = $400 $0 $0 $0 -$400.00 **Joint probabilities: Probs 1 and 2 = 0.8 0.6 0.5 = 0.24; Prob 3 = 0.8 0.4 = 0.32; Prob 4 = 0.2. 13. (13.3) Decision tree: SD and CV Answer: c MEDIUM The CV = SD/Expected NPV. Students can use the Expected NPV as found in Problem 12. Prob. 0.24 0.24 0.32 0.20 1.00 NPV $6,289.81 -$2,390.74 -$1,233.33 -$400.00 $461.11 NPVi E(NPV) $5,829 $2,852 -$1,694 -$861 Squared deviation $33,973,787 $8,133,059 $2,871,142 $741,512 Variance Standard deviation CV Squared dev. times probability $8,153,709 $1,951,934 $918,765 $148,302 $11,172,711 $3,342.56 7.25 14. (13.3) Investment timing option, decision trees Answer: d MEDIUM Cost of capital: 10% Invest immediately: 0 1 75% Good $500 -$1,500 25% Bad $25 2 $500 $25 3 $500 $25 4 $500 $25 5 $500 $25 6 $500 7 $500 Product: NPV* NPV Prob $934.21 $700.66 $25 $25 -$1,378.29 -$344.57 Expected NPV if Go Now: $356.08 Product: NPV* NPV Prob $616.03 $462.02 $ 0.00 $462.02 $105.94 Delay, then invest in period 1 if the outlook is good: 0 75% Good 25% Bad 1 -$1,500 $0 $0 $0 $0 $0 $0 $0.00 Expected NPV if Wait: 2 $500 3 $500 4 $500 5 $500 6 $500 7 $500 Increase in expected NPV from waiting: NPV Wait NPV Go Now = *The NPV under the delay option occurs one year later, so it must be discounted back to t = 0 at the cost of capital to make the NPVs comparable. The figure shown in the delay tree is after discounting. 15. (13.3) Timing option, effect of delay on CV Answer: a MEDIUM The CV = SD / Expected NPV. Students can use the Expected NPV as found in Problem 14. Invest immediately: Prob. 0.75 0.25 1.00 NPV $934.21 -$1,378.29 $356.08 NPVi E(NPV) $578 -$1,734 Squared deviation $334,228 $3,008,054 Variance Standard deviation CV

Squared dev. times probability $250,671 $752,013 $1,002,685 $1,001.34 2.81 Squared dev. times probability $17,789 $53,366 $71,154 $266.75 0.58 2.23 Delay, then invest in period 1 if the outlook is good: Prob. 0.75 0.25 1.00 NPV $616.03 $0.00 $462.02 NPVi E(NPV) $154 $462 Squared deviation $23,718 $213,463 Variance Standard deviation CV Reduction in the CV due to waiting Note that the problem implicitly assumes that the project is riskless if it is delayed. This is, of course, unrealistic. Note also that a lower cost of capital should be used to find the NPV of the Go Now decision than the Wait decision. The appropriate cost of capital is often lowered by the existence of real options. 16. (13.3) Project NPV--nonalgorithmic Answer: b EASY Find the project's NPV using a financial calculator and entering the following data inputs: CF0 = -3,000,000; CF1-5 = 500,000; I/YR = 10; and then solve for NPV = -$1,104,607. 17. (13.3) Growth option Answer: c MEDIUM 0 1 r = 10% | | -3,000,000 500,000 NPV = 1,104,607 +1,303,935 $ 199,328 2 | 500,000 3 | 500,000 4 | 500,000 5 | 500,000 NPV = +6,000,000 (35%) NPV = -6,000,000 (65%) Step 1: Find the NPV at t = 0 of the first project: Enter the following data inputs in the financial calculator: CF0 = -3,000,000; CF1-5 = 500,000; I/YR = 10; and then solve for NPV = -$1,104,607. Step 2: Find the NPV at t = 0 of the new projects: If at t = 5 the firm's technology is not successful, the firm will choose not to do the additional projects (since their NPV is -$6,000,000). Therefore, the NPV at t = 5 is calculated as 0.35($6,000,000) + 0.65($0) = $2,100,000. However, this is the NPV at t = 5, so we need to discount this NPV to find the NPV of the additional projects today. Enter the following data inputs in the financial calculator: N = 5; I/YR = 10; PMT = 0; FV = 2,100,000; and then solve for PV = $1,303,935. Step 3: Find the NPV of the entire project considering its future opportunities: -$1,104,607 + $1,303,935 = $199,328. 18. (13.3) Project NPV--nonalgorithmic Answer: a EASY Step 1: Find the project's expected cash flows in Years 1 through 5: (0.5)($110,000) + (0.5)($25,000) = $67,500. Step 2: Find the project's NPV by entering the following data inputs in the financial calculator: CF0 = -250,000; CF1-5 = 67,500; I/YR = 12; and then solve for NPV = -$6,678. 19. (13.3) Abandonment option--nonalgorithmic No abandonment: Yr. 0 1 | 110,000 25,000 2 | 110,000 25,000 3 | 110,000 25,000 4 | 110,000 25,000 5 | 110,000 25,000 Prob 0.5 0.5 NPV $146,525 159,881 Prob NPV $73,263 - 79,941 Answer: e MEDIUM 0.5 -250,000 0.5 E(NPV) = $ -6,678 Abandonment: Yr. 0 1 | 110,000 125,000 2 | 110,000 3 | 110,000 4 | 110,000 5 | 110,000 Prob 0.5 0.5 NPV $146,525 -138,393 Prob NPV $73,263 - 69,196 0.5 -250,000 0.5 E(NPV) = $ 4,067 Value of Abandonment = $4,067 (-$6,678) = $10,745 Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education. Below is a small sample set of documents: INART 115 NY Film >> INART >> 115 (Spring, 2010) INART 115: THE POPULAR ARTS IN AMERICA POPULAR MUSIC The Popular Music Forum: Assignment #1 A Position Paper on The Future of Popular Music. To be followed by a Response Paper NOTE: This assignment is to be a minimum of 500 words in length and due no late... cvpr01_segmentation ull.edu >> MATH >> CS715 (Spring, 2010)

