IDEC8014 Midterm Exam Solutions

1. C
2. B
3. C
4. A
5. A
6. D
7. D
8. B
9. C
10. B
11. E(rC ) = y E(rP ) + (1 y) r f = 0.6 12 + 0.4 4 = 8.8%
12. C2 = y2 2P = 0.62 202 = 144
13. E(rC ) = 4 +
14. y =

12 4
c = 4 + 0.4C
20

E(rP ) r f
0.12 0.04
= 0.2
=
2
10 0.22
AP

15. E(R M ) = 0.5 10 3 = 2%

16. A =

9 21
=3
0 10

2.5 7.5
= 0.5
0 10
B = 2 0.5 2 = 1%

17. B =

18. 2M = 25
Cov(rA , rB ) = A B 2M = 3 0.5 25 = 37.5
19. E(r) = 3 + (5 3) = 3 + 2
20. A = 6 3 3 2 = 3 < B , so we should buy stock B.
21. E(rP ) = 1.2 10 0.2 5 = 11%
22. 82 = 0.82 102 + 0.22 52 + 2 0.8 0.2 10 5
= = 0.0625

23. 2P = w2 102 + (1 w)2 52 + 2w(1 w) 10 5

= 100w2 + 25(1 w)2 + 100w(1 w)
2P /w = 200w 50(1 w) + 100(1 w) 100w
= 250w 200w 50 + 100 = 0
1 2
= w =
= 0.1
5 4
= = 0.3125
24.

wE

E(RE )2D E(RD )Cov(RD , RE )

=
E(RD )2E + E(RE )2D [E(RD ) + E(RE )]Cov(RD , RE )
8 52
=
3 102 + 8 52
= 0.4

25. Equity as S RE = 0.8 > 0.6 = S RD .

26. 1 = (9 5) (8 5) = 1%
27. Since 2 = 11 5 2 (8 5) = 0, w1 = 1
28. w1 = wA =
29. =

1 /21 (e21 )
1/202
=
= 1/3
E(R M )/2M 3/202

0.52 202 = 10%

30. Should be accepted because = 10 4 0.5 (12 4) = 2%