Additional Questions

The following questions are designed to assess your understanding of the various concepts we covered
in class. Ensure you know how to solve each one. These questions are straightforward but will test your
comprehension of the key concepts discussed.

APR to EAR Questions

• Question 1: A loan has an APR of 8%, compounded monthly. What is the Effective Annual Rate
(EAR) for this loan?
• Question 2: A credit card offers an APR of 18%, with interest compounded daily. Calculate the
Effective Annual Rate (EAR) for this credit card.
• Question 3: A savings account provides an APR of 4.5%, with interest compounded quarterly. What
is the Effective Annual Rate (EAR) for this savings account?
• Question 4: An investment offers an APR of 12%, with interest compounded semi-annually. What
is the Effective Annual Rate (EAR) for this investment?
• Question 5: A mortgage has an APR of 6%, with interest compounded weekly. What is the Effective
Annual Rate (EAR) for this mortgage?

Perpetuity Questions

• Question 1: A company offers to pay you $5,000 per year indefinitely, starting one year from now. If
the discount rate is 6%, what is the present value of this perpetuity?
• Question 2: You have an opportunity to invest in a perpetuity that will pay you $1,000 annually. If
you require a 4% return on your investment, how much should you be willing to pay for this perpetuity?
• Question 3: You are offered a perpetuity that will pay $2,000 per year, starting 5 years from now. If
the discount rate is 7%, what is the present value of this delayed perpetuity?
• Question 4: An investor purchases a bond that pays interest forever (a perpetuity) and is currently
priced at $100,000. The discount rate (or required rate of return) for such bonds is 5%. What is the
annual coupon payment on this bond?
• Question 5: You are offered a perpetuity that will pay $1,000 in the first year, and the payments will
grow at a rate of 3% annually. If the discount rate is 7%, what is the present value of this growing
perpetuity?

Annuity Questions

• Question 1: A bank offers a loan where you will make annual payments of $2,000 for 5 years, and
the loan carries an interest rate of 6% per year. What is the present value of the loan, i.e., how much
did you borrow?
• Question 2: You are planning to purchase an annuity that will pay you a fixed amount every year
for 15 years. The current value of the annuity is $50,000, and the discount rate is 6%. What is the
annual coupon (payment) that you will receive from this annuity?
• Question 3: You are planning to buy a car for $30,000 and will finance the purchase with a loan
that has a term of 5 years at an annual interest rate of 4%, compounded monthly. What will be your
monthly payment for this loan?

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Questions on EAC

• Question 1: Machine A costs $50,000, lasts 5 years, and has annual operating costs of $8,000. Machine
B costs $70,000, lasts 7 years, and has annual operating costs of $6,000. Discount rate: 10%. Compute
the EAC for each machine and choose the equipment with the lowest EAC.
• Question 2: A company has to replace a piece of equipment that costs $30,000 and lasts for 4 years
with no salvage value. The annual maintenance cost is $3,000, and the discount rate is 12%. What is
the EAC of the equipment?
• Question 3: A firm is choosing between two options to maintain its fleet of vehicles. Option 1 involves
buying new vehicles for $100,000 that will last 6 years and incur $5,000 per year in maintenance costs.
Option 2 involves leasing vehicles at a cost of $20,000 per year with no additional costs. If the discount
rate is 8%, which option has the lower EAC?

Capital Asset Pricing Model (CAPM)

• Question 1: A stock has a beta of 1.2, the risk-free rate is 3%, and the expected return on the market
portfolio is 10%. According to the CAPM, what is the expected return on the stock?
• Question 2: An investor is considering two stocks: Stock A with a beta of 0.8 and Stock B with
a beta of 1.5. If the risk-free rate is 2% and the market risk premium is 6%, what are the expected
returns for each stock according to CAPM?
• Question 3: The expected return on the market is 9%, and the risk-free rate is 2%. If a stock has an
expected return of 12% according to CAPM, what is the stock’s beta?
• Question 4: If the risk-free rate is 4%, and the expected return on the market is 9%, a stock with
a beta of 1.2 has an actual return of 13%. Is the stock overvalued or undervaluedaccording to the
CAPM, and why?
• Question 5: What is the Beta of the market portfolio?
• Question 6: What is the Beta of the risk free asset?

Portfolio Theory - Questions on the Standard Deviation of a Portfolio

• Question 1: You have a portfolio consisting of two assets, Asset A and Asset B. Asset A has a
standard deviation of 10%, and Asset B has a standard deviation of 15%. If the weight of Asset A in
the portfolio is 40% and Asset B is 60%, and the correlation coefficient between them is 0.3, what is
the standard deviation (volatility) of the portfolio?
• Question 2: A portfolio consists of two assets: Asset X, with a standard deviation of 12%, and Asset
Y, with a standard deviation of 8%. If the correlation between the two assets is -0.4, and the weights
of Asset X and Asset Y in the portfolio are 50% each, calculate the portfolio’s standard deviation.
• Question 3: You invest 70% of your portfolio in a stock with a volatility of 20% and the remaining
30% in a bond with a volatility of 5%. If the correlation between the stock and the bond is 0.2, what
is the volatility of your portfolio?
• Question 4: A portfolio contains 40% of Asset A, with a volatility of 18%, and 60% of Asset B, with
a volatility of 10%. If the assets are perfectly negatively correlated (correlation = -1), what is the
standard deviation of the portfolio?
Question 5: What is the volatility of the risk free asset?

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Portfolio Theory - Questions on Portfolio Return

• Question 1: You have a portfolio consisting of two assets. Asset A has an expected return of 8%,
and Asset B has an expected return of 12%. If you invest 40% of your portfolio in Asset A and 60%
in Asset B, what is the expected return of your portfolio?
• Question 2: An investor holds a portfolio with three assets: 50% is invested in Asset X, which has
an expected return of 7%, 30% in Asset Y, which has an expected return of 10%, and 20% in Asset Z,
which has an expected return of 15%. What is the expected return of the portfolio?
• Question 3: You invest 75% of your portfolio in a stock with an expected return of 9% and the
remaining 25% in a bond with an expected return of 5%. Calculate the expected return of your
portfolio.