Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 8 Solutions
1. This option represents a combination of 500 European Call options, each with a
strike price of $200 and a mature on February 1st.
2. (a) We shall use the following notation:
r is the risk free interest rate,
T is the ti
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 9 Questions
1. (a) Show that in a oneperiod binomial model of a nondividend paying share,
the riskneutral probability of an up movement is given by:
q=
er d
ud
where u, d, and r are quantities you must dene.
(b) Explain the formula
V
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 5 Solutions
1. (a) Recall the CML is = rf +
(M
M
rf ). Hence we need to nd the mean
and standard deviation of the market.
0.3 0.1 0.09
+
+
= 0.07 = 7%
6
2
3
1
1
1
=
(0.3 0.07)2 + (0.1 0.07)2 + (0.09 0.07)2
6
2
3
M =
M
= 0.13341664.
So
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 6 Solutions
1. (a) Unsystematic risk is the risk that depends on conditions peculiar to the individual security and can be reduced by diversication.
Systematic risk is the risk relating to the factor that aects every asset, and
cannot b
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 5 Questions
1. You forecast three dierent scenarios for the state of the economy next year. You
model is formulated as
STATE OF THE ECONOMY
Optimistic
Likely
Pessimistic
1
6
1
2
1
3
Return on Market
30%
10%
9%
Return on Asset X
36%
20%
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 3
1. Consider a person, John who has the utility function U (w) =
w
w+1
for w > 0.
(a) Show John prefers more to less and is risk adverse.
(b) Find the absolute and relative risk aversion of John.
(c) John currently has a wealth of 0. H
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 4 Questions
1. (a) Approximate the expected utility function using a Taylor series expansion
up to terms of the 2nd derivative and explain how this relates to modern
portfolio theory.
(b) If we assume modern portfolio theory is correct
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL5109
Financial Economics for Insurance and Superannuation
Test 1
Session 2, Year 2008
Wednesday 20 August 2008
Assessment weight: 7.5%
Name :
Id # :
INSTRUCTIONS:
1. TIME ALLOWED  50 MINUTES.
2. TOTAL NUMBER OF QUESTIONS  3.
3. TOTAL MARKS  100.
4.
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004
Financial Economics for Insurance and Superannuation
Test 1 Model Solutions
Question 1 [30 marks]
Hyperbolic Absolute Risk Aversion (HARA) utility function is dened by u (w) =
1
aw
1
generally with b > 0:
(a) [10 marks]
A (w) =
w
1
+
b
a
1
and R
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
THE UNIVERSITY OF NEW SOUTH WALES
MONTH OF EXAMINATION  NOVEMBER 2005
ACTL 3004
FINANCIAL ECONOMICS FOR INSURANCE AND
SUPERANNUATION
1. TIME ALLOWED  3 HOURS
2. TOTAL NUMBER OF QUESTIONS
=
12
3. ANSWER ALL QUESTIONS
4. QUESTIONS ARE NOT OF EQUAL VALUE
5
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
fPJ
THE UNIVERSITY OF NEW SOUTH WALES
MONTH OF EXAMINATION  NOVE:MBER 2006
Final Examination
ACTL 3004
FINANCIAL ECONOMICS FOR INSURANCE AND
SUPERANNUATION
INSTRUCTIONS
1. TIME ALLOWED  3 HOURS
2. TOTAL NUMBER OF QUESTIONS  11
3. TOTAL MARKS  100
4. A
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL 3004/5109
Financial Economics
Class Test 2
Thursday, 7 October 2004
Time Allowed: 50 minutes
Total Mark: 100 points
Total Assessment credit: 7.5%
Write your name and student number on the space provided:
Name:_
Student ID:_
Read through the following
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
THE UNIVERSITY OF NEW SOUTH WALES
MONTH OF EXAMINATION  NOVEMBER 2007
FINAL EXAMINATION SOLUTIONS
ACTL 3004/5109
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
Question 1. [10 marks] Assume that a property owner has a utility function u (w) where w
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004/5109
Financial Economics for Insurance and Superannuation
Test 2 Model Solutions
Question 1 [20 marks]
According to the SingleIndex model, the expected return on security i is given by
E (Ri ) =
i
+
iE
(RM ) ;
and the variance is given by
2 2
i
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 9 Solutions
1. (a) Let u and d be assumed proportionate changes in the price of the underlying
share if it goes up and down respectively. At time 1 let the price of a derivative
pay Cu if the price goes up and Cd if the price moves down
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 4 Solutions
1. (a) Using the Taylor series expansion and little oh notation,
1
u(W ) = u(E[W ]) + u (E[W ])(E[W ] W ) + u (E[W ])(E[W ] W )2 + o(E[W ] W )3 )
2
1
2
E[u(W )] u(E[W ]) + u (E[W ])W .
