1. The following table shows the yield to maturity (YTM) of various types of bonds on October 13, 2017.

	U.S. Treasury	Corp. AAA	Corp. AA
2-year	1.495%	1.645%	1.733%
5-year	1.901%	2.223%	2.279%
10-year	2.274%	2.886%	2.983%

1. What is the expected yield of a three-year treasury two years from the date above if the pure expectations theory holds? (3 marks)
2. What explains the 0.322% difference in YTM between a 5-year U.S. Treasury and a 5-year AAA corporate bond? (3 marks)
3. Explain why the shape of the Treasury yield curve is taken as an indicator of the state of the economy. (4 marks)

2. (12 points) The last dividend paid by Company A was $2.20. Its growth rate is expected to be 10 percent for three years, after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a rate of return on equity of 15 percent.

1. Draw a clear and accurate timeline of the expected cash flows. (4 marks) (The timeline should consist of time periods (t= 0, 1, 2, ), the cash flow associated with each period, the appropriate growth rates and the discount rate.)

b. What is P0, the current price of the stock? (4 marks)

3. What is P1, the expected price of the stock a year later at t = 1? (4 marks)

3. (8 points) Jack's Inc.'s most recent dividend paid was $2.40 per share (i.e., D₀ = $2.40). The dividend is expected to grow at a rate of 6 percent per year in the foreseeable future. The risk-free rate is 5 percent and the return on the market is 9 percent. If the company's beta is 3, what is the price of the stock today?

(Hint: You need to find the required rate of return of Jack's Inc.'s stock first.)

4. (4 marks) Explain why portfolio risk (s_p) tends to decrease as the number of stocks in the portfolio increases.

5. (12 points) Consider the following 4-stock portfolio:

Stock	Investment	Beta
A	$100,000	1.50
B	$150,000	-0.25
C	$250,000	1.25
D	$500,000	0.75

The market required rate of return is 12 percent and the risk-free rate is 4 percent.

1. Use the SML equation to find the required rate of return of each of the four stocks in the portfolio. (3 marks)

2. Use your results in part a. to find the required rate of return of the portfolio. (3 marks)

3. Find the beta (b) of this portfolio. (3 marks)

4. Use the portfolio b you obtained in part c. and the SML to verify that the required rate of return of the portfolio is the same as that in part b. (3 marks)

6. (4 marks) In an efficient market, money managers and investment advisers have little value to investors. Do you agree or disagree with this statement? Explain.