3. Calculate the expected return and standard deviation (square root of the variance) of the followingprobability distribution of returns:

Possible State of Economy Probability of State Return in State

Depression = State 1 0.05 = 5% -0.25 = -25%

Recession = State 2 0.25 = 25% -0.05 = -5%

Moderate Growth = State 3 0.5 = 50% 0.10 = 10%

Fast Expansion = State 4 0.2 = 20% 0.3 = 30%

4. You invest $50,000 with a wealth manager on December 31, 2015. Over the next five years, the wealth manager has returns of 17%, 12%, (-17%), 5% and 23%. Assuming there are no fees (BIG ASSUMPTION), how much will your initial investment be worth at the end of the fifth year? What was the wealth managers geometric mean ANNUAL return over that time?

5. Give an example of two variables that you think would be positively correlated (dont use this one, but think height and weight) and two that you think would be negatively correlated (dont use this one, but think hours of weekly exercise and weight). Provide a brief explanation of why you think these relationships exist (I wont grade on their actual correlation but if your explanation would lead to the correlation you believe).

6. You take out a loan to buy a brand new car. The finance guy at the car dealership tells you the APR is 7%. Calculate the Effective Annual Rate (EAR) if the interest compounds annually, quarterly, monthly AND continuously.

7. Calculate the interest rate on a credit card whose balance doubles every six years (if no payments are made and no fees are charged) using the Rule of 72.

8. Calculate the NPV of a project with the following cash flows and a 10% discount rate:

Year: 0 1 2 3 4

Cash Inflows: $0 $125 $150 $200 $225

Cash Outflows: $375 $175 $100 $50 $50

From years 5 9, you will receive net cash inflows of $200 per year

9. Your companys CEO is old and senile, damaging both the companys reputation along with the shareholders value. Last year, his salary and bonus combined to be $7.5 million. For $20 million, you can buy out his contract today while spending $2.5 million to recruit a new CEO (also assumed to occur today the new CEO will have the same compensation package as the old one). You estimate that the companys market valuation will increase shareholder value by $15 million on the same date, the date of the announcement. In addition, profits will increase by $5 million per year for the next 10 years. All payments can be viewed as being made by shareholders; calculate the payback period and IRR for shareholders on this investment.