2
This relates back to modern portfoli
Financial Economics for Insurance and Superannuation
ACTL 3004

Fall 2015
ACTL3004 PASS Week 6 Questions
1. (a) Explain the dierence between systematic and unsystematic risks
(b) For a multi factor model decompose the variance on the return on some asset
into systematic and unsystematic risk.
2. Explain how we can relate a sing
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 1
Financial Economics for Insurance and
Superannuation: Week 1
Introduction, Utility Theory and Pricing Fundamentals
ACTL3004: Week 1
Course Introduction
About the lecturer Brian W.B. CHU
Graduated from Macquarie University with BCom (Act
S
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 1
Financial Economics for Insurance and
Superannuation: Week 1
Introduction, Utility Theory and Pricing Fundamentals
1 / 46
ACTL3004: Week 1
Course Introduction
About the lecturer Brian W.B. CHU
Graduated from Macquarie University with BCom
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 2
Financial Economics for Insurance and
Superannuation: Week 2
Risk Measures, Financial Data and the Efcient Market
Hypothesis
1 / 26
ACTL3004: Week 2
Investment Risk Measures
Investment Risk Measures
Let X denote the rate of return random
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 3
Financial Economics for Insurance and
Superannuation: Week 3
The Mean Variance Portfolio Theory
1 / 32
ACTL3004: Week 3
The MeanVariance Portfolio Theory
Motivations
Motivation 1
Consider an individual with utility function u (). We can
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Weeks 45
Financial Economics for Insurance and
Superannuation: Weeks 45
The Capital Asset Pricing Model and Factor Models
1/1
ACTL3004: Weeks 45
Capital Asset Pricing Model
Assumptions
Assumptions: Individuals
1. Investors have the same onep
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Weeks 45
Financial Economics for Insurance and
Superannuation: Weeks 45
The Capital Asset Pricing Model and Factor Models
1/1
ACTL3004: Weeks 45
Capital Asset Pricing Model
Assumptions
Assumptions: Individuals
1. Investors have the same onep
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 6
Financial Economics for Insurance and
Superannuation: Week 6
Introduction to Derivatives
1 / 21
ACTL3004: Week 6
Derivatives
What is a Derivative Instrument?
What is a Derivative Instrument?
A derivative is a security/contract that promis
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Weeks 78
ACTL3004: Weeks 78
Binomial Lattice Model: European Option Valuation
Introduction
Binomial Lattice Model: European Option Valuation:
Introduction
Consider an investment world where we can only invest in two nancial instruments:
Financ
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Weeks 910
Financial Economics for Insurance and
Superannuation: Week 910
Continuous Time Derivative Valuation
1 / 43
ACTL3004: Weeks 910
Measure Theory
RadonNikodym Derivative
Change of Measure
Eg. Consider the two step random walk tree.
Wit
FINANCIAL ECONOMICS FOR INSURANCE AND SUPERANNUATION
ACTL 3004

Summer 2010
ACTL3004: Week 10a
Financial Economics for Insurance and
Superannuation: Week 10a
Black Scholes Option Pricing Model
1 / 16
ACTL3004: Week 10a
BlackScholes Model
Derivation
BlackScholes Model Derivation
The price of a derivative in the Black Scholes mod