Question 1. The gure above is a scatter plot of the returns of two assets against the return of the market. Both assets have the same expected return and the same variance. Which asset would you prefer to hold if your portfolio contained many stocks? Asset 1 is on the left and Asset 2 on the right.

(a) Asset 1
(b) Asset 2

Question 2. You have to pick one stock that will form your entire portfolio. Which stock will you not pick?

(a) Stock A
(b) Stocks A, B, and C
(c) Stock D
(d) Stocks B and C

Question 3. What is the standard deviation of the return of the tangency portfolio?

(a) 8.33%
(b) 11.11%
(c) 12%

(d) 13%

Question 4. Assuming you invest a positive amount in the risky asset, what is the weight of the risky asset in your nal portfolio?

(a) -0.56
(b) 0.083
(c) 0.44
(d) 1.56

Question 5. If you had $200 to invest, how many dollars would you invest in asset X?

(a) 133.33
(b) 192
(c) 200
(d) 208

Question 6. You hold the market portfolio. I have plotted the Security Market Line (SML) below. I have also plotted an asset, A (the black dot). According to the diagram:

(a) A is overpriced and you should not buy it, but you could short-sell it
(b) A is underpriced and you should buy it
(c) A is correctly priced and you are indierent between buying and selling it

Question 7. All investors like expected return and hate standard deviation. There are three stocks which are the only risky assets in the world. You have the following information:

Stock Number of shares outstanding Price per share

A 10000 $25

B 20000 $32

I ask you to construct the lowest-variance portfolio that has the same expected return as the market portfolio. What is the portfolio you choose?

(a) 1/3 in A, 2/3 in B
(b) .28 in A, .72 in B
(c) .41 in A, .59 in B
(d) Impossible to say, we would need the risk-free rate to tell.

Question 8. There are no taxes. Empanada Mama is a New York-based restaurant chain that is thinking of expanding to California. It is entirely nanced with equity, and the beta of its equity is

1. The empanada business is signicantly dierent in California: Latin American food is much more common and the competition is erce. There is an empanada chain, called LA Empanada, in Los Angeles, which is nanced with $40 of debt and $100 of equity (book values). The debt is risk-free. LA Empanada has 30 shares outstanding, and the current price of its shares is $2. The beta of its equity is

2. What is the beta you will use to calculate the NPV of Empanada Mama's venture in California?

(a) 1
(b) 1.2
(c) 1.43
(d) 2

Question 9. What is the YTM on a 1 year, semiannual payment 10% coupon bond with face value $1000 and price $900?

(a) 5.63%

(b) 10.82%

(c) 21.64%

(d) 22.81%

Question 10. A one-year zero coupon bond has face value $5,000. The issuer may default, and the probability of default is 0.1. In default, the bond pays nothing. Instruments of similar risk pay 6% (eective annual). What is the YTM on this bond, expressed as an APR with annual compounding?

(a) 6%
(b) 12%
(c) 13.01%
(d) 17.78%

Question 11. Assuming it maintains its ROE and payout ratios, what is the expected total dividend next year in $M?

(a) 10

(b) 10.25

(c) 30

(d) 30.75

Question 12. What should the market value of the equity be?

(a) $323.68M

(b) $315.79M

(c) $256.25M

Question 13. What is the value of GOOG's equity?

(a) 245,726

(b) 191,933

(c) 105,110

Question 14. What is the value of YHOO's debt?

(a) $100,000

(b) $105,000

(c) $90,000

Question 15. What is the value of YHOO's equity?

(a) $100,000

(b) $145,726

(c) $200,116

Question 16. What does the CAPM say the expected return on YHOO's equity should be?

(a) 11.125%

(b) 12.08%

(c) 14.11%

Question 17. What is the coupon on Company One's debt?

(a) $10
(b) $4
(c) $5

Question 18. What is the value of Company Two's equity?

(a) $200
(b) $300
(c) $400

Question 19. What is the value of Company One's equity?

(a) $180
(b) $200
(c) $240
(d) $300

Question 20. The tax rate is 0%, and the risk-free interest rate is 10%. Assume all betas are 0. An all-equity nanced rm lasts for one period and has a value of $100. It is thinking of changing its capital structure, without changing its assets. If it takes on $50 worth of debt (market value), its equity would be worth $48. This means that the expected value of bankruptcy costs next period is:

(a) $2
(b) $2.2
(c) $4
(d) $5.5