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1 Answers to the Sept 08 macro prelim - Long Questions1. Suppose that a representative consumer receives an endowment of a non-storable consumption good. The endowment evolves exogenously according to ln Ct = + ln Ct1+ "t ;(1)where is the difference ... prelims_Macro Prelim July 2005 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: July 5, 2005 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions.Short Answer Questions - Keep your answers shor... prelims_Macro Prelim July 2006 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: July 3, 2006 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions. Part 1 collectively counts for 25 percent of th... prelims_Macro Prelim July 2007 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: July 2, 2007 Time: 5 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions. SHORT QUESTIONS (Each question is worth 10 poin... prelims_Macro Prelim June 2004 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: June 28, 2004 Time: Four Hours Reading Time: 20 minutesPreliminary Examination for the Ph. D. DegreeDirections: Answer all questions. Note that, while you have four hours for t... prelims_Macro Prelim June 2008 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: June 30, 2008 Time: 5 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions.Short Answer Questions - Keep your answers sho... prelims_Macro Prelim Sept 2004 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: September 9, 2004 Time: Four Hours Reading Time: 20 minutesPreliminary Examination for the Ph. D. DegreeDirections: Answer all questions. Note that, while you have four hours f... prelims_Macro Prelim Sept 2005 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: September 8, 2005 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions; the weights for each question are given in... prelims_Macro Prelim Sept 2006 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MacroeconomicsDate: September 7, 2006 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions. Part 1 collectively counts for 25 percent ... prelims_Macro Prelim Sept 2007 UC Davis >> ECON >> 200D (Winter, 2006)

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... prelims_Micro Prelim ANSWERS Sept 2004 UC Davis >> ECON >> 200D (Winter, 2006) Answer Key, Question 2 2(a). There is a production externality, because the physical cost of firm i depends on theaggregate output q =N j =1q j through the term (q i + q -i ) . The parameter reflects theexternality. If > 0, then the externality is neg... prelims_Micro Prelim ANSWERS Sept 2005 UC Davis >> ECON >> 200D (Winter, 2006) MICROECONOMIC THEORY PRELIM FALL 2005 ANSWER KEYQUESTION 1Throughout this question we assume that consumers have preferences over the quantities of two market goods, x1 > 0 and x2 > 0, as well as the size g > 0 of a park. A consumer has no control over ... prelims_Micro Prelim August 2006 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: August 31, 2006 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE=Please answer four of the following equally weighted five questions1. Variat... prelims_Micro Prelim August 2007 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Agricultural and Resource Economics Department of Economics MicroeconomicsDate: August 30, 2007 Time: 5 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREEPlease answer four of the fo... prelims_Micro Prelim August 2008 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of EconomicsDate: August 28, 2008 Time: 5 hoursMicroeconomicsReading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Answer FOUR questions Question 1.L+ (a). Let P the set of relevant priceweal... prelims_Micro Prelim June 2004 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: June 21, 2004 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREEThis exam is designed to be done in 3 hours. The extra 1 hour is intended to rem... prelims_Micro Prelim June 2005 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: June 27, 2005 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE=Please answer four of the following five questions 1. Choice with status-quo bi... prelims_Micro Prelim June 2006 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: June 26, 2006 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREEQuestion 1. Fancy scotch in Scotland and in AustraliaIs the ratio of fancy scot... prelims_Micro Prelim June 2007 UC Davis >> ECON >> 200D (Winter, 2006)

... prelims_Micro Prelim June 2008 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of EconomicsDate: June 23, 2008 Time: 5 hoursMicroeconomicsReading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Answer FOUR questions Question 1. A consumer with wealth w buys goods 1 and 2 in... prelims_Micro Prelim Sept 2004 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: September 2, 2004 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREEPLEASE ANSWER FOUR QUESTIONS (OUT OF FIVE)Question 1. In this question we c... prelims_Micro Prelim Sept 2005 UC Davis >> ECON >> 200D (Winter, 2006)

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support. 5 CHAPTER RISK AND RETURN: EXTENSIONS (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: Beta coefficient 1. Answer: a Diff: E If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False Beta coefficient 2. Answer: b Diff: E A stock with a beta equal to -1.0 has zero systematic (or market) risk. a. True b. False Beta coefficient 3. Answer: a Diff: E It is possible for a firm to have a positive beta, even if the correlation between the returns of it and another firm are negative. a. True b. False Linearity and beta 4. Answer: a Diff: E In estimating a security's beta coefficient, the rise-over-run calculation results in a ratio. If all the observation points for the security's returns and the market's returns do not fall on a straight line then the ratio is subject to change. a. True b. False SML 5. Answer: a Diff: E The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line are not controllable by the financial manager. a. True b. False Chapter 5 - Page 1 Chapter 5 - Page 2 SML 6. Answer: b The slope of the SML is determined by the value of beta. a. True b. False Diff: E SML 7. Answer: a Diff: E If you plotted the returns of Selleck and Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future. a. True b. False Portfolio risk 8. Answer: a Diff: E In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data. a. True b. False Medium: CAPM 9. Answer: b Diff: M The Capital Asset Pricing Model (CAPM) is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk. a. True b. False Portfolio beta 10. Answer: b Diff: M We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. a. True b. False SML 11. Answer: b Diff: M The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average (b = 1)

