Question 1

During the past five years, you owned TWO stocks that had the following annual rates of return:

Year Stock T Stock B

1 0.19 0.08

2 0.80 0.03

3 -0.12 -0.09

4 -0.03 0.02

5 0.15 0.04

A. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?

(B. Compute the standard deviation of the annual rate of return for each stock. By this measure, which is the preferable stock?

C. Compute the coefficient of variation for each stock. By this relative measure of risk, which stock is preferable?

D. Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Relate the differences in the mean returns to the standard deviation of the return for each stock.

Question 2

Examine the information below and answer the following questions: Number of shares Closing Prices (per share)

Companies outstanding Day T Day T + 1

1 2,000 $30.00 $35.00

2 6,000 55.00 50.00

3 3,000 22.50 25.00

4 4,000 40.00 42.50

A. Assume that a stock price-weighted indicator consisted of the four issues with their prices. What are the values for the Day T and T + 1 and what is the change?

( B. For a value-weighted series, assume that Day T is the base period. What is the new index value for Day T + 1 and how has the index changed from Day T?.

C.. Assume that an investor had $4,000 to invest, compute an unweighted price indicator series. What is the percentage change in wealth for this portfolio?

Question 3

a. Explain the major purpose of a Stock Exchange.

b. Differentiate between a primary market and a secondary market on an organized security exchange.

c. Sufficiently explain each of the following marketable securities:

i. Treasury Bill

ii. Treasure Note

iii. Commercial Paper

iv. Repurchase Agreements (REPOS )

v. Certificate of Deposit

vi. Bankers Acceptance vii. Money Market Mutual Fund

Question 4

a. Describe an efficient capital market

b. Identify four (4) major factors contributing to an efficient market. (8 marks)

c. Give a general definition for derivatives. Sufficiently describe the major features of forward, futures and options contracts.

Question 5

Explain eight (8) assumptions of the Capital Asset Pricing Model and show how a business can use it for decision making.