1. The price index from 2016 to 2018 is : 200, 210, 220. Derive a forecast for 2019 on the basis of adaptive expectations using 0.2, 0.3 and 0.5 as weights in 2016, 2017 and 2018 respectively.
2. The optimal forecast for 2019 is 225 using all available information. What is the expected price index in 2019 based on rational expectations?
3. The actual value in 2019 is 223. Based on this, Paul concluded that the expected value in (b) derived using rational expectations was wrong. Do you agree? Why?

Considering the stocks in the previous question, where Stock Xillow has an expected return of 16% and a standard deviation of 4% and Stock Yash has an expected return of 12% and a standard deviation of 3%. The stocks have a correlation coefficient of -0.3. What is the weight of the investment in Stock Xillow that creates the minimum variance portfolio of the two stocks? A. From 0% to 20% B. From 20% to 40% C. From 40% to 60% D. From 60% to 80% E. From 80% to 100%

A farmer has a utility function of u(w) = w^0.5. If there is good weather, the farmer will earn 100,000. If there is bad weather, she will earn 50,000. The probability of bad weather in any given year is 0.3. An insurance company offers the farmer a contract where the farmer would receive a 50,000 payout when there is bad weather. The insurance premium is denoted as p. What is the maximum premium that the farmer would be willing to pay for the insurance contract? Show your calculations and draw your answer on a graph.

Consider a bond with 10,000 USD par value, 8% coupon rate paid semi annually and 10 years to maturity. Assuming a 10% required return, answer the following questions:

Find the PV of the bond

Find the PV of the bond given it’s a Zero-Coupon Bond.

What is the bond’s price elasticity if the required return changed to 12%?

Calculate the duration of the bond.

What is the modified duration at an 8% yield?

What is the percentage change in bond’s price for an increase in yield for 0.3 percentage point.

i.Based on the Fama-French model, calculate the required return for HSU Limited using these estimates. Assume that the Treasury billrate is 5 percent. (4marks)

ii. What do you know about HSU Limitedbased on its factor sensitivities?(6marks)

Question 1 (1 point)

Suppose the consumer's utility function is given by

U(x1,x2)=xa1xb2{"version":"1.1","math":"U(x_1, x_2)=x_1^ax_2^b"}

, where a=9.5, and b=8.5. Suppose further, the price of good 1 is 3.0, price of good 2 is 2.7 and income is 69

Finally suppose the price of good 1 has decreased to 0.3

What is the substitution effect for good 1 Round your answer to two decimal places

Your Answer:

1. Let Xi = lunch condition on day i (rice/noodles)

P(Xi+1 = rice| Xi-1 = rice, Xi = rice) = 0.7

P(Xi+1 = rice| Xi-1 = noodles, Xi = rice) = 0.6

P(Xi+1 = rice| Xi-1 = rice, Xi = noodles) = 0.3

P(Xi+1 = rice| Xi-1 = noodles, Xi = noodles) = 0.55

Q1. Is {Xn} a Markov Chains? Why?

Q2. How to transform the process into a M.C. ?

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA =0.03 + 0.7RM + eA RB = -0.02 + 1.2RM + eB σM = 0.2 R-squareA = 0.3; R-squareB = 0.25 Assume you create for portfolio Q with investment proportions of 0.50 in P, 0.30 in the market index, and 0.20 in T-bills, portfolio P is composed of 60% Stock A and 40% Stock B. What is the standard deviation of the portfolio Q?

0.4800

0.2556

0.1831

0.2766

Roger has a levered cost of equity of 0.12. He is thinking of investing in a project with upfront costs of $8 million, which pays $2 million per year for the next 8 years. He is going to borrow $4 million to offset the startup costs at a rate of 0.05. His tax rate is 0.3. He will repay this loan at the end of the project. What is the NPV of this project, using the FTE method?

You Answered

Correct Answer

643,693 margin of error +/- 10,000

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

R_A =0.03 + 0.7R_M + e_A

R_B = -0.02 + 1.2R_M + e_B

σ_M = 0.2

R-square_A = 0.3;

R-square_B = 0.25

Assume you create for portfolio Q with investment proportions of 0.50 in P, 0.30 in the market index, and 0.20 in T-bills, portfolio P is composed of 60% Stock A and 40% Stock B. What is the standard deviation of the portfolio Q?

0.2766

0.1831

0.4800

0.2556