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ECO3420 (2002-03)

ECO3420 (2002-03) - $“fi(4t H)Pagelof 2 ‘ name mama 2...

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Unformatted text preview: $“fi (4t- H)Pagelof 2 ‘ . . name mama 2;: 7% Ci? fie; Copyright Reserved W Course Examinations _ZQ.O 2 ~— 03 35-11% F! 9? iii. ECO 3420 Financial Economics Course Code & Title it El 5% iii/1J8 77$ 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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