stock is zero. a. True b. False Chapter 5 - Page 3 Risk aversion 12. Answer: a Diff: M If investors are risk averse, we can conclude that the required rate of return associated with an asset held in isolation whose standard deviation is 0.21 will be greater than the return required on an asset whose standard deviation is 0.10. However, if assets are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock. a. True b. False Arbitrage Pricing Theory 13. Answer: b Diff: M Arbitrage Pricing Theory is based on the premise that more than one factor affects stock returns. The factors are (1) market returns, (2) dividend yield, and (3) changes in inflation. a. True b. False Multiple Choice: Conceptual Easy: Risk aversion 14. You have developed the following data on three stocks: Stock A B C Standard Deviation 0.15 0.25 0.20 Beta 0.79 0.61 1.29 Answer: b Diff: E As a risk minimizer, you would choose Stock if held in isolation and Stock if held as part of a well-diversified portfolio. a. b. c. d. e. A; A; B; C; C; A. B. C. A. B. Chapter 5 - Page 4 Risk measures 15. Answer: d Diff: E Which Which is the best measure of risk for an asset held in isolation? is the best measure for an asset held in a diversified portfolio? a. b. c. d. e. Variance; correlation coefficient. Standard deviation; correlation coefficient. Beta; variance. Coefficient of variation; beta. Beta; beta. Answer: c Beta coefficient 16. Diff: E Which of the following is not a difficulty concerning beta and its estimation? a. Sometimes a security or project does not have a past history which can be used as a basis for calculating beta. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta. c. The beta of an "average stock," or "the market," can change over time, sometimes drastically. d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. e. All of the statements above are potentially serious problems. Beta coefficient 17. Answer: d Diff: E Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.) a. When held in isolation, Stock A has greater risk than Stock B. b. Stock B would be a more desirable addition to a portfolio than Stock A. c. Stock A would be a more desirable addition to a portfolio than Stock B. d. The expected return on Stock A will be greater than that on Stock B. e. The expected return on Stock B will be greater than that on Stock A. Chapter 5 - Page 5 Portfolio risk and return 18. Answer: c Diff: E In a portfolio of three different stocks, which of the following could not be true? a. The riskiness of the portfolio is less than the riskiness of each of the stocks held in isolation. b. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks. c. The beta of the portfolio is less than the beta of each of the individual stocks. d. The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas. e. None of the above (i.e., they all could be true, but not necessarily at the same time). Medium: Beta coefficient 19. Answer: d Diff: M You have developed data which give (1) the average annual returns of the market for the past five years and (2) similar information on Stocks A and B. If these data are as follows, which of the possible answers best describes the historical beta for A and B? Years 1 2 3 4 5 a. b. c. d. e. bA bA bA bA bA > > = < < 0; bB = 1. +1; bB = 0. 0; bB = 1. 0; bB = 0. -1; bB = 1. Answer: a Diff: M Market 0.03 -0.05 0.01 -0.10 0.06 Stock A 0.16 0.20 0.18 0.25 0.14 Stock B 0.05 0.05 0.05 0.05 0.05 Market equilibrium 20. For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels), a. The expected rate of return must be equal to the required rate of ^ r. return; that is, r b. The past realized rate of return must be equal to the expected rate ^ of return; that is, r r. c. The required rate of return must equal the realized rate of return; that is, r r . d. All three of the above statements must hold for equilibrium to exist; ^ that is, r r r . e. None of the above statements is

correct. Chapter 5 - Page 6 CML 21. Which of the following statements is most correct? Answer: e Diff: M a. The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio. ^ b. The slope of the CML is ( r M rRF)/bM. c. All portfolios that lie on the CML to the right of are M inefficient. d. All portfolios that lie on the CML to the left of M are inefficient. e. None of the above statements is correct. Characteristic line 22. Which of the following statements is most correct? a. "Characteristic line" is another name for the Security Market Line. b. The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. c. The slope of the characteristic line is the stock's standard deviation. d. The distance of the plot points from the characteristic line is a measure of the stock's market risk. e. The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk. Tests of the CAPM 23. Which of the following statements is most correct? a. Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. b. Richard Roll has argued that it is not even possible to test the CAPM to see if it is correct. c. Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is less than that predicted by the CAPM. d. Statements a and b are correct. e. Statements a, b, and c are correct. Answer: e Diff: M Answer: e Diff: M Chapter 5 - Page 7 Beta calculation 24. Which of the following statements is most correct? a. The typical portfolio is b. The typical portfolio is c. The typical portfolio is d. The typical portfolio is e. The typical portfolio is Fama-French Model 25. R2 for a stock about 0.3. R2 for a stock about 0.6. R2 for a stock about 0.94. R2 for a stock about 0.94. R2 for a stock about 0.6. Answer: c Diff: M is about 0.3 and the typical R2 for a is about 0.94 and the typical R2 for a is about 0.3 and the typical R2 for a is about 0.94 and the typical R2 for a is about 0.6 and the typical R2 for a Answer: a Diff: M Which of the following are the factors for the Fama-French model? a. The excess market return, a size factor, and a book-to-market factor. b. The excess market return, a debt factor, and a book-to-market factor. c. The excess market return, a size factor, and a debt. d. A debt factor, a size factor, and a book-to-market factor. e. The excess market return, an industrial production factor, and a book-to-market factor. Multiple Choice: Problems Easy: Portfolio beta 26. Answer: b Diff: E You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.0) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.0). What is the new beta of the portfolio? a. b. c. d. e. 1.12 1.17 1.22 1.10 1.02 Chapter 5 - Page 8 Portfolio return 27. Answer: b Diff: E You are an investor in common stock and currently hold a welldiversified portfolio which has an expected return of 12 percent with a beta of 1.2. You plan to buy 100 shares of AT&E at $10 a share. AT&E has an expected return of 20 percent with a beta of 2.0. The total value of your current portfolio is $9,000. What will be the expected return and beta of the portfolio after the purchase of the new stock? a. b. c. d. e. rp rp rp rp rp = = = = = 20.0%; 12.8%; 12.0%; 13.2%; 14.0%; bp bp bp bp bp = = = = = 2.00 1.28 1.20 1.40 1.32 Answer: d Diff: E Required return 28. Calculate the required rate of return for Mercury, Inc., assuming that investors expect a 5 percent rate of inflation in the future. The real risk-free rate is equal to 3 percent and the market risk premium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5 years. a. b. c. d. e. 15% 16% 17% 18% None of the above Medium: Required return 29. Answer: c Diff: M You are holding a stock which is currently in equilibrium. The required rate of return on the stock is 15 percent when the required return on an average stock is 10 percent. What will be the percentage change in the required return on the stock if the required return on an average stock

