1

Assume the following information for stocks A and B: Stock A: Expected Return = 10%, Standard Deviation of Returns 30%; Stock B: Expected Return = 15%, Standard Deviation of Returns 25%; Correlation between returns of Stock A and Stock B = +1. The expected return and standard deviation of an equally weighted portfolio of stocks A and B are:

	A.	Expected Return = 12.5%, Standard Deviation = 23%
	B.	Expected Return = 13%, Standard Deviation = 23%
	C.	Expected Return = 12.5%, Standard Deviation = 27.5%
	D.	Expected Return = 13%, Standard Deviation = 27.5%

2

Using the following information to calculate the standard deviation of a two-stock portfolio. Characteristics for this two-stock portfolio: Caffeine Plus Drink stock: Amount invested $40,000. Expected Return = 11%. Standard Deviation = 15%; Sparkling Drink Stock: Amount invested $60,000. Expected Return = 25%. Standard Deviation = 20%. Correlation between Caffeine Plus Drink stock and Sparkling Drink stock is 0.30.

3

Both FCFF and DDM use some discount rate to estimate intrinsic value, but DDM is more popular in application.

True

False

4

Solve the Sharpe ratio of the mutual fund using the following information: 1) Beta of mutual fund = 0.75 2) Return of mutual fund = 10% 3) Standard Deviation of mutual fund = 4% 4) Risk-free rate of return = 3% 5) S&P 500 return = 12%

5

Bronco Inc.'s common stock is currently selling for $40 and just paid an annual dividend of $5. If the investors expect dividends to double in 10 years, what is close number to the required rate of return for Bronco Inc.?

	A.	10%
	B.	15%
	C.	20%
	D.	30%

6

Even the investors use the same FCFF model to value the same stock, they CAN still arrive at the different estimate of value

True

False

7

QUESTION 10

The investor who invest in both bonds and stocks should have more risk than the investor who only invest in bonds.

True

False

5 points

QUESTION 11

For FCFF and FCFE model, we use the income statement and balance sheet to derive the free cash flow to compute stocks fair value, it might be not necessary to look into the capital structure and its adjustment.

True

False

5 points

QUESTION 12

In an efficient market:

	A.	returns tend to be positive on the last trading day before a holiday
	B.	security prices are seldom far above or below their justified level
	C.	stock prices do not rapidly adjust to new information
	D.	firms that are not followed by many analysts tend to yield higher returns

5 points

QUESTION 13

Edison Energy NJ, Ltd. just paid an annual dividend $2. Analyst expects the dividends to grow at a rate of 5 percent per year over the foreseeable future. If the required rate of return for this stock is 10 percent, what is its intrinsic value today? If the market price of the stock is $50, why the intrinsic value you solved is not consistent? Could you give several explanations?

QUESTION 14

Solve the Jensen's Alpha of the mutual fund using the following information: 1) Beta of mutual fund = 0.75 2) Return of mutual fund = 10% 3) Standard Deviation of mutual fund = 4% 4) Risk-free rate of return = 3% 5) S&P 500 return = 12%

5 points

QUESTION 15

Using the following information to calculate the expected return of a two-stock portfolio. Characteristics for this two-stock portfolio: Caffeine Plus Drink stock: Amount invested $40,000. Expected Return = 11%. Standard Deviation = 15%; Sparkling Drink Stock: Amount invested $60,000. Expected Return = 25%. Standard Deviation = 20%. Correlation between Caffeine Plus Drink stock and Sparkling Drink stock is 0.30.

5 points

QUESTION 16

The investor who invest in both bonds and stocks should have more risk than the investor who only invest in bonds.

True

False