Reference no: EM131929467

1. A stock is expected to pay a dividend of $10 next year, and this dividend is expected to grow by 5% each year thereafter. What should the price of the stock be if instruments of similar risk are paying 12%?

(a) $83.33 (b) $142.86 (c) $150 (d) $200

2. I am considering buying a Greek government bond that promises to pay $1210 in two years’ time. However, there is a possibility that the Greek government will default between now and the promised payment. If the government does default, the bond will only pay $500. The probability of default is 0.5. What should the price of the bond be if instruments of similar risk are paying 10%?

(a) $1000 (b) $706.62 (c) $413.22 (d) $303.68

3. A credit card company offers me a card with 20% APR, compounded daily. I make purchases of $3,000 on the card, and allow interest to accrue on those purchases for a year. Assuming each year has 365 days, the amount I will have to pay back is:

(a) $3,315 (b) $3,600 (c) $3,664 (d) $3,901

4. Answer the next two questions with reference to this information: Analysts argue that two things can happen over the next year: the economy can continue as it is or it can go into recession. The returns of two stocks: General Electric (GE) and Cisco (CSCO) in each possible state are given below: State Return on GE Continue as-is 15 Recession −15 Return on CSCO 5 -1

The analysts estimate the probability of continuing as-is to be 0.8 , and the probability of a recession to be 0.2.

5. What is the expected return on a portfolio which is 120% in GE and −20% in CSCO?

(a) 10.04% (b) 8% (c) 2.55% (d) 0%

6. What is the variance of CSCO?

(a) 1.96%2 (b) 5.76%2 (c) 13%2 (d) 23.04%2 3