FIN 203 Final Review
Name____________________________________
FIN 203
GEHY
Signature________________________
FRANK G. ZARB SCHOOL OF BUSINESS
HOFSTRA UNIVERSITY
December 16, 2013
FINAL EXAM
SAMPLE
Answer any 4 out of 5 questions. If you answer all five questions, Question 5 will be dropped.
1. You have $100,000 invested in this portfolio. $55,000 is invested in IBM:
Recession
Normal
Boom
a.
b.
c
d.
e.
Probability of State of Economy
0.15
0.65
0.20
IBM
0.05
0.08
0.13
TWTR
-0.17
0.12
0.29
What is the expected return and standard deviation of each stock?
What is the portfolio expected return and standard deviation?
You are considering adding another stock, DNKN, with a beta of 1.3 to the portfolio. The market risk premium is 8% and the risk-free rate is 2.5%. What is the expected return of this asset?
You decide to open a separate account at another brokerage firm. Your goal is to have a portfolio beta of
1.12. The portfolio consists of 20% U.S. Treasury bills, 50% stock A, and 30% stock B. Stock A has a risklevel equivalent to that of the overall market. What is the beta of stock B? Please interpret what this beta measure represents relative to the beta of the market.
What is the difference between systematic and unsystematic risk? Be sure to mention which is diversifiable risk and non-diversifiable risk.
2.
Year
A
0
-400,000
1
55,000
2
55,000
3
55,000
4
225,000
5
225,000
The discount rate is 10%. These are independent projects.
a)
b)
c)
d)
How long does each project take to payback on a nominal basis? What about on a discounted basis?
Which project(s) would you select if you used the NPV method? Why?
Which project(s) would you select if you used the IRR methods. Why?
If these were mutually exclusive projects, what is the cross-over rate for these two projects? Explain the significance of this rate.
Explain to Grandma the problem of multiple rates of returns under the IRR method? Under what
FIN 203
GEHY
Signature________________________
FRANK G. ZARB SCHOOL OF BUSINESS
HOFSTRA UNIVERSITY
December 16, 2013
FINAL EXAM
SAMPLE
Answer any 4 out of 5 questions. If you answer all five questions, Question 5 will be dropped.
1. You have $100,000 invested in this portfolio. $55,000 is invested in IBM:
Recession
Normal
Boom
a.
b.
c
d.
e.
Probability of State of Economy
0.15
0.65
0.20
IBM
0.05
0.08
0.13
TWTR
-0.17
0.12
0.29
What is the expected return and standard deviation of each stock?
What is the portfolio expected return and standard deviation?
You are considering adding another stock, DNKN, with a beta of 1.3 to the portfolio. The market risk premium is 8% and the risk-free rate is 2.5%. What is the expected return of this asset?
You decide to open a separate account at another brokerage firm. Your goal is to have a portfolio beta of
1.12. The portfolio consists of 20% U.S. Treasury bills, 50% stock A, and 30% stock B. Stock A has a risklevel equivalent to that of the overall market. What is the beta of stock B? Please interpret what this beta measure represents relative to the beta of the market.
What is the difference between systematic and unsystematic risk? Be sure to mention which is diversifiable risk and non-diversifiable risk.
2.
Year
A
0
-400,000
1
55,000
2
55,000
3
55,000
4
225,000
5
225,000
The discount rate is 10%. These are independent projects.
a)
b)
c)
d)
How long does each project take to payback on a nominal basis? What about on a discounted basis?
Which project(s) would you select if you used the NPV method? Why?
Which project(s) would you select if you used the IRR methods. Why?
If these were mutually exclusive projects, what is the cross-over rate for these two projects? Explain the significance of this rate.
Explain to Grandma the problem of multiple rates of returns under the IRR method? Under what