Fisher Separation Theorem - Economics of Financial Markets - Exam, Exams of Financial Accounting

Download Fisher Separation Theorem - Economics of Financial Markets - Exam and more Exams Financial Accounting in PDF only on Docsity! 1 Ollscoil na hÉireann, Gaillimh GX_____ National University of Ireland, Galway Semester 1 Examinations 2008/2009 Exam Code(s) 4FM1 Exam(s) B.Sc. (Financial Mathematics & Economics) Module Code(s) EC411 Module(s) Economics of Financial Markets II Paper No. 1 Repeat Paper External Examiner(s) Professor Cillian Ryan Internal Examiner(s) Professor Eamon O’Shea Dr. Srinivas Raghavendra Instructions: SECTION A: Answer all questions in Section A. Each question carries 10 marks. SECTION B: Answer any two in Section B. Each question carries 25 marks. Duration 2 hours No. of Pages 1+2 Department(s) Economics Course Co-ordinator(s) Dr. Srinivas Raghavendra Requirements: MCQ Handout Statistical Tables Graph Paper Log Graph Paper Other Material 2 EC411: Economics of Financial Market Maximum Duration: 2 hours Max Marks: 100 Section A 1. What is the implication of the Fisher Separation Theorem for corporate policy? 2. What is the essential difference between the measures absolute (ARA) and the relative (RRA) risk aversion? 3. Explain how the monotonicity property of a martingale is related to ‘learning without forgetting’. 4. Suppose your wealth is €10,000 in the bank and a car worth €2100. The probability that your car can be stolen is 0.1. The utility function is given by 2/1 wu = . Suppose that an insurance company offers to pay you c = €2100 if the car is stolen in exchange of a payment p that is made before the uncertainty is revealed. How much would you be willing to pay for the insurance? 5. How would you classify the agents’ attitude towards risk using the actuarial value and the expected utility of a gamble? Section B 6 Suppose that an individual is risk averse and is endowed with a current amount of wealth W, and has been presented with an actuarially neutral gamble of Z (i.e., E(Z)=0). What risk premium ),( ZW! must be added to the gamble to make her/him indifferent between the gamble and the actuarial value of the gamble? 7 Derive the minimum variance portfolio for the following cases: a. Two perfectly correlated assets. [10] b. Two perfectly inversely correlated assets. Also prove that we could construct a perfect hedge for the inversely correlated assets. [15] 8 What happens to portfolio variance as you increase the number of assets in a portfolio? Derive the portfolio variance for an N-asset case and for the limiting case of N approaching infinity.