Ec1723, Fall 2012: Midterm Exam 1
Do all four questions. Read the questions carefully before starting to answer.
Each question is worth 25 points. You will be graded on the quality of your
explanations as well as the accuracy of your answers. You may use
Economics 1723: Problem Set 1 Solutions
Problem 1:
a) Buy 3 units of asset 1 and sell 1 unit of asset 2. This strategy will have 0.5 dollars of
cash flow today and zero cash flow tomorrow. There is an arbitrage opportunity
because there is a violation of
Ec1723, Fall 2013: Problem Set 1
This assignment is due at the beginning of class on Tuesday, September 17. The assignment will not be accepted after 10.15am on Tuesday, September 17.
1. In each of the following situations there is an arbitrage opportunit
Ec1723, Fall 2014: Problem Set 5 Solutions
Problem 1
We will use the Gordon growth formula from the formula sheet:
Pt =
Dt+1
RG
1. Let PV and PG refer to the prices per share of Value Corp. and Growth Corp. When the required rate
of return is 5%:
10
10
PV
Economics 1723: Capital Markets
Lecture 23
John Y. Campbell
Ec1723
November 25, 2014
John Y. Campbell (Ec1723)
Lecture 23
November 25, 2014
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Key questions
Are the average returns on calls, puts, and straddles on the
index portfolio consistent with t
Solutions to Problem Set 4
October 14, 2013
Question 1
a) The Sharpe ratio of Berkshire Hathaway is 0.76, and the Sharpe ratio of the market portfolio used in the paper is 0.39. (Section 3, Buffetts Track Record)
b) Berkshires average excess return was 19
Economics 1723: Capital Markets
Lecture 22
John Y. Campbell
Ec1723
November 20, 2014
John Y. Campbell (Ec1723)
Lecture 22
November 20, 2014
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Key questions
What does it mean to determine option values using risk-neutral
pricing?
What are the ve input
Economics 1723: Capital Markets
Lecture 21
John Y. Campbell
Ec1723
November 18, 2014
John Y. Campbell (Ec1723)
Lecture 21
November 18, 2014
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Key questions
How do the price of call and put options depend on the price
volatility of the underlying stoc
Economics 1723: Capital Markets:
Lecture 24
John Y. Campbell
Ec1723
December 2, 2014
John Y. Campbell (Ec1723)
Lecture 24
December 2, 2014
1 / 50
Key questions
What are some dierences between a AAA tranche of a CDO
and a AAA corporate bond?
Provide a brie
Economics 1723: Problem Set 6 Solutions
Problem 1
a) We know that for perpetuity P=C/Y, so we can calculate modified duration as:
b) Recall that unmodified duration is defined as the weighted average of the times to each payment, where
the weights are the
Economics 1723: Capital Markets
Lecture 12
John Y. Campbell
Ec1723
October 15, 2013
John Y. Campbell (Ec1723)
Lecture 12
October 15, 2013
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From returns to prices
Last lectures on informational e ciency:
Returns in short horizons are di cult to predi
Economics 1723: Problem Set 7 Solutions
EC 1723: Problem Set 8 Solutions
Problem 1:
a) Alpha = 4.78, beta = 0.04.
b) The current period beta has increased to 0.08 and become more significant. The
sum of all betas are statistically significantly away from
Economics 1723: Section 2 Notes
Todays Plan:
Problem Set 1 Solutions (15 minutes)
Mean-Variance Analysis (25 minutes)
Review Problem (15 minutes)
1. Any questions about material so far?
2. Mean-Variance Analysis with Two Risky Assets
2.1 Setting: the M
Ec1723, Fall 2014: Solutions to Problem Set 7
1.
(a) The absolute risk aversion for
U (w) = exp( aw)
is
U 00 (w)
=
U 0 (w)
a2 exp( aw)
=a
a exp( aw)
i.e. a constant.
(b) Using the rst order condition for q, we nd
Et (Pt+1 )
Pt = qaV art (Pt+1 )
) q =
Et (
Ec1723: Final concept review sheet
1. Introduction
Discrete-state model
Arrow-Debreu securities and state prices
Arbitrage
Complete markets
Commonly used utility functions
Absolute and relative risk aversion
Expected utility
Insurance premium form
Economics 1723: Capital Markets
Lecture 19
John Y. Campbell
Ec1723
November 11, 2014
John Y. Campbell (Ec1723)
Lecture 19
November 11, 2014
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Key questions
How are forward prices determined?
