ECON 3420 Sample Mid-term

ECON 3420 Sample Mid-term - ECON 3420 Financial Economics...

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ECON 3420 Financial Economics Sample Mid-term Examination (2011-12 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 = 70 minutes. Answer all seven 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
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ECON 3420 Sample Mid-term - ECON 3420 Financial Economics...

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