Past Paper 2010-11 Term 1

Past Paper 2010-11 Term 1 - ECO 3420 Financial Economics...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECO 3420 Financial Economics Final Examination (2010-11 Term 1) (Closed-Book) Always explain your answer clearly and completely. Credits are given to concise and well-presented answers. Provide diagrams wherever appropriate. Time allowed = 90 minutes. Answer all nine questions, 9 marks each. Sub-questions carry the same marks unless otherwise stated. 1. (a) What is the major difference between risky arbitrage and riskless arbitrage? (b) Suppose the market cap of a company is $50 million. This company holds assets that are worth at least $75 million. If you believe in the efficient market hypothesis, what would you do? (c) If the company is controlled by some substantial shareholders, cite some reasons that might convince you not to take arbitraging actions. 2. (a) Explain briefly the filter rule and the “buy-and-hold” strategies. (4 marks) (b) Explain how the filter rule might beat “buy-and-hold” in rate of return where the efficient market hypothesis does not hold. (5 marks) 3. “Financial economics may suggest feasible and sustainable ways to lift the poor out of poverty. For instance, many poor people are living in undeveloped areas where farming can bring large extra income. Instead of giving money and food to these people, a better way is to lend them money so that they could buy the necessary equipment and materials to start farming. In the long term, markets will develop so that money can be borrowed and lent and further investments made.” Assuming that there is no uncertainty, explain with a model how investment and consumption smoothing can lead to higher utilities. 4. Consider two assets, A and B, with the following returns. Situation Probability Asset A Asset B Portfolio Recession 0.1 -15% -30% Weak 0.2 -10% -10% Normal 0.3 5% 0 Strong 0.2 15% 20% Boom 0.2 20% 50% (a) Calculate the mean and variance of the rate of return of A and B. (b) Form a portfolio with 40% in A and 60% in B. Find the mean and variance of this portfolio. (c)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/03/2012 for the course ECON 3420 taught by Professor Kwong during the Spring '11 term at CUHK.

Page1 / 4

Past Paper 2010-11 Term 1 - ECO 3420 Financial Economics...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online