increases by 30 percent while the risk-free rate is unchanged? Your stock has a beta of 2. a. b. c. d. e. +20% +30% +40% +50% +60% Chapter 5 - Page 9 Required return 30. Answer: c Diff: M Consider the following information and then calculate the required rate of return for the Scientific Investment Fund. The funds' assets are as follows: Stock A B C D Investment $ 200,000 300,000 500,000 1,000,000 Beta 1.50 -0.50 1.25 0.75 The market required rate of return is 15 percent and the risk-free rate is 7 percent. a. b. c. d. e. 14.3% 15.0% 13.1% 12.7% 10.3% Answer: c Diff: M Required return 31. Oakdale Furniture, Inc. has a beta coefficient of 0.7 and a required rate of return of 15 percent. The market risk premium is currently 5 percent. If we expect the inflation premium to increase by 2 percentage points and Oakdale to acquire assets which will increase its beta by 50 percent, what will be Oakdale's new required rate of return? a. b. c. d. e. 13.50% 22.80% 18.75% 15.25% 17.00% Answer: d Diff: M Market return 32. The returns of United Railroad, Inc. (URI) are listed below, along with the returns on the market: Year 2000 2001 2002 2003 2004 URI -14% 16 22 7 -2 Market -9% 11 15 5 -1 If the risk-free rate is 9 percent and the required return on URI's stock is 15 percent, what is the required return the on market? Assume the market is in equilibrium. (Hint: Think rise over run.) a. 4% b. 9% c. 10% d. 13% Chapter 5 - Page 10 e. 16% Beta and base year sensitivity 33. Answer: a Diff: M Given the following returns on Stock Q and "the market" during the last three years, what is the difference in the calculated beta coefficient of Stock Q when Year 1 and Year 2 data are used as compared to Year 2 and Year 3 data? Year 1 2 3 a. b. c. d. e. 9.17 1.06 6.23 0.81 0.56 Diff: T Stock Q 6.30% -3.70 21.71 Market 6.10% 12.90 16.20 Portfolios and risk 34. Assume an economy in which there are three securities: Stock A with r A = 10 percent and A = 10 percent; Stock B with rB = 15 percent and B = 20 percent; and a riskless asset with rRF = 7 percent. Stocks A and B are uncorrelated (rAB = 0). a. Develop a graph of the feasible and efficient set of portfolios of risky assets. Show your work, and make a precise graph. b. Now add to the graph the Capital Market Line (CML). c. Finally, show on your graph the indifference curve of an investor who has a relatively low degree of risk aversion. What are r p and p for this investor as read from your graph? (Different students will use different indifference curves, hence get different values of rp and p.) Portfolios and risk 35. Security A has an expected return of 12.4 percent deviation of 15 percent, and a correlation with the Security B has an expected return of 0.73 percent deviation of 20 percent, and a correlation with the The standard deviation of rM is 12 percent. Diff: T with a standard market of 0.85. with a standard market of -0.67. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? No calculations are necessary to answer this question; it is easy. b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6 percent, what is the value of rM? Chapter 5 - Page 11 Portfolios and risk 36. Diff: T You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10 percent, and The X = 5 percent. expected return for Y is 12 percent, and = 6 percent. The Y correlation coefficient, rXY is 0.75. a. Calculate rp and p for 100 percent, 75 percent, 50 percent, 25 percent, and 0 percent in Stock X. b. Use the values you calculated for rp and p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 11 percent. c. Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios? d. Suppose rM = 12 percent, M = 4 percent, and rRF = 6 percent. What would be the required and expected return on a portfolio with P = 10 percent? e. Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 0.9. Use this information, along with data

