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Date Posted: 16:59:13 02/22/00 Tue
Author: Charles Hodges
Subject: Continued corrections to First sample mid term continuing with answers
In reply to: James 's message, "Re: First sample mid term continuing with answers" on 18:24:54 02/21/00 Mon

Again, I only show answers that needed corrections or explanations.

14. true, this was a badly written question and will not be reused.

> 15. True
False, any company specific news can be diversified away by holding the market portfolio. Bad news for one company is good news for the competitor.

> 17. True
False, long term rates are more stable than short term rates. Somewhat related is that the Fed can easily affect short term rates but would have trouble affecting long term rates.


> 22. A. When held in isolation, Stock A has greater
> risk than Stock B
The answer is A, higher beta implies higher systematic risk and therefore higher expected return. Stock held in isolation should use standard deviation as a measure of risk.

> 24. Need some help
Lots of mumbo jumbo here, but nominal risk free (i.e., one year bonds) = real risk free rate + expected inflation ==>
8.5 = 3 + expected inflation. you can solve it from here.


> 25. Dont understand what you are asking for
the first number is the company's ratio, the second number is the industry average, thus the current ratio, return on assets, and times interest earned are below the industry average, ROA is above average.

> 1.
> 1. Beta of new portfolio = .569
this will not be on the test, but should be calculated just like a weighted average return. step 1 find beta of remaining 19 stocks, step 2 use this beta and beta of new stock to find the portfolio, hint the new beta is higher than the old beta.

> 2. need help
not covered on this exam, however, the solution is to use the SML equation and recognize you have 2 equations and 2 unknowns, solve using algebra.

> 3. ROA = 22.5% and ROE = 90%, if ROE is not 90% can
> you please tell me how to figure it out
you are correct.

> 4. Profit margin = 2.9% if this is not correct can
> you please tell me how to figure it out
hint, assume total assets = 100 and then solve from there.

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