1.

Smith Inc. is considering an investment in one of two common stocks. Given the following information, which investment is better, based on the risk (as measured by the standard deviation) and return of each? (Please calculate the expected rate of return of each investment and its corresponding standard deviation). (20 points)

Common Stock A:

Probability Return

0.30 10%

0.40 15%

0.30 17%

Common Stock B:

Probability Return

0.20 - 2%

0.30 5%

0.30 11%

0.20 22%

2. Define risk as it relates to an investment? Briefly discuss how risk can be measured

3. Briefly discuss the difference between a share of common stock versus a share of preferred stock. What are the characteristics of each? What is meant by a call provision and what is a convertible stock?

4. What is a bond? Briefly discuss the difference between a coupon bond and a zero coupon bond. What are the characteristics of each? Define par value as it relates to a bond.

5. Briefly discuss the relationship between bond price and yield to maturity (interest rate).

6. Current forecasts are for ABC Company to pay annual cash dividends of $3.00, $0, and $6.50 per share over the next three years, respectively. At the end of three years, you expect to sell your share at a market price of $127. What should the price of a share today be with a 10% expected rate of return?