given previously, to determine Stock X's and Stock Y's beta coefficients. f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium? Efficient portfolios 37. Diff: T Stock A has an expected return rA = 10 percent and A = 10 percent. Stock B has rB = 14 percent and B = 15 percent. rAB = 0. The rate of return on riskless assets is 6 percent. a. Construct a graph that shows the feasible and efficient sets, giving consideration to the existence of the riskless asset. b. Explain what would happen to the CML if the two stocks had (a) a positive correlation coefficient or (b) a negative correlation coefficient. c. Suppose these were the only three securities (A, B, and riskless) in the economy, and everyone's indifference curves were such that they were tangent to the CML to the right of the point where the CML was tangent to the efficient set of risky assets. Would this represent a stable equilibrium? If not, how would an equilibrium be produced? Chapter 5 - Page 12 CHAPTER 5 ANSWERS AND SOLUTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Beta coefficient Beta coefficient Beta coefficient Linearity and beta SML SML SML Portfolio risk CAPM Portfolio beta SML Risk aversion Arbitrage Pricing Theory Risk aversion Risk measures Beta coefficient Beta coefficient Portfolio risk and return Beta coefficient Market equilibrium CML Characteristic line Tests of the CAPM Answer: e Answer: e Diff: M Diff: M Answer: a Answer: b Answer: b Answer: d Answer: c Answer: d Answer: c Answer: d Answer: a Diff: M Diff: M Diff: E Diff: E Diff: E Diff: E Diff: E Diff: M Diff: M Answer: a Answer: b Answer: b Diff: E Diff: M Diff: M Answer: a Answer: b Answer: a Answer: a Diff: E Diff: E Diff: E Diff: E Answer Answer Answer Answer Answer Chapter 5 - Page 13 24. 25. 26. Beta calculation FamaFrench Model Portfolio beta Answer: c Answer: a Answer: b Diff: M Diff: M Diff: E Before: 1.12 = 0.95(bR) + 0.05(1.0); 0.95(bR) = 1.07; bR = 1.13. After: bP = 0.95(bR) + 0.05(2.0) = 1.07 + 0.10 = 1.17. 27. Portfolio return Answer: b Diff: E ^ rp 28. 0.9 12%) ( 0.1 20%) ( 12.8%; bp 0.9 1.2 ( ) 0.1 2.0 ( ) 1.28. Answer: d Diff: E Required return rRF = r* + IP = 3% + 5% = 8%. rs = 0.08 + (0.05)2.0 = 18%. Answer: c Diff: M 29. Required return Step 1: Step 2: Step 3: 15% = rRF + (10% - rRF)2; 15% = rRF + 20% - 2rRF; rRF = 5%. rM increases by 30%, so rM = 1.3(10%) = 13%. rs = 5% + (13% - 5%)2 = 21%; 21% 15% = 40%. 15% 30. Required return Stock A B C D Weight 0.10 0.15 0.25 0.50 Answer: c Diff: M b = (0.10)1.5 + (0.15)(-0.5) + (0.25)1.25 + (0.50)0.75 = 0.7625. rs = 7% + (15% - 7%)0.7625 = 13.1%. 31. Required return Before: 15% = rRF + (5%)0.7; rRF = 11.5%. After: rs = 13.5% + (5%)1.05 = 18.75%. 32. Market return b = Rise = Run 22 Y = 15 X 16 6 = = 1.5; rs = 15%. 11 4 Answer: c Diff: M Answer: d Diff: M 15% = 9% + (rM - 9%)1.5; 6% = (rM - 9%)1.5; 4% = rM - 9%; rM = 13%. Chapter 5 - Page 14 33. Beta and base year sensitivity Answer: a Diff: M Year 1-Year 2 data: Rise/Run = (Y1 - Y0)/(X1 - X2) = (-3.7% - 6.30%)/(12.90% - 6.10%) = -10.0%/6.8% beta = 1.47. Year 2-Year 3 data: beta = (21.71% - (-3.70%))/(16.20% - 12.90%) = 25.41%/3.3% = 7.70. Difference: betaY2-Y3 - betaY1-Y2 = 7.70 - (-1.47) = 9.17. 34. kp p (%) (%) 15 14 13 12 11 10 9 8 7 Portfolios and risk CML Diff: T r 2 4 6 8 10 12 14 16 18 20 p (%) Percent A _________ 100 75 50 25 0 Percent B _________ 0 25 50 75 100 rp ______ 10.00% 11.25 12.50 13.75 15.00 ______ 10.00% 9.01 11.18 15.20 20.00 p rp = xrA + (1 - x)rB. p x2 AB 2 A 1 x 2 2 B 2x 1 x AB A B . But p = 0, so, 2 A x2 1 x2 2 B . p For our investor, rp = 14.75% and = 14.25%. Chapter 5 Page 15 35. Portfolios and risk Diff: T a. The very fact that rA > rB indicates that Security A is regarded by investors as the more risky one. This occurs because Security B has a negative covariance with the market--holding B in a diversified portfolio lowers the riskiness of the portfolio. Although it is not necessary for answering the question, one could use the data to calculate covariances for A and B: Cov(rA,rM) = where A,M A,M A,M A M, = Correlation of

