Question

4. Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________. (2 points)

A) 8.28%

B) 12.43%

C) 14.08%

D) 16.57%

5. Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________. (2 points)

A) $30.07

B) $49.40

C) $42.96

D) $34.37

6. The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns? (2 points)

A) -1.5%, 21.8%

B) -10.7%, 32.8%

C) -30.6%, 54.6%

D) -30.6%, 76.4%

7. Consider the following average annual returns:

Investment	Average Return
Small Stocks	23.8%
S&P 500	13.1%
Corporate Bonds	7.5%
Treasure Bonds	6.8%
Treasury Bills	4.9%

What is the excess return for corporate bonds? (2 points)

A) 2.6%

B) 1.3%

C) 5.2%

D) 0%

8. Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%.

What is the expected payoff for Little Cure's ten drugs? (2 points)

A) $250 million

B) $50 million

C) $1 billion

D) $0

9. Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return.

What is the expected return for an individual firm? (2 points)

A) -12%

B) -20%

C) 10%

D) 20%

10. Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.

The standard deviation for the return on an portfolio of 20 type S firms is closest to ________. (3 points)

A) 13.75%

B) 22.91%

C) 5.00%

D) 4.58%

11. Consider the following returns of a portfolio:

Jan2% Feb 5% Mar -6% Apr 3% May -2% Jun 4%

1. Calculate the arithmetic average monthly return (1 point)
2. Calculate the geometric average monthly return (1 point)
3. Calculate the monthly variance (2 points)

Answer 1

4. Calculate the geometric average annual return as follows: R1 = 20%, R2 = 20%, R3 = 10% Geometric average retum=[(1+0.2)x(1+0.2)/(1+0.1)]* –1 = (1.584)03333 -1 = 0.1657 Therefore, the geometric average annual return is 16.57% (Option D). 5. Calculate the weekly standard deviation as follows: Sum of weekly stock prices Average stock price => Number of weeks 98+103+58 +29+4 = 58.4 (Stock price - Average stock price) Weekly standard deviation=1 Number of weeks -1 (98-58.4) +(103-58.4)* +(58 - 58.4) +(29-58.4) 11+(4-58.4) 5-1 _7381.2 V4 = 1845.3 = 42.96 Therefore, the standard deviation of the sample is 42.96 (Option C).

6. Calculate the 95% confidence interval for 2010 returns as follows: Average return - 2x Standard deviation, 95% Confidence interval = Average retum + 2x Standard deviation =(0.12 – 2x0.213,0.12+2x0.213) =(-30.6%, 54.6%) The correct answer is option C. 7. Calculate the excess return for corporate bonds as follows: Excess return = Corporate bond returns - Retum on T-bill = 7.5%-4.9% = 2.6% Therefore, the correct answer is option A.

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