UGBA 103 PRACTICE EXAM I 100% CORRRECT

UGBA 103 Final Exam PRACTICE EXAM I Time: 3 hours Name: Student id#: Note: Throughout the exam, assume that there are no frictions, i.e., perfect capital markets, information is immediately incorporated into stock prices, there is no spread between borrowing and lending rates, etc. If nothing else is stated, assume that everything is in real terms. Also, if nothing else is stated, do not consider taxes. If you think that you need to make additional assumptions, please specify these. Circle your final numerical answers! This study source was downloaded by from CourseH on :55:35 GMT -06:00 This study resource was shared via CourseH 2 1. Portfolio choice: The following table shows the possible returns for two stocks, i and j, in different states of the world. Here, pij denotes the probability for stock i returning ri and stock j returning rj . Returns rj 0% 20% 30% ri pij 10% 30% 0% 0% 30% 0% 20% 20% 50% 0% 20% 10% Hint: Notice that there are only 5 states of the world for which the probability to occur is greater than 0. a) (5 points) Calculate expected return of stock i and j respectively. b) (5 points) Calculate the standard deviation of stock i ’s and j’s returns respectively. c) (5 points) The correlation coefficient between stock i’s and j’s return is 0.76. Calculate the standard deviation of the return of a portfolio of 40% in stock i and 60% in stock j. This study source was downloaded by from CourseH on :55:35 GMT -06:00 This st