A's return with the market return = 0.85. = Standard deviations respectively. of returns of A and the market, Cov(rA,rM) = 0.85(0.15)(0.12) = 0.0153. Cov(rB,rM) = B,M B M = 0.67(0.20)(0.12) = -0.01608. Security A's contribution to the portfolio risk is, therefore, higher than that of B. In a single-asset portfolio, the security's risk is measured by the variance of its returns. VarianceA = VarianceB = 2 A = (0.15)2 = 0.0225, and = (0.20)2 = 0.04. 2 B Thus, in a single-asset portfolio, B is riskier than A, but in a diversified (CAPM) portfolio, A is riskier. b. Beta coefficients of A and B are calculated as follows: bA Cov rA , rM 2 M A,M A 2 M M 0.0153 0.12 2 1.0625 . bB Cov rB, rM 2 M 0.01608 0.12 2 1.1167 . c. The value of rM is calculated from the CAPM equation: rsA = rRF + (rM - rRF)bA. Therefore, 1.0625rM = 12.4% 6% + 6.375% = 12.775%. 12.02%. A similar solution could be obtained by applying the CAPM equation to Chapter 5 - Page 16 rM = 12.775%/1.0625 = 12.4% = 6% + (rM 6%)1.0625. Security B. 36. Portfolios and risk Diff: T Expected Portfolio Return, kp rp (%) 13.0 12.0 11.0 10.0 B C A D Efficient Set (BCDE) E Attainable Set 1 2 3 4 5 6 7 Portfolio Risk, p(%) a. rp = x(rX) + (1 x)(rY) x rX + (1 - x) rY = rp ______________________________________________ 1.00 0.75 0.50 0.25 0.00 2 p 10% 10 10 10 10 2 X 0.00 0.25 0.50 0.75 1.00 2 2 Y 12% 12 12 12 12 x cov XY 10.0% 10.5 11.0 11.5 12.0 x2 1 X Y x 2x 1 covXY = rXY = (0.75)(0.05)(0.06) = 0.00225. At 100% Stock X: p 1.00 2 0.05 2 0.0025 0.05. At 75% Stock X: p 0.75 2 0.05 2 0.00141 0.25 2 0.06 2 0.000225 2 0.75 0.25 0.00225 0.002479 0.04979 . 0.000844 At 50% Stock X: p 0.50 2 0.05 0.000625 2 0.50 2 0.06 0.0009 2 2 0.50 0.50 0.00225 0.00265 0.05148 . 0.001125 At 25% Stock X: Chapter 5 - Page 17 p 0.25 2 0.05 2 0.000156 0.75 2 0.06 2 0.002025 2 0.25 0.75 0.00225 0.003025 0.055 . 0.000844 At 0% Stock X: p 1.0 2 0.06 2 0.0036 0.06. b. Portfolio _________ A B C D E Percent in X ____________ 100% 75 50 25 0 Percent in Y ____________ 0% 25 50 75 100 rp ______ 10.0% 10.5 11.0 11.5 12.0 p ______ 5.00% 4.98 5.15 5.50 6.00 The segment BCDE is efficient. The segment BAE is not efficient. c. With the addition of a riskless asset, a new portfolio can be created which combines risk-free and risky assets. Now investors will choose combinations of the market portfolio and the riskless asset. If borrowing is permitted, then less risk-averse investors will move out the CML beyond P. d. rp rRF rM M rRF p 6% XM 12% 6% 10% 4% X 21%. 4% 4% e. b X cov rX , rM 2 M X M 2 M XM M 5% 0.80 4% 1.0. bY 6% 0.9 4% 5.4% 4% 1.35. f. rX = rRF + (rM - rRF)bX = 6% + (11% - 6%)1.0 = 11%. rY = 6% + (11% - 6%)1.35 = 12.75%. ^ ^ 10% < 11%, and rY 12% < Since the expected return on X, rX 12.75%, both stocks are out of equilibrium. They are both overvalued. Their prices would decline, and their expected returns would rise, until an equilibrium was restored. Chapter 5 - Page 18 37. Efficient portfolios kp Diff: T (%) (%) 14 13 12 11 10 9 8 7 6 C B A D E rp p (%) 0 2 4 6 8 10 12 14 16 ABCDE = feasible set. BCDE = efficient set of risky assets. rRFD = efficient set including riskless asset. a. The table below shows the returns and standard deviations for various portfolios of Securities A and B. ======================================================== Percent of Percent of Expected Standard Portfolio in Portfolio in Portfolio Deviation of Security A Security B Return Portfolio (x) (1 - x) rp(%) Return p (%) ________________________________________________________ 100 0 10.0 10.00 75 25 11.0 8.39 50 50 12.0 9.01 25 75 13.0 11.52 0 100 14.0 15.00 ________________________________________________________ Calculations: rp = xrA + (1 - x)rB. Chapter 5 - Page 19 p x2 2 A 1 x 2 2 B 2x 1 x AB B A B . rA = 10%; A = 10%; rB = 14%; For x = 0.5: = 15%; rAB = 0%. rp = 0.5(10%) + 0.5(14%) = 0.05 + 0.07 = 0.12 = 12%. p 0.5 2 10 2 25 56.25 1.5 2 15 2 81.25 2 0.5 0.5 0 10 15 9.01%. rp and for other combinations of p portfolio were similarly calculated. Securities A and B in the b. If the correlation coefficient

were positive, then the CML would have a less steep slope. The riskiness of the portfolio would increase. If the correlation coefficient were negative, then the CML would be steeper. c. This would not represent a stable equilibrium, because no one would want to hold the riskless asset. In a stable equilibrium, all securities must be priced so that they will be held in portfolios. Therefore, the price of the riskless asset will fall, and its rate of return, rRF, will rise. This will produce a new tangency point and cause a new CML to be created. However, at the new tangency point we have a new market portfolio. This will probably lead to a repricing of stocks, hence to a change in the efficient set. The final results will include (1) a higher rRF, (2) a CML that is less steep than the present one, (3) some change in the efficient set, (4) a rebalancing of portfolios, with some investors (those who are most risk averse) holding portfolios that contain some of the riskless asset and some of the market portfolio, and (5) an equilibrium situation in which all securities were held in portfolios and there was no general desire to change portfolio compositions. Chapter 5 - Page 20 Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education. Below is a small sample set of documents: FM11_Ch_06_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 6 BONDS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Discounted cash flows Answer: b Diff: E 1. The market value of any real or financial asset, including stocks, bonds, or art work, may be found by ... FM11_Ch_07_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 7 STOCKS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Total stock returns Answer: b Diff: E 1. The total return on a share of stock refers to the dividend yield less any commissions paid when the sto... FM11_Ch_08_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 8 FINANCIAL OPTIONS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, T = Tough)True-False Easy:Options 1. Answer: a Diff: EAn option is a contract which gives its holder the right to buy or sell an asset at a predetermined price wi... FM11_Ch_09_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 9 THE COST OF CAPITAL(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Capital Answer: a 1. Capital can be defined as the funds supplied by investors. a. True b. False Component costs of capital Answer: a Diff: E 2. The com... FM11_Ch_10 CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 10 THE BASICS OF CAPITAL BUDGETING: EVALUATING CASH FLOWS(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Capital budget Answer: b Diff: E 1. A firm should never undertake an investment if accepting the project would cause... FM11_Ch_13_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007)

