Midterm #2 – Spring 2016 – Econ 134A
May 18, 2016
Test Form A
Name (Please Print) : ______
Seat:______
Has the person sitting to YOUR RIGHT given you a valid photo ID that matches the one written on the top of their cover sheet? If the seat to your right is empty, check the ID of the next person to the right.
____ Yes
____ No
____ There is no person to my right
Has the person sitting to YOUR LEFT given you a valid photo ID that matches the one written the top of their cover sheet? If the seat to your left is empty, check the ID of the next person to the left.
____ Yes
____ No
____ There is no person to my left
Name (Please print your name):______
Signature______
Econ 134A John Hartman
Test 2, Form A May 18, 2016
Instructions:
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 40 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 5 multiple choice questions (10 points) and 2 problems (13 points). The maximum possible point total is 24 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. 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?
A. 15% B. 16% C. 17% D. 18% E. 19%
You can only use the following information to answer the next two questions: On Apr. 1, 2015, the Dow Jones was at 17,840.52. On Apr. 1, 2005, the Dow Jones was at 10,192.51. (Please note that this may or may not be enough information to answer each of the next two questions.)
2. What is the geometric average rate of return over this 10-year period?
A. 4.7% B. 5.8% C. 6.5% D. 7.5% E. Not enough information to answer
3. What is the arithmetic average rate of return over this 10-year period?
A. 4.7% B. 5.8% C. 6.5% D. 7.5% E. Not enough information to answer
4. 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 bond always has a 21% rate of return. What is the standard deviation of a portfolio with 50% of each asset?
A. 7% B. 11% C. 13% D. 15% E. 17%
5. A zero-coupon bond will mature in 4½ 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?
A. 22% B. 20% C. 19% D. 17% E. 15%
Name______Perm #______Day/time/TA 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.
6. (6 points) 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 the company is 15%, compounded six times per year?
7. (7 points) 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 (paid on the date of maturity) is $110. A 5% coupon of the face value is promised twice: One year from today and two years from today. What is the yield to maturity, expressed as an effective annual interest rate?
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.
Perpetuity
Annuity
Growing perpetuity
Growing annuity
Quadratic formula
ax2 + bx + c = 0 è
Logarithmic rule
ab = c è b = log c / log a
Variance of a sample
Variance of a distribution, with each outcome having the same probability of occurring
Covariance formula
Correlation of A and B
, where SD stands for standard deviation
Variance of a portfolio