FAC 1602 ASSIGNMENT 5 UPDATED ACTUAL EXAM QUESTIONS CORRECT ANSWERS
GRADED A PLUS
Question:
Basic Finance Concepts.
Answer:
There are some basic concepts in finance that I expect you have already mastered in other finance
courses you have taken. For example, the following: 1. Return 2. Risk 3. Risk-Premium
Question:
Return: Single Period.
Answer:
Holding Period Return (HPR) HPR = Pt-Pt-1+div.t. / Pt-1 Continuous Compounded Return r = ln(Pt
/ Pt-1 )
Question:
Return: Multiple Periods.
Answer:
Arithmetic Average: sum of returns in each period, divided by number of periods Geometric
Average: single per-period return; gives same cumulative performance as sequence of actual returns
compound period-by-period returns; find per-period rate that compounds to same final value.
Dollar-weighted Average Return: Internal Rate of Return on Investment.
Question:
Example: Multiple Period Return.
Answer:
Arithmetic Average = 8.75% Dollar Weighted = 0 =. IRR = 3.38%
,Question:
Normal Distribution.
Answer:
r = 10% standard deviation = 20% 1-68.26% 2-95.44% 3-99.74%
Question:
Variance and Standard Deviation.
Answer:
Using Time Series of Returns Scenario analysis derived from sample history of returns Variance and
Standard Deviation estimates from time series of returns Var(r) = 1 / n - 1 SUM(rt - _rt)^2 SD(rt) =
SQRT(Var (rt)) _rt = 1/ n SUM(rt)
Question:
Deviation From Normality.
Answer:
Skewness: measure of asymmetry from probability distribution Kurtosis: measure of fatness of tails
of probability distribution indicates likeliness of extreme outcomes Tail Risk Measures: measure of
small probability events
Question:
VAR and Standard Deviation Score.
Answer:
Value at Risk (Var): measure of downside risk, worst loss that will be suffered with given
probability, usually 5% Transform normally distributed return into standard deviation score: sri = ri
- E(ri) / Stdev.i Original return, given standard normal return: ri = E(ri) + sri x Stdev.i
Question:
Risk Premium.
, Answer:
Compensation of risk returned by investor. For example, the equity risk premium is the incremental
return (premium) that investors require for holding equities rather than a risk-free asset. Required
return on equity = Current expected risk-free return + Equity risk premium.
Question:
Chapter 2.
Answer:
Corporate Valuation Overview
Question:
Intrinsic Value.
Answer:
The value of an asset given a hypothetically complete understanding of the asset's investment
characteristics. For any particular investor, an estimate of intrinsic value reflects their view of the
"true" or "real" value of an asset.
Question:
Dividend Discount Model and Multiples Approach.
Answer:
Question:
Valuation Overview.
Answer:
Essence: intrinsic value equals the sum of present value of discounted future cash flows. Tricky part
is the estimation of the "discount factor" For example, in equity valuation, we introduce the
Dividend Discount Model (DDM) as follows: DDM: formula for intrinsic value of a firm equal to
present value of all expected future dividends. P(0) = D1 / r - g
GRADED A PLUS
Question:
Basic Finance Concepts.
Answer:
There are some basic concepts in finance that I expect you have already mastered in other finance
courses you have taken. For example, the following: 1. Return 2. Risk 3. Risk-Premium
Question:
Return: Single Period.
Answer:
Holding Period Return (HPR) HPR = Pt-Pt-1+div.t. / Pt-1 Continuous Compounded Return r = ln(Pt
/ Pt-1 )
Question:
Return: Multiple Periods.
Answer:
Arithmetic Average: sum of returns in each period, divided by number of periods Geometric
Average: single per-period return; gives same cumulative performance as sequence of actual returns
compound period-by-period returns; find per-period rate that compounds to same final value.
Dollar-weighted Average Return: Internal Rate of Return on Investment.
Question:
Example: Multiple Period Return.
Answer:
Arithmetic Average = 8.75% Dollar Weighted = 0 =. IRR = 3.38%
,Question:
Normal Distribution.
Answer:
r = 10% standard deviation = 20% 1-68.26% 2-95.44% 3-99.74%
Question:
Variance and Standard Deviation.
Answer:
Using Time Series of Returns Scenario analysis derived from sample history of returns Variance and
Standard Deviation estimates from time series of returns Var(r) = 1 / n - 1 SUM(rt - _rt)^2 SD(rt) =
SQRT(Var (rt)) _rt = 1/ n SUM(rt)
Question:
Deviation From Normality.
Answer:
Skewness: measure of asymmetry from probability distribution Kurtosis: measure of fatness of tails
of probability distribution indicates likeliness of extreme outcomes Tail Risk Measures: measure of
small probability events
Question:
VAR and Standard Deviation Score.
Answer:
Value at Risk (Var): measure of downside risk, worst loss that will be suffered with given
probability, usually 5% Transform normally distributed return into standard deviation score: sri = ri
- E(ri) / Stdev.i Original return, given standard normal return: ri = E(ri) + sri x Stdev.i
Question:
Risk Premium.
, Answer:
Compensation of risk returned by investor. For example, the equity risk premium is the incremental
return (premium) that investors require for holding equities rather than a risk-free asset. Required
return on equity = Current expected risk-free return + Equity risk premium.
Question:
Chapter 2.
Answer:
Corporate Valuation Overview
Question:
Intrinsic Value.
Answer:
The value of an asset given a hypothetically complete understanding of the asset's investment
characteristics. For any particular investor, an estimate of intrinsic value reflects their view of the
"true" or "real" value of an asset.
Question:
Dividend Discount Model and Multiples Approach.
Answer:
Question:
Valuation Overview.
Answer:
Essence: intrinsic value equals the sum of present value of discounted future cash flows. Tricky part
is the estimation of the "discount factor" For example, in equity valuation, we introduce the
Dividend Discount Model (DDM) as follows: DDM: formula for intrinsic value of a firm equal to
present value of all expected future dividends. P(0) = D1 / r - g