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RIT >> CIAS >> 2083.206.0 (Winter, 2008) Erica Grimaldi Imaging For New Media January 24, 2008 Paper 1: Critique and Reaction of an Exhibit I decided to visit the George Eastman House in Rochester. The Eastman house is an educational museum. The museum is both independent and nonp... ClassNotes3 RIT >> CIAS >> 2083.206.0 (Winter, 2008) After camera raw workflow for photoshop 1. 2. 3. 4. image size dodge/burn save flatten/cropTHURSDAY! DNG Layered TIFF Flattened File LOG... ClassNotes1 RIT >> CIAS >> 2083.206.0 (Winter, 2008) Adobe Photoshop: Settings Locations: emg8599 -> Library -> Preferences -> Adobe Photoshop CS3 Settings Workflow: 1. Image Size a. 8x10 2. Sharpen a. duplicate layer b. rename layer c. overlay d. filter -> other -> high pass e. keep under 4 3. Levels/... ClassNotes2 RIT >> CIAS >> 2083.206.0 (Winter, 2008) Layer Types in Photoshop: Background Regular Adjustment Vector Layer Masks: layer-layer mask- reveal all Selection types: Area based marquee and lassoUSE ANTIALIAS! Color Tone: Magic wand tool Quick selection tool ! really cool Color Range (located... lecture1-Gestalt RIT >> CIAS >> 2009.213.7 (Winter, 2007) Elements of Graphic Designinstructor: Miguel Cardona email: elements@mc82.com course site: http:/newmedia.mc82.comWeek 1 : Overviewsyllabus gestalt principals project 1 homework assignment 1The Gestalt Principles / Overview"the whole is greate... MakingVectors RIT >> CIAS >> 2009.213.7 (Winter, 2007) Making vectors from Markers!Step 1 Scanning your markersPlease scan in your images using Photoshop. You can do so in the lab, the computer in the back has a scanner attached. I also believe there are a number of scanners available for student use t... notes RIT >> CIAS >> 2009.213.7 (Winter, 2007) ... Exam I Answers RIT >> MATH >> 1016.319.0 (Spring, 2008) 1016-319: Data Analysis I Exam ILong A1. (10 pts.) Given the Histogram below what can be said about it? Please put an X on the line next to all correct statements:_The histogram is positively skewed. _X_ The histogram is negatively skewed. _X_T... Pornography and Harm RIT >> CLA >> 0509.217.0 (Spring, 2008) 1. The US government should ban the possession of violent pornography if and only if violent pornography harms women.a. b. Violent pornography is protected by the First Amendment. Legal pornography is considered a form of free speech. When produced ... ClassesObjectsFunctionsForLoopsEtc RIT >> GCCIS >> 4002.230.0 (Winter, 2008) What is the difference between a class and an object? object - what happens on the screen - does stuff as told by the screen class - defines what an object can do - general plan for the object instance - an object is an instance of a class instantiat...

December18 RIT >> GCCIS >> 4002.230.0 (Winter, 2008) What is the difference between a class and an object? object - what happens on the screen - does stuff as told by the screen class - defines what an object can do - general plan for the object instance - an object is an instance of a class instantiat... Events RIT >> GCCIS >> 4002.230.0 (Winter, 2008) Example Code: -upArrow.addEventListener(MouseEvent.CLICK, goUp); -private var currentCar:Car; What are events? -when something happens. -user inputs - when the user interacts with the program mouse, keyboard, wii, touch -system events - when flash do... notes RIT >> CLA >> 0502.227.4 (Fall, 2008) ProQuest: http:/proquest.umi.com/pqdweb?DBID=4138&RQT=306&clientId=3589&cfc=1 Article Title: The First Hollywood Sound Shorts, 1926-1931 Author A J Dutka; Periodical Choice; Date Nov 2005; Volume 43; Issue 3; Page 446 In the late 1920s, as movies beg... 1 Mississippi State >> EM >> 2413 (Spring, 2008) Engineering Mechanics - StaticsChapter 1Problem 1-1 Represent each of the following combinations of units in the correct SI form using an appropriate prefix: (a) m/ms (b) km (c) ks/mg (d) km N Units Used: N = 10-6N kmkm = 109-6Gs = 10 s... In Class Discussion guide Mary Washington >> PSCI >> 291 (Spring, 2008) Feb 2007 Election RFE/RL analyst Liz Fuller: "only one election has been seen as free or fair" This election: ballot stuffing, multiple voting, voter intimidation, vote buying Result: Incumbent Robert Kocharain's successor Serzh Sarkisian wins over o... 7 Mary Washington >> PSCI >> 495 (Fall, 2008) Question 4: (A) St. Paul's and Augustine's view of salvation, which are not identical but share much in common, have a profound effect on their views about politics. Discuss in detail the effects of their views on salvation on (i) the best form of go... 1 Mary Washington >> PSCI >> 495 (Fall, 2008) (1) Augustine's view of the state is in many ways the antithesis of the ancient Greek view of the state found in Pericles and Socrates. Explain in detail why this is the case, but also be careful to note any similarities Augustine's view of the state... 2 Mary Washington >> PSCI >> 495 (Fall, 2008) Comprehensive (2) The view that political theorists have about the most important goal in life has a profound effect on their views about (a) the role of the state, and (b) which type of state is best. Provide a discussion on the relationship between... 3 Mary Washington >> PSCI >> 495 (Fall, 2008) Cumulative Question #3 While democracy is universally accepted as the only legitimate form of government in the Western world today, ancient and medieval political thinkers were severely divided about the value of democracy. Provide a nuanced discus... 4

