FIN 402 Investment Fundamentals and Portfolio Management Final Exam Guide   True/False  1.___  ___ The balance sheet shows what assets the firm controls at a point in time and how it financed the assets.    2.___  ___ Free cash flow = Cash flow from operations “� Capital expenditures + Disposition of property and equipment.    3.___  ___ The income statement indicates the flow of sales, expenses, and earnings during a period of time.    4.___  ___ Financial ratios are used in stock and bond valuation models.   5.___  ___ A good portfolio is a collection of individually good assets.   6.___  ___ If the covariance of two stocks is positive, these stocks tend to move together over time.   7.___  ___ Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio. 8.___  __ In a three asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.    9.___  __ Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.   10.__  ___ Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings. Multiple choice (4 points each)     Multiple Choice 11. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is   12. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio’s rate of return is a function of   13. The premise of behavioral finance is that   14. The efficient market hypothesis ____________.   15. The CAPM is not testable unless 16. The duration of a bond is a function of the bond’s A. coupon rate. B. yield to maturity. C. time to maturity. D. All of these are correct. E. None of these is correct.   17. Treasury STRIPS are   Problems/Essay: Problem 1(15 points): Be sure to show your work for computations. Use CAPM methodology to compute the following:    Problem 2 (15 points) High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be: g = .125 X .6 = 7.5%; $2.50(1.075) = $2.69   Essay question (12 points) Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks, even though they have historically been riskier than government bonds or T-bills.

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