FIN 6100 MIDTERM EXAMS ANSWERS AND
QUESTIONS SET A+
✔✔What is preferred stock? - ✔✔the middle between debt and stock.
fixed payments, no voting (like debt)
no legal recourse, no maturity date (like stock). but you get paid first
✔✔3 ways to price stock - ✔✔zero growth: dividend is fixed and unchanging
Constant growth: dividend is changing at a fixed percentage
Non-constant growth: dividend changes at multiple rates.
✔✔Dividends with constant growth equation - ✔✔P0 = D1 / (Ke - g)
P0: price right now
D1: next dividend
Ke: return
g: growth
✔✔What are the 3 types of returns? - ✔✔Realized Returns: backward looking. What did
you actually earn?
Expected Return: forward looking. what do you expect to earn?
Required Return: forward looking. How much should you get based on risk?
✔✔What are the 2 ways to invest based on? - ✔✔1. invest based on the amount of risk
you want
2. invest based on the return you want.
, ✔✔What is the difference between positive correlation (+1) and Negative Correlation (-
1)?
Zero correlation? - ✔✔Positive: they affect each other. One is positive, the other is also
positive.
Negative: When one is negative, so is the other.
zero: no correlation.
✔✔What does the greek letter o mean?
How about p? - ✔✔o = standard deviation
p = Correlation
✔✔Do you want a stock with zero risk? - ✔✔No. At that point, you'd just buy a T-bill
✔✔Who is the founder of modern portfolio history? - ✔✔Harry Markowitz.
✔✔What is the optimal portfolio?
What is the ratio called? - ✔✔The portfilio that gives you the highest ratio of return to
units of risk.
Called the "Sharpe Ratio"
✔✔What are the two parts of standard deviation? - ✔✔standard deviation = risk you can
diversify + risk you can't.
✔✔What are the different names for Overall risk? 3 - ✔✔Standard deviation
Stand-alone risk
Volatility
✔✔What are the different names for risk you can't diversify away? 3 - ✔✔systematic
risk
market risk
non-diversifiable risk
✔✔What are the names for the risk you CAN diversity away? - ✔✔Non-systematic risk
firm specific risk
diversifiable risk
✔✔Which risk do we get compensated for? - ✔✔the systematic risk.
QUESTIONS SET A+
✔✔What is preferred stock? - ✔✔the middle between debt and stock.
fixed payments, no voting (like debt)
no legal recourse, no maturity date (like stock). but you get paid first
✔✔3 ways to price stock - ✔✔zero growth: dividend is fixed and unchanging
Constant growth: dividend is changing at a fixed percentage
Non-constant growth: dividend changes at multiple rates.
✔✔Dividends with constant growth equation - ✔✔P0 = D1 / (Ke - g)
P0: price right now
D1: next dividend
Ke: return
g: growth
✔✔What are the 3 types of returns? - ✔✔Realized Returns: backward looking. What did
you actually earn?
Expected Return: forward looking. what do you expect to earn?
Required Return: forward looking. How much should you get based on risk?
✔✔What are the 2 ways to invest based on? - ✔✔1. invest based on the amount of risk
you want
2. invest based on the return you want.
, ✔✔What is the difference between positive correlation (+1) and Negative Correlation (-
1)?
Zero correlation? - ✔✔Positive: they affect each other. One is positive, the other is also
positive.
Negative: When one is negative, so is the other.
zero: no correlation.
✔✔What does the greek letter o mean?
How about p? - ✔✔o = standard deviation
p = Correlation
✔✔Do you want a stock with zero risk? - ✔✔No. At that point, you'd just buy a T-bill
✔✔Who is the founder of modern portfolio history? - ✔✔Harry Markowitz.
✔✔What is the optimal portfolio?
What is the ratio called? - ✔✔The portfilio that gives you the highest ratio of return to
units of risk.
Called the "Sharpe Ratio"
✔✔What are the two parts of standard deviation? - ✔✔standard deviation = risk you can
diversify + risk you can't.
✔✔What are the different names for Overall risk? 3 - ✔✔Standard deviation
Stand-alone risk
Volatility
✔✔What are the different names for risk you can't diversify away? 3 - ✔✔systematic
risk
market risk
non-diversifiable risk
✔✔What are the names for the risk you CAN diversity away? - ✔✔Non-systematic risk
firm specific risk
diversifiable risk
✔✔Which risk do we get compensated for? - ✔✔the systematic risk.
