3330%20Final%202008 - Cornell University Gregory Besharov...

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C o r n e l l U n i v e r s i t y Gregory Besharov Economics 3330 Final December 16, 2008 2:00-4:30pm 1. True/False/Explain (24 points) Please answer six (6) of the following eight (8) questions. If more than six are answered, only the first six will be graded. State whether the sentence is true or false and explain your answer. All credit is based on the explanation. Please limit your explanations to no more than three sentences each—additional sentences will not be considered. a. (4 points) Suppose you own a share of stock. If you sell a call and buy a put with the same strike price and expiration, then at expiration the combined value of the three will be equal to the strike price. b. (4 points) The phrase “alpha becomes beta” means that any outperformance that purports to be based on alpha on examination turns out really to be based on taking unrecognized risk. c. (4 points) Recourse debt is equivalent to non-recourse debt plus a call option. d. (4 points) The leveraging of the government sector refers to the short sale of government issued debt to finance the purchase of risky assets. e. (4 points) The higher the beta of a stock, the lower its price in the dividend discount model. f. (4 points) The cash flow statement of a company gives a better indication of how the assets and liabilities of a company change over a period of time than the income statement does because it does not rely on accounting concepts but only on measurable changes in cash. g. (4 points) “Survivorship bias” may lead to the conclusion that a mutual fund manager has outperformed the market when the manager has not actually done so. h. (4 points) International investment in risky assets, unlike in riskless assets, is more risky than domestic investment because of currency fluctuations.
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2. Portfolio Construction (25 points) Consider two assets: a stock fund and a bond fund. The states of the world, their probabilities, and the percentage return of each fund in each state is given in the table
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3330%20Final%202008 - Cornell University Gregory Besharov...

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