1. Below is the information about stocks A and B. If someone insists that you cannot construct an optimal portfolio composed of these two stocks without short sales, please show whether this argument is correct or incorrect. (2 points) 0.04 0.08 0.24 , () 0.08 0.02 0.10 S Er Risk-free rate = 2%

2. (4 points) Please consider the following information about two stocks of your investment universe. Variance of Stock A returns 0.04 Variance of Stock B returns 0.02 Black-Litterman market's expected return for Stock A 1.5% Black-Litterman market's expected return for Stock B 0.4% Your adjustment () for Stock A 0.5% Your adjustment () for Stock B -0.2% (1) Construct Black-Litterman tracking matrix when the covariance between stocks A and B is 0.01. (1 points) (2) Calculate the opinion-adjusted expected returns for stocks A and B when the covariance between stocks A and B is 0.01. (1 points) (3) Calculate the opinion-adjusted expected returns for stocks A and B when these stocks have zero correlation. (1 point) (4) What can you infer from parts (2) and (3)? (1 point)

3. Based on Black-Litterman optimization, you obtained an optimal portfolio which invests 70% and 40% funds in stocks A and B and short-sells 10 percent of stock C. However, you are only 80% confident about your opinion. When the market capitalization of stocks A, B, and C are 6 million dollars, 3 million dollars, and 4 million dollars respectively, what are the confidence-adjusted portfolio weights? (3 points)

4. (4 points) On March 15, 2016, Ewing Corp. announced that it will acquire 100% common stocks of Trenton Inc. Following this announcement, you want to analyze whether it has a significant impact on Ewings stock prices by employing event study analysis. Below are the Security Characteristics Line (SCL) for Ewing Corp. and stock return database for market portfolio and Ewing Corp. during the event window [-1, +1]. Date rm rEwing Day -1 Day 0 Day +1 0.01 0.02 0.005 0.03 0.08 0.05 (1) Calculate expected returns for Ewings stocks during the event window. (1 point) (2) Calculate abnormal returns (AR) and cumulative abnormal returns (CAR) for Ewings stocks during the event window. (1 point) (3) Calculate t-statistics for abnormal returns during the event window and explain whether the abnormal returns are statistically significant. (1 point) (4) Discuss about the impact of this acquisition on the level of wealth of Ewings shareholders. (1 point)

5. Explain how you can use Event Study technique to examine the general impact of M&A (mergers and acquisitions) on firm value. (1 point)

6. (2 points) You have purchased a call option (100 contracts) on Mercer Corporation common stock. The option has an exercise price of $20.00 and Mercers stock currently trades at $20.00. The call premium (price) is $2 per contract. (a) Calculate your net profit on the option if Mercer Corporations stock price rises to $23.50 and you exercise the option. (1 point) (b) Calculate your net profit on the option if Mercer Corporations stock price does not change over the life of the option. (1 point)

7. (2 points) You expect that the price of Microsoft (MSFT, Current price: $53) stocks will fall in future and want to write MSFT September 50 call option at $5.00. However, you want to hedge your risk by purchasing MSFT September 60 call option which is traded at $2.00 at the market. (1) Calculate your total payoff per contract when the stock price will fall/rise to $40, $45, $50, $55, $60, $65, and $70, respectively. (1 point) (2) Draw the payoff chart for your investment. (Hint: this strategy is called as bear spread.) (1 point)

8. Current stock price for South Brunswick Corp. (SBRC) on March 15 is $18 and 3-months treasury rate (a measure for risk-free rate) is 1% (in terms of APR). If you purchased SBRC September 20 call option at $2, what is the price for SBRC September 20 put option? (2 points) 9. The stock price for Ewing Corp. today is $30 and at date 1 will either go up by 5% or go down by 2%. When the one-period interest rate is 2%, calculate the price for the call option (underlying asset: Ewing Corp. stocks) matures at date 1 and has exercise price X = $25 by using binomial pricing model. (3 points)

10. The stock price for Lawrence Corp. today is $20 and in each period the stock price goes up by 6% or down by 3% from what it was in the previous period. When the one-period interest rate is 1%, calculate the price for the put option (underlying asset: Lawrence Corp. stocks) matures at date 2 and has exercise price X = $22 by using binomial pricing model.