Mary Washington >> PSCI >> 495 (Fall, 2008) Second Half Question #1 Aristotle's praise of a society composed primarily of middle class citizens rests on an intriguing psychological analysis of the mindsets of the three main social classes. Describe Aristotle's class analysis and his arguments ... 5 Mary Washington >> PSCI >> 495 (Fall, 2008) Second Half Question 2 A. Explain why Machiavelli's belief that morality must be divorced from politics is a radical break from the political thought that preceded him and what limits does Machiavelli place on the use of evil and cruel means in polit... 6 Mary Washington >> PSCI >> 495 (Fall, 2008) (A) What is Aristotle's doctrine of the mean and how is the doctrine intended to help us lead a vitruous life? Doctrine of the Mean There is no mathematics or precise answers for to determine moral virtue. For Aristotle, then, virtue is a mean that l... The Symposium Mary Washington >> PHIL >> 201 (Fall, 2008) The Symposium: Exploring Eros Eryximachus suggests an encomium for Eros. Virtue- Good form Bad virtue- Bad Form The Speeches: A. Phaedrus 1.Phaedrus claims Eros is oldest of gods, i. The most authoritative ii. Inspires people to do brave things iii. ... Apology&Crito Mary Washington >> PHIL >> 201 (Fall, 2008) Apology Introduction 1. Socrates is defending himself against his accusers at court 2. Socrates is not a sophist because he is concerned with truth, not persuasion 3. Socrates feels he must defend himself first against old accusers, then against pres... Phaedo Mary Washington >> PHIL >> 201 (Fall, 2008) Phaedo Forms and Ideas, Immortality of the Soul "Itself" the just itself, the beautiful itself, the good itself, the equal itself, etc. The true essence of something is different from something being beautiful or good, it is not perceptible by the s... Presocratics Mary Washington >> PHIL >> 201 (Fall, 2008) Presocratics Thales-1 of seven sages of Greece, Material Monist - story w/ falling into well and being mocked by servant girl - universe is made of only water, explains one many problem b/c its diff. physical states and sustains life - everything is ... POL202(3) Pol Dev SEA Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202(3): Political Development in Southeast Asia -Bureaucracy, Authoritarianism, and Elite Government in Southeast Asia The term bureaucratic polity or bureaucratic-authoritarian regime is often used to describe the elite-dominated political order... POL202(4) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202(4): Political Development in Northeast Asia: Democratization in South Korea and Taiwan South Korea and Taiwan have generated active and effective grass-roots political participation in shaping modern democratic systems, mostly directed agains... POL202(5) Handout Mary Washington >> PSCI >> 000 (Fall, 2007)

POL 202 (5): Japan and the Newly-Industrializing Economies From about 1965 to 1995, East Asia was by far the most dynamic and fastest growing region in the world, with relatively equal income distribution After the Meiji Reforms, Japan became the fir... POL202(6) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) Economic Development of the "Emerging Newly Industrializing Economies" The ENIEs Malaysia, Thailand and Indonesia In Southeast Asia, the dominant economic alliance is between multinational firms and the state's politicians, bureaucrats, and their ur... POL202(7) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202(7): Social Change and Ethnic Issues (I)There are many social concerns and ethnic issues to look into in contemporary Asia-Pacific, but we will only address how economic growth effects gender, population, education and ethnicity, and vice-ver... POL202(8) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202(8): Social Change and Ethnic Issues (II) Education and economic growth In countries where Confucian values have been dominant, education is regarded as a means of upward social mobility, and reverence for learning has been an important influe... POL202(9) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202 (9): The Asia-Pacific Security Order During and After the Cold War The U.S.-Japan Security Treaty, signed between Japan and the U.S. in 1951, has been bedrock of military security in the Asia-Pacific region. This treaty allowed the U.S. to st... POL202(10) Handout Mary Washington >> PSCI >> 000 (Fall, 2007) POL 202 (10): RegionalismJapan-Centered Structure of Regional Trade: The dynamic postwar economy of Japan provided the drive and a model for development in the region, and made Japan the principal champion of greater regional association across the ... Outline for Presentation Mary Washington >> PSCI >> 000 (Fall, 2007) Sino-Japanese Relations and International Influences During and After the Cold WarHistory of Imperialist Japan I. Colonies i. Meiji Restoration 1867/68 Western style Industrialization 1. Economically 2. Militarily 3. Politically ii. 1884/85 First S... JFK policy essay outline Mary Washington >> PSCI >> 000 (Fall, 2007) http:/www.thespacereview.com/article/735/1I. Introduction: (Hazel) A. overview of W.D. Kay argument 1. "The goal of US space policy was to portray the United States as a more progressive and advanced society, thus better equipped to set an example ... Italy Terms Mary Washington >> PSCI >> 000 (Spring, 2007) CHAPTER 21 Statuto albertino: The 1848 constitution put forth by King Charles Albert of Piedomont that allowed extensive powers to remain with the king. It allowed the king to appoint Mussolini to PM and use emergency decrees to create his dictatorsh... Britain IDs Mary Washington >> PSCI >> 000 (Spring, 2007)

Chapter 6 IDs: Higher Education Bill of 2004 A bill that would raise student fees in order to fund university education, a centerpiece of Tony Blair's legislative program in 2004. Bill of Rights 1689 Declared that only Parliament could vote to incr... Fla