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Part II
1. Explain the relationship between the internal rate of return (IRR) and Net present value (NPV).
(10 marks)
2. Find the 90%, 95% and 99% critical values for t-distribution with 3, 6, 10 and 20 and 30 degrees of
freedom, assuming two tails. (10 marks)
3. Outline the relation between the normal, t and F distributions. (10 marks)
4. Explain the following i) primary data, ii) secondary data, iii) sample, iv) population.
(10 marks)
5. Discuss the drawback of the expected payoff method when ranking alternatives under the
assumption of non-linear utility function. Give examples. (10 marks)
a) Explain what is the purpose of assigning a significance level when testing a hypothesis. (5 marks)
b) A car dealer believes that the average cost of accessories in new cars is £3000 over the basic sticker
price. Selecting a sample of 50 new cars at random, it is found that the average cost of the accessories is
£3256 with the standard deviation of £2300. Test whether the claim of the car dealer is true at 5%
significant level. (10 marks)
c) The beta coefficient of a stock is a measure of the stock’s volatility (risk) relative to the market as a
whole. Stocks with beta coefficients greater than 1 generally bear greater risk than the market, whereas
stocks with beta coefficients less than 1 are less risky than the overall market portfolio. A random
sample of 15 high technology stocks was selected at the end of 1996 and the mean and SD of the beta
for these stocks were calculated as 1.23 and 0.37, respectively. Set up the appropriate null and
alternative hypothesis to test whether high-tech stocks are more risky than the market on average.
(10 marks)
b) Discuss with reference to the appropriate statistics whether the estimates above are significant.
(5 marks)
c) Write the regression equation estimated above and outline the assumptions of the estimation
procedure adopted. (15 marks)
a) What is the difference between a bond and an annuity? Which is more riskier (5marks)
b) Calculate the sum of the first eight terms of GP with a first term 1 and a common ratio 3.
(5marks)
c) A project has the following cash flows (negative values being costs and positive values
being revenues. Now = -1200, year 1 = 700, year 2 = 800. What is the IRR of this project
assuming rates of 15% and 18% respectively.
End of Paper