Question 1: The smaller range of expected future returns, the greater the risk of a given investment. True or False?

Question 2: In the perfect CAPM world, I should only care about beta as the sole source of systematic risk. True or False

Question 3: In bond pricing, annual percentage rate (APR) is always equal to effective annual rate (EAR). True or False.

Question 6

Which of the following assets is likely to have the lowest volatility (risk)?

Junk bonds

Mexican peso

Treasury bills

Common stocks

Question 7

If we are living in the CAPM world, which of the following risks of assets should we care about?

Monthly number of coffee bags sold

Systematic risk, i.e. beta

Weather of tomorrow

Industry-specific risk

Question 8

If want to increase my portfolio expected return, I can

Add assets with low volatility

Add assets with low expected returns

Add assets with high volatility

Add assets with high expected returns

Question 9

Which one of the following is an assumption of CAPM?

People are stupid

People are rational

CAPM has no assumption at all

All asset returns are uniformly distributed

Question 10

You found out that an identical iphone that is selling for $500 at BestBuy is selling for $1500 at MSU Computer Store nearby. What should you do to exploit this situation? Assume perfect market and no frictions.

Short the BestBuy iphone and short the MSU iphone

Long the BestBuy iphone and short the MSU iphone

Long the BestBuy iphone and long the MSU iphone

Short the BestBuy iphone and long the MSU iphone

Question 11

A firm is generating $100 million free cash flow per year forever. It's discount rate is 10%. What's the firm's value today? (Hint: perpetuity)

$5 billion

$1 billion

$500 million

$100 million

Question 12

You have two assets A and B with their CAPM betas at 1 and 0.8 respectively.

Assume you only invest in these two assets. What percentages of your portfolio should you invest in A and B to make your portfolio beta to be 0?

5 and -4

O-4 and 5

0.5 and 0.5

2 and -1

Question 15

You have two choices for selecting your firm's technology:

Technology A: fixed cost $500000, variable cost $5 per unit

Technology B: fixed cost $50000, variable cost $50 per unit

Assume price of your product is $100, at how many units are you indifferent between the 2 technologies? (Hint: assume X units, and make the two EBITDAs equal)

100000

5000

10000

80000

Question 16

You sat down with your financial advisor Mr. Cohen and started a converation about your investment portfolio. He carefully stated the following points:

Right now, your portfolio is entirely consisted of corporate bond issued by General Motors that pays out 5% coupon annually on $1000 face value. It has a term to maturity of 10 years and an annual yield of 8% (expected return).You have 500 such bond in your portfolio.

Your portfolio is overly conservative considering you are young and have a long career ahead of you. You should consider selling HALF of your portfolio and fund your purchase in Apple stock, which has a CAPM beta of 1.2. Right now the market risk premium is about 6%, and risk-free rate is 2%.

The GM bond has an annual volatility of 5%, while the Apple stock has an annual volatility of 15%. The 2 assets have a correlation of 0.3.

Answer questions 16-19 using the information above.

Question 16: how much is your portfolio worth now?

1000000

594500

450000

Question 17:

What's your portfolio expected return if you follow the advisor's suggestion by exchanging half of your net worth into Apple stocks?

9%

8.6%

8%

09.2%

Question 18

If you follow the advisor's suggestion, what is your portfolio volatility going to be?

9%

16%

8.6%

10.2%

Question 19 (10 points)

Following your advisor's suggestion, how much would your portfolio be worth after 5 years, assuming it's going to grow by its expected return each year?