UCSB's Department of Economics



Econ 134AJohn HartmanTest 2, Form ASeptember 4, 2019Instructions: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 80 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 12 multiple choice questions (24 points) and 2 problems (14 points). The maximum possible point total is 38 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. Suppose that you know the following information about a bond: It has a face value of $500, the effective annual interest rate for this bond is 9%; there will be 10 equal annual coupon payments, starting one year from today; the bond matures 10 years from today; the present value of the bond is $750. How much will each coupon be?A. $85B. $80C. $75D. $70E. $652. Red Red Thyme, Inc. will pay its next dividend of $10 later today. Every 12 months, the company will pay a dividend 7% higher than the previous payment. The appropriate discount rate for this company’s stock is 20%. What will the value of the stock be in 3 years, immediately after that day’s dividend payment is made?A. $100B. $105C. $110D. $115E. $1203. Which of the following answers best describes a company that is a cash cow?A. A company that only produces meat productsB. A company that has no riskC. A company that does not re-invest any earningsD. A company that has a low price-to-earnings ratioE. A company whose dividends decrease each year4. A zero-coupon bond will mature 19 months from today. It is currently selling for $1,000 and will pay a face value of $1,100 on the date of maturity. What is the effective annual rate of return for this bond?A. 6.3%B. 6.2%C. 6.1%D. 6.0%E. 5.9%5. Two stocks’ rates of return have a correlation coefficient of –1. The expected rate of return for the first stock is 19%, and the standard deviation of the return for this stock is 7%. The values for the second stock are 11% and 3%, respectively. If you can invest a non-negative percentage in both stocks, and all of your money must be invested in one or both of these assets, which of the following could be the minimum standard deviation possible?A. 11%B. 7%C. 3%D. 1%E. 0%6. The beta of a security is 2, the annual market rate of return is 8%, and the annual risk-free rate is 3%. What is the expected present value of this security if it pays an expected value of $5 each year starting two years from today?A. $30B. $32C. $34D. $36E. $387. Two stocks, A and B, have a covariance of zero. Suppose that you invest in a portfolio of 80% of your money in stock A and 20% of your money in stock B. What is the standard deviation of this portfolio if the standard deviation of stock A’s return is 25% and the standard deviation of stock B’s return is 35%?A. 17%B. 21%C. 25%D. 27%E. 35%8. An asset is valued at $3 today, $2.50 one year from today, $4 two years from today, and $8 three years from today. What is the arithmetic average for the annual rate of return over this three-year period?A. 51%B. 48%C. 44%D. 39%E. 35%Use the following information for the next two problems: An investment portfolio has annual returns of 90%, –50%, 10%, 2%, 5%, 9%, and 30%.9. What is the geometric average return over this seven-year period?A. 7%B. 9%C. 11%D. 14%E. 19%10. What is the standard deviation of this sample?A. 8%B. 14%C. 21%D. 30%E. 40%Use the following information for the next two questions: Returns to Tear Us Apart Clothing, Inc. stock act as a random walk over the next week. At the same time each day, the stock either goes up by $6 or goes down by $4. Assume that the probability that the value goes up is 30% and the probability that the value goes down is 70%. The stock is currently valued at $100.11. What is the probability that the stock will have a value over $100 three days from today?A. 44%B. 33%C. 22%D. 11%E. 0%12. What is the probability that the stock will have a value below $85 three days from today?A. 44%B. 33%C. 22%D. 11%E. 0%Name______________________ Perm #_______________ Time 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.13. (7 points) An asset has a 40% chance of an 8% annual rate of return, a 25% chance of a 7% annual rate of return, a 20% chance of a 6% annual rate of return, and 15% chance of a 2% annual rate of return. What is the standard deviation of the annual rate of return of this known distribution?14. (7 points) Silly Trophy Toys, Inc., expects to pay out the following dividends: $1 each of 9 months, 12 months, 15 months, and 18 months from today; each subsequent dividend paid every three months will be 8% higher than the dividend payment from 12 months before. These dividends are expected to continue forever. What is the total present value of all of these dividends if the effective annual discount rate for this stock is 18%?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.PerpetuityAnnuityGrowing perpetuityGrowing annuityQuadratic formulaax2 + bx + c = 0 Logarithmic ruleab = c b = log c / log aVariance of a sampleVariance of a distribution, with each outcome having the same probability of occurringCovariance formulaCorrelation of A and B, where SD stands for standard deviationVariance of a portfolio ................
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