(b) (3 points) Which project should be implemented? Justify your answer using words, math, and/or a graph. 17. (5 points) There are two known states of the world, A and B. Stock 1 has a 18% rate of return in State A, and 2% in State B. Stock 2 has a 5% rate of return in State A and a 7% rate of return in State B. The probability of each state occurring is ½. What is the covariance between these two stocks’ rates of return? NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS Logarithmic rule EXPLICITLY SPECIFIED ON THE TEST. = ab c b = log c / log a Perpetuity Variance of a sample Variance of a distribution, with each outcome having the same probability of occurring Annuity Covariance formula Growing perpetuity Correlation of A and B Growing annuity , where SD stands for standard deviation Variance of a portfolio Quadratic formula + + = 0 ax2 bx c
(b) (3 points) Which project should be implemented? Justify your answer using words, math, and/or a graph. 17. (5 points) There are two known states of the world, A and B. Stock 1 has a 18% rate of return in State A, and 2% in State B. Stock 2 has a 5% rate of return in State A and a 7% rate of return in State B. The probability of each state occurring is ½. What is the covariance between these two stocks’ rates of return? NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST. Perpetuity Annuity Growing perpetuity Growing annuity Quadratic formula ax2 + bx + c = 0 Logarithmic rule ab = c b = log c / log a Variance of a sample Variance of a distribution, with each outcome having the same probability of occurring Covariance formula Correlation of A and B , where SD stands for standard deviation Variance of a portfolio
Test3A_Fall2016.docx