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Department
Finance
Course
MGFB10H3
Professor
Derek Chau
Semester
Summer

Description
1) B 2) B 3) D 4) D 5) C 6) A 7) D 8) B 9) C 10) E 11) E 12) B 13) D 14) A 15) E 16) B Question 1 a. n ER X   probi*ri i1 ER A 0.4(0.14) + 0.6(0.07) = 0.098 ER B 0.4(0.05) + 0.6(0.1) = 0.08 n    (proi)ir xER ) X i1  A  0.4(0.14 -0.098) + 0.6(0.07 -0.098) 0.0342929   0.4(0.05 -0.08) + 0.6(0.1 -0.08 0.0244949 B b. n   prob (r  ER )(r  ER ) XY  i X ,i X Y ,i Y i1 AB = 0.4(0.14 - 0.098)(0.05 - 0.08) + 0.6(0.07 - 0.098)(0.1 - 0.08) = -0.00084    AB  0.00084  1 AB   0.0342929*0.0244949 A B c. Since AB 1 , we can construct a risk-free portfolio by investing w   B  0.0244949  0.416667in Asset A, 0.583333 in Asset B. A A B 0.0342929 0.0244949 Risk-free rate 0.416667 (0.098)  0.583663(0.08)  0.0875 d. 0.098  0.0875   A0.095 0.0875)   1A4 0.08  0.0875   B0.095 0.0875)    B1 Question 2 Monthly payment for the 25-year $200,000 mortgage: 6 Monthly interest rate =1 0.18 1 0.014467  2  200,000  X *PVAF 0.014467, 300 2,932.76 Loan balance at the end of year 5: 2,936.76*PVAF 0.014467, 240,272.06 1  0.24  6 Monthly interest rate from year 6 to year 71  1 0.019068  2  Loan balance at the end of year 7 (assume no payments in years 6 and 7): 24 196,272.06* 1 0.019068   308,837.88 Value of years 6’s and 7’s payments (1,466.38 per month) at the end of year 7: 24 1,466.38*PVAF 0.019068, 240.019068)  44,106.04 Loan balance at the end of year 7: 308,837.88 – 44,106.04 = 264,731.
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