Lubin School of Business
FIN 632: Introduction to Financial Decision Making
Prof. P.V. Viswanath
Fall 2013

Final

• The exam is closed book; however you are allowed one 8.5x11 sheet containing only formulas, but no worked out examples.
• Time allowed is 2 hours.
• Explain all your answers; correct answers without explanations may not be given any credit at all. Make sure you do not use more space than the question allows you.
• Make sure that your answer is clear and concise. Confused and rambling answers will lose points.
• If you answer a question, I have the discretion to award you some points, even if you are completely wrong. If you don't attempt the question at all, I can give you no points! So attempt every question.

1. 1. (10 points) According to the CAPM, what is the most important measure of riskiness of an asset? Provide an explanation, no longer than half a page, for your answer.
   2. (5 points) Why might the Fama-French-Carhart model be preferred to the CAPM?
   3. (10 points) Suppose I have historical data on the return on Sprint Corporation for the last 15 years. I believe that the distribution of returns on this stock in the future will be similar to its past behavior. I want to forecast the return on Sprint Corporation for the next year using only the history of its past returns. My friend wants to forecast the average return on Sprint Corporation over the next five years, again using only the history of its past returns. Whose forecast will be more precise -- in the sense of a lower confidence interval -- mine or my friend's? Explain.
      
      
2. You have figured out the following table of scenarios for the return on your favorite stock for the following year.
   1. (5 points) What is the expected return on this stock?
   2. (10 points) What is the variance of returns?
      
   
   

   Probability	Return
   0.1	10%
   0.2	2%
   0.3	-5%
   0.4	3%

   
   
3. The following bonds are available. Assume face value is $1000.
   

   Bond	Maturity	Coupon	Price
   A	1	0%	943.396
   B	2	0%	873.439
   C	3	5%	924.366

   1. (10 points) What is the term structure of interest rates?
   2. (10 points) What would be the price of a 10% coupon 2 year bond today, assuming there are no arbitrage opportunities?
   3. (10 points) What is the one-year forward rate one year forward and two years forward?
   4. (10 points) If you believe that all liquidity premiums are equal to 1%, what is your estimate of the price of a one-year zero coupon T-bill, one year from now?
4. (10 points) The annualized yield on a 4-week (28 day) T-bill issued on 12/19/2013 and maturing on 1/16/2014 was 0.010%, according to the Treasury's website, http://www.treasurydirect.gov/instit/annceresult/annceresult.htm. What would the price of a T-bill with a face value of $1,000,000 be?
5. (15 points) Here's the yield curve for Great Britain for 9th February, 2005, as viewed on a Wikipedia image:
   

   

   Come up with a forecast regarding interest rates for the next ten years. Explain and justify any assumptions that you have made. Do not use more than half a page for your answer.

6. (Bonus, 5 points)) What is the difference between a market order and a limit order?