course 2 final answers

[Anonymous]

have you guys seen that the final answers are on the soa site? i found them by accident, because there is no indication that they have been posted. but, the detailed solutions are not up yet. anyway the final answers are a little different than the preliminary.

#2 all
#22 D
#37 D

[Drzy]

The change for #22 was pretty well expected, since there's no way anything but D could be the right answer.

#37 is a lot more interesting. I put D, which is what it was changed to (yay!), but the more I think about it, it really doesn't seem like there's enough information to solve the problem. How the heck are we supposed to know what rate of return they're expecting? Are we supposed to assume they're all geniuses who know exactly what the average rate of return would be?

[Dr T Non-Fan]

Re: 37.
You should check the syllabus for the topic of perpetuities' rates of returns.

A perpetuity that increases by 5% per year, starting with 10 in one year, which is worth $500, implies an interest rate of 7%. You'll need this later. (No mention of any additional risks, so it must be risk-free?) This is the constant opportunity cost of capital.

The selling price after one year is 5% more than the previous year, since the next dividend is 5% higher than 10.
The reinvestment rate at the going interest rate makes the rates of return exactly equal.
(Next time bring your PC with you.)

<font size=-1>[ This Message was edited by: Dr T Non-Fan on 2001-12-05 18:36 ]</font>

<font size=-1>[ This Message was edited by: Dr T Non-Fan on 2001-12-05 18:37 ]</font>

[Toonces]

#2 is correct because I'm pretty sure the question was not on the syllabus.

#22 was obviously a mistake.

For #37, you have all of the information you need. We know that dividend growth will be constant and indefinite. We also know that the cost of capital is constant (cost of capital is always assumed indefinite). There is no condition that could make the rate of return in year 1 different from the rate on return in year 2, 3, etc. Therefore, the annualized returns for 1 year, 2 years and 3 years must be the same.
(Poor GuoQiang, who's been defending the E answer for the last month)

And as far as who "expects" a greater rate of return, "expects" in this context refers to a probability "expectation", not what each investors "hopes" are.

<font size=-1>[ This Message was edited by: Toonces on 2001-12-05 18:53 ]</font>

[Dr T Non-Fan]

let x = the opportunity cost of capital.

500 = 10/(1+x) + 10(1.05)/(1+x)^2+...
(1+x)*50 = 1 + (1.05)/(1+x) + [(1.05)/(1+x)]^2 + ...

(1+x)*50 = 1 / [1 - (1.05)/(1+x)]
(1+x)*50 = (1+x)/(x-0.05)
50 = 1 /(x-0.05)
0.02 = (x-0.05)
x = 0.07

[Dr T Non-Fan]

Where is GuoQiang defending E?

[Toonces]

GuoQiang was defending it for the past month on the "Test 2 Solutions" thread.

[Dr T Non-Fan]

I see now. Thanks.

[Macroman]

What was offerred as the original answer for #2? I think it should be C (10) since a competitive firm would have MP1/MC1=MP2/MC2...

This may well not be on the syllabus however.

I think #22 and #37 are both pretty obvious. #22 was fingered as wrong almost immediately. #37 why would expected rate of return vary based on holding period based on the given information?

[cthawk]

Hey Fred, where did you find these answers?
what is the link?

[Anonymous]

Go here: http://www.soa.org/eande/examinations.html

And click on "Course 2". The answers at the end of the PDF that comes up now say what Fred says they say. They're now titled "Course 2 / November 2001 / Final Answer Key". (My emphasis.)

<font size=-1>[ This Message was edited by: The Frugal Actuary on 2001-12-06 09:11 ]</font>

[cthawk]

THANKS, That means 3 more right for me!! Gives me more breathing room with 37 right!!!
Yippee, Course 3 here I come

[Newf]

Does anyone remember what the original response to #37 was?

[Anonymous]

Originally, the answer key listed E (not enough info) as the correct response.