FAC1602 ASSIGNMENT 5 ACTUAL TEST 2026
QUESTIONS WITH ANSWERS GRADED A+
◉ Basic Finance Concepts. Answer: There are some basic concepts
in finance that I expect you have already mastered in other finance
courses you have taken.
For example, the following:
1. Return
2. Risk
3. Risk-Premium
◉ Return: Single Period. Answer: Holding Period Return (HPR)
HPR = Pt-Pt-1+div.t. / Pt-1
Continuous Compounded Return
r = ln(Pt / Pt-1 )
◉ Return: Multiple Periods. Answer: Arithmetic Average: sum of
returns in each period, divided by number of periods
,Geometric Average: single per-period return; gives same cumulative
performance as sequence of actual returns
- compound period-by-period returns; find per-period rate that
compounds to same final value.
Dollar-weighted Average Return: Internal Rate of Return on
Investment.
◉ Example: Multiple Period Return. Answer: Arithmetic Average =
8.75%
Dollar Weighted = 0 = ... IRR = 3.38%
◉ Normal Distribution. Answer: r = 10%
standard deviation = 20%
1-68.26%
2-95.44%
3-99.74%
◉ Variance and Standard Deviation. Answer: Using Time Series of
Returns
,- Scenario analysis derived from sample history of returns
- Variance and Standard Deviation estimates from time series of
returns
Var(r) = 1 / n - 1 SUM(rt - _rt)^2
SD(rt) = SQRT(Var (rt)) _rt = 1/ n SUM(rt)
◉ Deviation From Normality. Answer: Skewness: measure of
asymmetry from probability distribution
Kurtosis: measure of fatness of tails of probability distribution
- indicates likeliness of extreme outcomes
Tail Risk Measures: measure of small probability events
◉ VAR and Standard Deviation Score. Answer: Value at Risk (Var):
measure of downside risk, worst loss that will be suffered with given
probability, usually 5%
Transform normally distributed return into standard deviation
score:
sri = ri - E(ri) / Stdev.i
, Original return, given standard normal return:
ri = E(ri) + sri x Stdev.i
◉ Risk Premium. Answer: Compensation of risk returned by
investor.
For example, the equity risk premium is the incremental return
(premium) that investors require for holding equities rather than a
risk-free asset.
Required return on equity = Current expected risk-free return +
Equity risk premium.
◉ Chapter 2. Answer: Corporate Valuation Overview
◉ Intrinsic Value. Answer: The value of an asset given a
hypothetically complete understanding of the asset's investment
characteristics.
For any particular investor, an estimate of intrinsic value reflects
their view of the "true" or "real" value of an asset.
QUESTIONS WITH ANSWERS GRADED A+
◉ Basic Finance Concepts. Answer: There are some basic concepts
in finance that I expect you have already mastered in other finance
courses you have taken.
For example, the following:
1. Return
2. Risk
3. Risk-Premium
◉ Return: Single Period. Answer: Holding Period Return (HPR)
HPR = Pt-Pt-1+div.t. / Pt-1
Continuous Compounded Return
r = ln(Pt / Pt-1 )
◉ Return: Multiple Periods. Answer: Arithmetic Average: sum of
returns in each period, divided by number of periods
,Geometric Average: single per-period return; gives same cumulative
performance as sequence of actual returns
- compound period-by-period returns; find per-period rate that
compounds to same final value.
Dollar-weighted Average Return: Internal Rate of Return on
Investment.
◉ Example: Multiple Period Return. Answer: Arithmetic Average =
8.75%
Dollar Weighted = 0 = ... IRR = 3.38%
◉ Normal Distribution. Answer: r = 10%
standard deviation = 20%
1-68.26%
2-95.44%
3-99.74%
◉ Variance and Standard Deviation. Answer: Using Time Series of
Returns
,- Scenario analysis derived from sample history of returns
- Variance and Standard Deviation estimates from time series of
returns
Var(r) = 1 / n - 1 SUM(rt - _rt)^2
SD(rt) = SQRT(Var (rt)) _rt = 1/ n SUM(rt)
◉ Deviation From Normality. Answer: Skewness: measure of
asymmetry from probability distribution
Kurtosis: measure of fatness of tails of probability distribution
- indicates likeliness of extreme outcomes
Tail Risk Measures: measure of small probability events
◉ VAR and Standard Deviation Score. Answer: Value at Risk (Var):
measure of downside risk, worst loss that will be suffered with given
probability, usually 5%
Transform normally distributed return into standard deviation
score:
sri = ri - E(ri) / Stdev.i
, Original return, given standard normal return:
ri = E(ri) + sri x Stdev.i
◉ Risk Premium. Answer: Compensation of risk returned by
investor.
For example, the equity risk premium is the incremental return
(premium) that investors require for holding equities rather than a
risk-free asset.
Required return on equity = Current expected risk-free return +
Equity risk premium.
◉ Chapter 2. Answer: Corporate Valuation Overview
◉ Intrinsic Value. Answer: The value of an asset given a
hypothetically complete understanding of the asset's investment
characteristics.
For any particular investor, an estimate of intrinsic value reflects
their view of the "true" or "real" value of an asset.