Is the forward price equal to the expected future spot pric
Economics 1723: Capital Markets
Lecture 18
John Y. Campbell
Ec1723
November 4, 2014
John Y. Campbell (Ec1723)
Lecture 18
November 4, 2014
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Key questions
Describe two views of the bid-ask spread.
What is the liquidity premium? How does it change with
Economics 1723: Capital Markets
Lecture 17
John Y. Campbell
Ec1723
October 31, 2013
John Y. Campbell (Ec1723)
Lecture 17
October 31, 2013
1 / 40
Key questions
Is conventional wisdom consistent with mean-variance analysis?
Are bills, bonds, and stocks more
Economics 1723: Capital Markets
Lecture 16
John Y. Campbell
Ec1723
October 29, 2013
John Y. Campbell (Ec1723)
Lecture 16
October 29, 2013
1 / 38
Key questions
What are two reasons why corporate bond yields are higher than
Treasury bond yields?
What is the
Economics 1723: Capital Markets
Lecture 13
John Y. Campbell
Ec1723
October 17, 2013
John Y. Campbell (Ec1723)
Lecture 13
October 17, 2013
1 / 42
Key questions
How do short selling constraints and belief dierences generate
overvaluation?
What determines th
Economics 1723: Capital Markets
Lecture 21
John Y. Campbell
Ec1723
November 19, 2013
John Y. Campbell (Ec1723)
Lecture 21
November 19, 2013
1 / 37
Key questions
How do the price of call and put options depend on the price
volatility of the underlying stoc
Economics 1723: Capital Markets
Lecture 18
John Y. Campbell
Ec1723
November 7, 2013
John Y. Campbell (Ec1723)
Lecture 18
November 7, 2013
1 / 42
Key questions
Describe two views of the bid-ask spread.
What is the liquidity premium? How does it change with
Ec1723, Fall 2013: Problem Set 2
The assignment is due at the beginning of class on Tuesday, September 24. The assignment
will not be accepted after 10:15am on Tuesday, September 24.
1. You are serving on a nancial reform commission studying ways to reduc
Economics 1723: Capital Markets
Lecture 14
John Y. Campbell
Ec1723
October 21, 2014
John Y. Campbell (Ec1723)
Lecture 14
October 21, 2014
1 / 53
Key questions
What is the yield to maturity of a bond? What is the relation
between the price and the YTM?
Wha
Ec1723 Midterm2 Review
Lecture 9
1. Key assumptions of factor models
Base: Market model/ Single index model
Key assumption: Suppose that the errors in this equation are uncorrelated across stocks. Thus, the
residual risk in any stock is idiosyncratic, unr
Economics 1723: Capital Markets
Lecture 5
John Y. Campbell
Ec1723
September 16, 2014
John Y. Campbell (Ec1723)
Lecture 5
September 16, 2014
1 / 44
Key questions
What do the coe cients of absolute and relative risk aversion
measure?
What is the Sharpe rati
Economics 1723: Capital Markets
Lecture 12
John Y. Campbell
Ec1723
October 14, 2014
John Y. Campbell (Ec1723)
Lecture 12
October 14, 2014
1 / 39
From returns to prices
Last lectures on informational e ciency (Fama):
Returns at short horizons are di cult t
EC1723 Problem set 1: Suggested solutions
1. (a) Asset two has a payoff vector which is a multiple of the payoff vector of asset
one. So, to avoid an arbitrage opportunity the price of asset two ought to be the
same multiple of the price of asset one.
Thi
Ec1723, Fall 2006: Assignment 1
This assignment is due at the beginning of class on Tuesday, October 3. The assignment
will not be accepted after 10.15am on Tuesday, October 3.
If you have a question, please email any of the teaching sta or post it to the
Ec1723, Fall 2016: Problem Set 1
This assignment is due at the beginning of class on Tuesday, September 13. The assignment will not be accepted after 8.45am on Tuesday, September 13.
1. In each of the following situations there is an arbitrage opportunity
Ec1723, Fall 2016: Problem Set 2
This assignment is due at the beginning of class on Tuesday, September 20. The assignment will not be accepted after 8.45am on Tuesday, September 20.
1. Suppose that your wealth is $800,000. You buy a $600,000 house and in
EC1723 Problem Set 1
Emily Fricke, HUID: 51247213
1.
a)
Asset 2 has a pay-off vector that is 4times the pay-off vector of Asset 1. Therefore,
the price of those assets should be the same multiple due to the law of one price.
This isnt true: Asset