FIN 421 Midterm Exam Fall 2020 Questions with Answers: Arizona State University

Midterm Exam FIN 421 Fall 2020 Name: Student ID: Section: 70853 (T/TH 1:30pm) 85577 (T/TH 3pm) Part I / 60 Part II / 40 Total / 100 • You have 80 minutes to complete this exam: 60 minutes for answering questions and 20 minutes for uploading solutions. • You are allowed to use a calculator. A formula sheet is provided on the last page. • You are to answer these questions without consulting anyone or anything besides the formula sheet, your calculator, and your own knowledge. • Answers can be typed or handwritten, but be sure they are labeled and legible. • Show your work wherever necessary. • Manage your time wisely. Shorter answers are often better. 1. Your portfolio had real net returns of 5% in 2014, −4% in 2015, and 2% in 2016. The net inflation rate for each period was 2% in 2014, 4% in 2015, and −1% in 2016. What is the gross, nominal, compound return of your portfolio over those three years? A) 6.05% B) 2.82% C) 1.09% D) −3.05% E) 9.04% 2. For a single factor model of returns, given by ri,t = αi +βiFt +ϵi,t, which of the following assumptions do we make? 1 E[ϵi,t|Ft] = 0 2 αi = 0 for all assets 3 var(αi) < 0 4 Corr(ϵi,t,Ft) = 0 for all i,t A) both 1 and 4, but not 2 and 3 B) both 2 and 3, but not 1 and 4 C) only 1 D) we make all of these assumptions E) none of the above