Section A: Non-numerical Questions

Q1. You won a lottery. Its prize is £1,000,000. You will receive the prize in thirty annual instalments. Which ONE of the following statements is correct?

1.    Such cash flow is called “perpetuity”, and its present value is smaller than £1,000,000.

2.    Such cash flow is called “perpetuity”, and its present value is larger than £1,000,000.

3.   Such cash flow is called “annuity”, and its present value is smaller than £1,000,000.

4.    Such cash flow is called “annuity”, and its present value is larger than £1,000,000.

5.    (Tick here if you think that none of the statements is correct.)

Q2. Which ONE of the following statements is correct?

1.    Internal rate of returns approach is related to Net present value and often leading to          identical decisions but may lead to incorrect decisions in comparison of mutually exclusive investments.

2.    Net present value approach may result in multiple answers with non-conventional cash flows.

3.    Payback period approach is related to Net present value and always leading to identical decisions.

4.    Internal rate of return approach is related to Net present value and always leading to identical decisions.

5.    (Tick here if you think that none of the statement is correct.)

Q3. Which ONE of the following statements is correct?

1.    If a bond does not pay a coupon, its present value must equal to its principal value.

2.    If a bond does not pay a coupon, its interest rate risk is zero.

3.    If a bond’s coupon rate is zero, its present value must equal to its principal’s present value.

4.    If a bond’s coupon rate is zero, its interest rate risk is zero.

5.    (Tick here if you think that none of the statement is correct.)

Q4. If the market is strong-form efficient, which ONE of the following is FALSE?

1.    Investors cannot earn abnormal returns regardless of the information they possess.

2.    Prices reflect all information, including public and private.

3.    Either Technical analysis or Fundamental analysis do not help investors earn abnormal returns.

4.    Insiders can earn abnormal returns by using their privately owned information.

5.    (Tick here if you think that none of the above is false.)

Q5. Which ONE of the following statements correctly describes the implications of the Capital Asset Pricing Modell?

1.    Investors should spend a lot of effort in fundamental analysis to outsmart the market.

2.    Investors should focus on a small group of companies to invest.

3.    Investors should always invest in the recent winners and sell the recent losers.

4.    Investors should hold a well-diversified portfolio.

5.    (Tick here if you think that none of the above is correct.)

Section B: Numerical Questions

Q6. Assume the following information for three projects that last for 1 year:

Which of the following is true?

1.    Project 1’s internal rate of return is higher lower than its discount rate.

2.    Project 2’s net present value is positive.

3.    Project 3’s net present value is positive.

4.   All projects have the same internal rate of returns.

5.    (Tick here if you think that none of the answers is correct.)

Q7. Nintendo just paid an annual dividend of 400 Japanese yen. The company is expected to            increase its dividend by 2% for the next two years. After that, its growth rate is predicted as 1% per annum forever. What is the fair price of this stock today if the required return is 5%?

1.    10129.90

2.    10319.67   10297.14

3.    11296.61

4.    13622.53

5.    (Tick here if you think that none of the answers is correct.)

Q8. The annual returns of three stocks over a 3-year period are given below:

The weights of Stocks A, B, and C in a portfolio is given below:

What is the expected return of the portfolio ABC?

1.    1.85%

2.    2.16%

3.    2.45%

4.    14.69%

5.    (Tick here if you think that none of the answers is correct.)