VRIJE UNIVERSITEIT AMSTERDAM Exam: Corporate Finance 1
Faculty of Economics and Business Administration Instructor: Ir F.W. van den Berg mba
Date exam: March 27th 2003 (12.45 – 15.30 hrs.)
Place: Emergo Hall in Amstelveen Name: …………………………..
Date graded: April 10th 2003 Student number: ………………..
Date for review: April 23rd 2003 Number signature list: ………….
(exam solutions posted on Netlearning)
Time and place of review: 16.00 hr. in room 1A-33
- REVISED -
Instructions:
1. This exam consists of 8 open questions.
Check whether this hand out consists of 10 pages (1 through 10) including this front page.
2. All answers are to be given in the designated open spaces belonging to each question. It is required that the student
hand in the complete exam. Leave the staple as is, do not loosen it. No additional writing on extra paper is to be
handed in.
3. Fill in your name, student number and number on signature list (unless already provided for).
4. Please place your student card (“collegekaart”) on your desk.
5. The answers are to be given in English or in Dutch. Students who wish to qualify for an “internationaal diploma”
must answer in English.
6. NO DICTIONARY is allowed. No other books , no notes are allowed. A (financial) calculator, without memory for
text, is acceptable.
7. Write your answers in the open space after each question. WRITE VERY CLEARLY. Even if not explicitly
asked for, motivate your answer.
8. In calculations demonstrate the various steps by which you reach the answer. So just giving a final number is not
sufficient .
Points:
# 1 2 3 4 5 6 7 8
Pts. 18 12 10 16 10 12 10 12
Question 1
Note: do calculations first on “scrap” paper (which you don’t hand in!), thereafter on these sheets.
a) Assume that you posses a 2 stock-portfolio, for which the following is applicable:
Stock x: expected return E(rx) per year = 8%, standard deviation of return σ x = 3%
, 2
Stock y: expected return E(ry) per year = 14%, standard deviation of return σ y = 8%
Correlation coefficient of the 2 stocks (ρ xy) = - 0,3
Portion of share x in portfolio = 60%; Portion of share y in portfolio = 40%.
Give the formulas for calculating the expected return E(rp) and the resulting standard deviation σ p of this portfolio and
calculate E(rp) and σ p for this situation.
b) Draw the above portfolio in graph form with E(rp) on the vertical axis and σ p on the horizontal axis with varying
portions for stock x and y (no need to exactly calculate every point of the graph, intrapolate using the known points
for x = 100%, x = 60%, x = 0%).
Indicate in this graph also the Capital Market Line using a risk free rate of 7%.
What does this CML represent?
Indicate also in this graph the (approximate) Minimum Variance Point (MVP)
c) Using a similar curve as drawn under b), draw in a graph how the portfolios behave with correlation coefficients of
ρ xy = 1 and ρ xy = -1.
Indicate in this figure the efficient set (or “efficient frontier”). What does this represent?
Faculty of Economics and Business Administration Instructor: Ir F.W. van den Berg mba
Date exam: March 27th 2003 (12.45 – 15.30 hrs.)
Place: Emergo Hall in Amstelveen Name: …………………………..
Date graded: April 10th 2003 Student number: ………………..
Date for review: April 23rd 2003 Number signature list: ………….
(exam solutions posted on Netlearning)
Time and place of review: 16.00 hr. in room 1A-33
- REVISED -
Instructions:
1. This exam consists of 8 open questions.
Check whether this hand out consists of 10 pages (1 through 10) including this front page.
2. All answers are to be given in the designated open spaces belonging to each question. It is required that the student
hand in the complete exam. Leave the staple as is, do not loosen it. No additional writing on extra paper is to be
handed in.
3. Fill in your name, student number and number on signature list (unless already provided for).
4. Please place your student card (“collegekaart”) on your desk.
5. The answers are to be given in English or in Dutch. Students who wish to qualify for an “internationaal diploma”
must answer in English.
6. NO DICTIONARY is allowed. No other books , no notes are allowed. A (financial) calculator, without memory for
text, is acceptable.
7. Write your answers in the open space after each question. WRITE VERY CLEARLY. Even if not explicitly
asked for, motivate your answer.
8. In calculations demonstrate the various steps by which you reach the answer. So just giving a final number is not
sufficient .
Points:
# 1 2 3 4 5 6 7 8
Pts. 18 12 10 16 10 12 10 12
Question 1
Note: do calculations first on “scrap” paper (which you don’t hand in!), thereafter on these sheets.
a) Assume that you posses a 2 stock-portfolio, for which the following is applicable:
Stock x: expected return E(rx) per year = 8%, standard deviation of return σ x = 3%
, 2
Stock y: expected return E(ry) per year = 14%, standard deviation of return σ y = 8%
Correlation coefficient of the 2 stocks (ρ xy) = - 0,3
Portion of share x in portfolio = 60%; Portion of share y in portfolio = 40%.
Give the formulas for calculating the expected return E(rp) and the resulting standard deviation σ p of this portfolio and
calculate E(rp) and σ p for this situation.
b) Draw the above portfolio in graph form with E(rp) on the vertical axis and σ p on the horizontal axis with varying
portions for stock x and y (no need to exactly calculate every point of the graph, intrapolate using the known points
for x = 100%, x = 60%, x = 0%).
Indicate in this graph also the Capital Market Line using a risk free rate of 7%.
What does this CML represent?
Indicate also in this graph the (approximate) Minimum Variance Point (MVP)
c) Using a similar curve as drawn under b), draw in a graph how the portfolios behave with correlation coefficients of
ρ xy = 1 and ρ xy = -1.
Indicate in this figure the efficient set (or “efficient frontier”). What does this represent?
