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W Course Examinations _ZQ.O 2 ~— 03 35-11% F! 9? iii. ECO 3420 Financial Economics Course Code & Title it El 5% iii/1J8 77$ Time allowed Him 3 ........ ............................. hours '1‘”? ............................. U minutes at:
Student ID. No. $3; ﬁili‘. 3 ........................................................................... .. Seat No. ﬂit 3 .......................... .. Answer all questions. All questions carry equal marks.
Always explain your answer clearly and completely. Provide diagrams wherever appropriate. 1. A) In an indifference curve diagram, show the likely difference between the
indifference curves of a 25-year old investor and that of a retired investor. Explain
brieﬂy. ‘ B) Use a Markowitz equilibrium model to show the optimal portfolios of the two
investors in (A) above. 2. “In a capital asset pricing equilibrium, the excess return of a risky asset is
proportional to the excess return of the market portfolio.”
A) What is the market portfolio?
B) What is excess return?
C) What is the proportion equal to?
D) Does the variance of the return of the asset have any importance? 3. (A) A company is expected to earn a constant $0.5 per share in each year in future.
If the CAPM required rate of return of this company is 10%, what is the price of a
share of this company today if the market is efﬁcient? (B) In an efficient market, if the beta risk of a company increases, what is the
effect on its price-earnings ratio? C) There is evidence that value stocks significantly outperform glamour stocks in
many markets around the world. Why is this taken as evidence against the
efﬁcient market hypothesis? 4. (A) “When noise traders move price away from its fundamental level, smart
traders can bring it back by arbitraging. No asset is mispriced and the market is
efficient.” Explain this argument carefully. (B) Cite evidence that suggests the arbitraging activity described in (A) is limited
in practice and assets are sometimes mispriced. 5. (A) In an efﬁcient stock market, mutual fund managers cannot achieve a return
higher than some market benchmark, e. g. the market index. Why?
(B) Is available evidence consistent-with this efﬁcient market prediction? Cite
some speciﬁc studies. - 6. Consider the following forms of financing,
0 retained earnings,
0 bank borrowing, and
o issuing of new shares. What are the advantages and disadvantages of each of the three forms from the
point of View of the existing shareholders? Course Code ﬁﬁl 5155?. I % KW: ﬂ) Page 2 0f 2 7. Mergers and acquisitions are sometimes Viewed as indications that the market for
corporate control is at work in disciplining bad management. Explain three
reasons why this argument may be unrealistic in practice. 8. Some recent studies found that a surprisingly high percentage of large companies
around the world were controlled by large shareholders.
A) In these companies, what is the distribution of control rights and cashﬂow
rights between large and small shareholders?
B) If small shareholders are not protected by the government, describe brieﬂy
three ways in which small shareholders may be cheated by large shareholders. -End- ...
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- Spring '11