Investment Analysis
Sample Midterm (with solutions)
1. I invested $1 in XOM stock on 1 Jan 2000. XOM paid no dividends. Here are the returns (HPRs) that that stock made over the subsequent years: Over period Return 1 Jan 2000-1 Jan 2001 20% 1 Jan 2001-1 Jan 2002 20% 1 Jan 2002-1 Jan 2003 20% How much do I have on Jan 1 2003?
(a) $1.20 (b) More than $1.20 (c) Less than $1.20
2. My bank offers me an interest rate of 7% APR with monthly compounding. I deposit $ 200 today. Two months later I pull all my money out. Treating this as an investment with a holding period return, what is my AHPR?
(a) 7.229% (b) 7% (c) 0.583% (d) Cannot be determined
3. I use Verizon FIOS for internet, and I pay $60 per month. My first payment is due one month from today, and my contract with them is for two years. Spectrum (formerly Time Warner Cable) is running a promotion in my area. If I switch to them, my monthly bill will be $20 one month from now, and that will grow by 10% per month over the next two years. Assume the quality of service is the same, and I will be locked in to Sprint's contract if I switch. The interest rate is 0.5% EMR. What should I do?
(a) Switch (b) Don't switch
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4. While on spring break in Fort Lauderdale, I took my phone into the sea with me and ruined it. Sprint offers to lease me a new phone on the following terms. The phone costs $800. I pay Sprint a lease fee of $31.25 a month for the next 36 months, and then the phone is mine. The first payment of $31.25 is one month from today. What is the interest rate on the implicit loan that Sprint is making?
(a) 1.973% EMR
(b) 3.906% EMR (c) 4% EMR (d) 26.49% EMR
5. I was injured at work ten years ago. As part of the settlement, my company has paid me $10,000 each year. The first payment was made ten years ago, and the last payment was made today. As soon as I received each payment, I put it into my bank account.
(a) 103,676.3 (b) 110,000 (c) 114,523.1 (d) 115,668.3
6. While in the MBA, I run a short-term business on the side. My company runs guided tours of "haunted New York" (we hire actors to play the ghosts). The nature of the business is that I am able to predict accurately what I will make. I will receive $50,000 one month from now and $200,000 two months from now. Three months from today I know I will have to pay $200,000 in a class action lawsuit, brought by clients who
payments into a bank account paying 10% EAR, how much do I have in the account at the end of three months?
(a) 50,000 (b) 50,800.59
(c) 52,395.42 (d) 66,550
7. Two risky assets, X