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1 SAMPLE FINAL EXAM: FIN 672 Investment Analysis/Portfolio Analysis True, False or Uncertain (20 points total or 4 points each) Are each of the following true, false or uncertain? Justify your answer in two (2) sentences or less. If the answer is false you may provide a counter-example as justification. 1. The variance of stock returns is a measure of firm-specific risk. 2. Abnormal profits earned by P/E ratio analysis would violate the semi-strong form of market efficiency. 3. Researchers have discovered that stock returns exhibit negative autocorrelation in 3- to 12- month horizons, but positive autocorrelation at 3- to 5-year horizons. 4. Duration is one measure of default risk in the bond market. 5. Historically speaking, large stocks have typically been the best performing group of U.S. securitiesthat is, they have a higher average annual return than most other assets. Short Answer (23 points) Answer each of the questions below completely. Show all your work. 6. (6 points) Briefly explain one way that ROE can be decomposed to examine the performance of a firm. 7. (5 points) Describe a P/E regression screen and discuss how a stock analyst might use it. 8. (6 points) When analyzing a P/S ratio, we often consider the Profit Margin of the firm as a factor that contributes to this ratio. Describe specifically how Profit Margin is related to P/S ratios in financial theory.

2 9. (6 points) Sketch the net payoff diagram below for: a) A Long futures contract b) A written put contract Problems (57 points) Answer each of the questions below completely. Show all your work. 10. (10 points total) Consider a security currently trading at $27. The security is expected to pay dividends of $4 and is expected to trade for $29 at the end of the year. a) (5 points) If the security has a beta of 1.2, Rf=6% and the market risk premium equals 5%, what is your required rate of return for this security? b) (5 points) Calculate the intrinsic value of the stock. Based on your analysis, should you buy or sell this stock? 11. (12 points total) Suppose you own stock in Blue and Red, Inc. and are trying to decide whether or not to sell the stock. You use your best economics training to come up with 2 scenarios for the coming year. The first scenario predicts a booming market for Blue and Reds new model building apparatus (MBA) products and the second scenario predicts a continuing stagnant market. You assign probabilities to these scenarios and the predicted Blue and Reds returns as follows: Scenario (s) Probability p(s) Return Booming 0.3 0.35 Stagnant 0.7 0.05 a) (3 points) Calculate the expected return E(r) on Blue and Red stock.

3 b) (6 points) Calculate the standard deviation of the expected Blue and Red returns. c) (3 points) Suppose you cant decide whether or not to sell the stock. Describe one way to use options to hedge your long Blue and Red stock position. 12. (7 points total) You run a regression of some fundamental stock characteristics on past telecommunications industry stock characteristics and find that the get the following relation: where P/E is the price to earnings ratio using 1-year analyst consensus forecasts for the earnings, beta is the CAPM beta, g is the consensus analyst forecast of 5-year growth and b is the historical earnings retention ratio (the amount of earnings reinvested in the company). You collect the following data on tech stocks that you are considering purchasing. Firm Beta G b Telecon USA 2.2 28 1.0 Jog PCS 1.5 18 0.9 a) (3 points) Calculate the expected P/E ratio of Jog PCS. b) (4 points) If the actual P/E ratio of Jog PCS is 32, would this analysis suggest buying, selling or holding the stock? Explain your logic. 13. (8 points total) On January 1, 2018, Kellys Kites, Inc. issued 10% bonds with a face value of $1,000,000. The market interest rate is 12% on these bonds. The bonds mature in 10 years. Interest is paid semi-annually on June 30 and December 31 of each year. Kellys Kites, Inc. has a December 31 year-end. a. (2 Points) Are these bonds premium, discount or par bonds (circle one)? Premium Discount Par b. (6 Points) Calculate Kellys Kites proceeds from this bond issue. 14. (8 points total) Consider a bond paying a coupon rate of 8% and a 20-year maturity. The bond makes coupon payments every 6 months and currently is priced at $950. a) (4 points) What is the annual bond equivalent yield to maturity? b) (4 points) What is the effective annual yield to maturity for this bond? 15. (12 points) Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 6%. bgBetaEP *15*8.2*5.08.4/

Sketch the net payoff diagram below for: a) A Long futures contract b) A written put contract Problems (57 points) Answer each of the questions below completely. Show all your work. 10. (10 points total) Consider a security currently trading at $27. The security is expected to pay dividends of $4 and is expected to trade for $29 at the end of the year. a) (5 points) If the security has a beta of 1.2, Rf=6% and the market risk premium equals 5%, what is your required rate of return for this security? b) (5 points) Calculate the intrinsic value of the stock. Based on your analysis, should you buy or sell this stock? 11. (12 points total) Suppose you own stock in Blue and Red, Inc. and are trying to decide whether or not to sell the stock. You use your best economics training to come up with 2 scenarios for the coming year. The first scenario predicts a booming market for Blue and Reds new model building apparatus (MBA) products and the second scenario predicts a continuing stagnant market. You assign probabilities to these scenarios and the predicted Blue and Reds returns as follows: Scenario (s) Probability p(s) Return Booming 0.3 0.35 Stagnant 0.7 0.05 a) (3 points) Calculate the expected return E(r) on Blue and Red stock.