06 Sep 2019
Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.
- Identify two reasons for the existence of different valuations produced by the Price-Earnings Method. Which would you use and why?
- Briefly distinguish each of the three forms of market efficiency from each other. Which do you think best represents US markets?
- Stock ABC has a beta of 1.5, a risk-free rate of 2.5%, and a market return of 7.5%. What is the expected return for this stock?
- Company QRS just paid a dividend of $0.75. It is expected this dividend will grow at a constant rate of 4% indefinitely. What is the price of this stock if the required return is 10%?
- You make the following investments in stocks: $5,000 in GE, $7,000 in BA, and $8,000 in XON. The betas for the stocks are GE: 1.05; BA: 0.97, and XON: 1.24. What is the portfolio beta?
- Why would a bank be interested in a long hedge?
- Briefly describe the characteristics of a single stock future. What type of investor might be interested in these?
- You decided to buy Treasury bill futures contracts with a quoted price was 96-50. When you close this position, the quoted price was 95-25. Determine the profit or loss per contract, ignoring transaction costs.
- You decided to sell Treasury bill futures contracts with a quoted price was 92-50. When you close this position, the quoted price was 91-75. Determine the profit or loss per contract, ignoring transaction costs.
- You sell S&P 500 stock index futures that specified an index of 1,725. When you close this position, the index specified by the futures contract was 1,815. Determine the profit or loss, ignoring transaction costs.