The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

###P_0=\frac{d_1}{r-g}###

A stock pays dividends annually. It just paid a dividend, but the next dividend (##d_1##) will be paid in one year.

According to the DDM, what is the correct formula for the expected price of the stock in 2.5 years?

The covariance and correlation of two stocks X and Y's annual returns are calculated over a number of years. The units of the returns are in percent per annum ##(\% pa)##.

What are the units of the covariance ##(\sigma_{X,Y})## and correlation ##(\rho_{X,Y})## of returns respectively?

**Hint**: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.

**Question 580** price gains and returns over time, time calculation, effective rate

How many years will it take for an asset's price to **quadruple** (be four times as big, say from $1 to $4) if the price grows by **15**% pa?

**Question 589** future, contango, market efficiency

In general, stock prices tend to rise. What does this mean for futures on equity?

A stock has a beta of **1.5**. The market's expected total return is **10**% pa and the risk free rate is **5**% pa, both given as effective annual rates.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market **fell** by **1**%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

**Question 699** utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is **NOT** correct?

**Question 704** utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $256 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $256. Each player can flip a coin and if they flip heads, they receive $256. If they flip tails then they will lose $256. Which of the following statements is **NOT** correct?

**Question 729** book and market values, balance sheet, no explanation

If a firm makes a profit and pays no dividends, which of the following accounts will increase?

**Question 739** real and nominal returns and cash flows, inflation

There are a number of different formulas involving real and nominal returns and cash flows. Which one of the following formulas is **NOT** correct? All returns are effective annual rates. Note that the symbol ##\approx## means 'approximately equal to'.

**Question 809** Markowitz portfolio theory, CAPM, Jensens alpha, CML, systematic and idiosyncratic risk

A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the graph below. The CML is the capital market line.

Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is **NOT** correct?