Part A

1.

If two variables do not have a strong (linear) relationship, the correlation coefficient between the two variables will be closest to:

a. 0

b. -1

c. +1

2. When CAPM return is lower than the estimated actual return, the stock is mostly likely:

a. overvalued

b. fairly valued

c. undervalued

3. When you use regression method to get beta in CAPM, which of the following is the correct way (Ri is the gross return of the stock, Rm is the gross return of the market index, Rf is the gross return of T-bond)?

a. regress Ri on Rm.

b. regress (Ri - Rf) on (Rm - Rf).

c. regress Ri on Rf.

4. If the stock has dividend yield higher than the industry average, then the stock is most likely to be?

a. value stock

b. growth stock

c. efficient stock

5 . Which of the following should be included in the NPV calculation?

a. sunk cost.

b. overhead.

c. cannibalization.

6. What is the relationship between intrinsic value and market value of a stock?

A. intrinsic value is higher than market value

B. intrinsic value is lower than market value

C. intrinsic value can be lower or higher than or equal to market value

Part B

1. Price per unit is $50. Number of units produced and sold is 500. Fixed operating costs are $5000. Fixed financial cost is $50000. Variable cost per unit is 45. Calculate the breakeven number of units.

2. A company pays following dividends: D1 (dividend in year 1/next year) is $7, D2(dividend in year 2) is $8, D3(dividend in year 3) is $12.38. Thereafter, the dividend will grow at a constant rate. Suppose ROE will be 20% with dividend and EPS will being $12.75 and $15 in year 4 respectively. The required rate of return is 10%, use 2-stage DDM to estimate the intrinsic value of stock at the current year.

3. The comparable company has a beta at 1.2 with D/A ratio being 0.2. D/A ratio of the target company is 0.5. Marginal tax rate is 40%. Rf is 8%. Expected market return is 20%. What is the cost of equity for the target company?

Hint: use pure play method to get beta of the target company

Part C

1. Please recommend one industry to invest in the stock market in the context of economic recession, and justify your recommendation
2. Please talk about your opinion regarding quantitative easing monetary policy, is it good or bad? Justify your point of view
3. Please construct a portfolio with 3 asset classes among the following, namely equity, fixed income securities and options with underlying being common stocks, and alternative investment assets. You can make assumptions by yourself regarding client's information including return target, risk preference, investment horizon, income status, etc.