ECO3420 (1999-00)

ECO3420 (1999-00) - Eli—‘EHJ‘: Fl) Page 1 of 2...

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Unformatted text preview: Eli—‘EHJ‘: Fl) Page 1 of 2 mfimfi mfifiw Copyright Reserved 7% 5%» “F 5‘: k ‘3‘? The Chinese University of Hong Kong Course Examinations 1999 - 2000 ffifl El Course Code & Title fl?! eat/1mg; : ............. ..ECQ....3.QZQ ..... .Einaneial...EchQmics ....................................... .. Time allowed first I .............. .2 .................... ,. hours IN??? ...................................... .minutes iv‘éi Student ID. No. I ........................................................................... .. Seat No. E33? 2 ...................................... H Answer all questions. Each question carries the same marks. Always explain your answer clearly and completely. 1. “In a two-period model with complete certainty, the existence of a money market, on which investors can borrow or lend funds at the same interest rate, would always bring higher utility to the investors.” True or False? Explain with the use of a diagram. (a) What is the condition under which a portfolio of two assets has a variance of zero? (b) Does it follow that the risk-free portfolio has zero return as well? Explain how the market portfolio is determined in a two-fund separation framework with a risk—free asset. Explain also why the market portfolio must consist of all risky assets. Explain why, according to the Capital Asset Pricing Model, the variance of an asset plays no part in determining its equilibrium rate of return. In following the present value method of project appraisal, an “interest rate” has to be chosen to do the discounting. Assuming that the investor is well—diversified, what is the procedure for finding the appropriate “interest rate”? What is the volatility test of market efficiency? Was this test found to be consistent with empirical data? Describe two pieces of evidence that throw doubts on the validity of the Efficient Market Hypothesis. The Stock Exchange of Hong Kong will soon launch a second board called Growth Enterprise Market. The basic difference between this board and the main board is that companies do not need to have a track record of profits and a strong asset position. It is believed that this market is essential for hi-tech companies to raise funds. Explain why banks are not interested in providing the necessary funding to these companies. When a listed company decides to raise funds by issuing new shares, shareholders are usually given rights to buy those shares in proportion to the number of shares they already own. Give a signaling reason to explain how this practice can prevent instant drop in share prices. Course Code fiEJ I ........ .......................... .. fig EH? E) Page 2 of 2 10. Give two reasons why, in. a merger and acquisition deal, the shareholders of the acquiring firm usually lose. 1 1. (a) What is the difference between put option and call option. (b) If an investor is holding shares of company A, and she wants to reduce the risk from a decline in share price, which derivative instrument can she buy? -End- ...
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