Technical Analysis - Economics of Financial Markets - Exam, Exams of Financial Accounting

Download Technical Analysis - Economics of Financial Markets - Exam and more Exams Financial Accounting in PDF only on Docsity! EC362 Autumn 2012 Page 1 of 6 Ollscoil na hÉireann, Gaillimh GX_____ National University of Ireland, Galway Autumn Examinations 2011-2012 Exam Code(s) 3BA1, 3BA5, 4BA4, 3BC1, 4BC2, 4BC3, 4BC4, 3FM2, 1EM1, 1OA1, 1EK2, 1EK3 Exam(s) B.A., B.A. (Public & Social Policy), B.A. (Economic & Social Studies), B.Comm., B.Comm. International, 3rd B.Sc. in Financial Mathematics and Economics, Erasmus, International Students, HDip. Economic Science Module Code(s) EC362 Module(s) ECONOMICS OF FINANCIAL MARKETS Paper No. 1 Repeat Paper Special Paper External Examiner(s) Prof. L. Delaney Internal Examiner(s) Prof. J. McHale C. Twomey Instructions: Section A – answer all questions (40 marks) Section B - answer 3 out of 5 questions (60 marks) There are 100 marks in total. All questions will be marked equally. If you attempt MORE THAN the correct number indicate clearly those questions which you wish to be graded. Duration 2hrs No. of Answer Books 1 Requirements: None No. of Pages 5 Department(s) Economics EC362 Autumn 2012 Page 2 of 6 SECTION A Answer all questions. This section is worth 40 marks. Each question is worth 2 marks 1. The geometric average of -12%, 20% and 25% is: A. 8.42% B. 11.00% C. 9.70% D. 18.88% 2. Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels 3. A high amount of short interest is typically considered as a __________ signal and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false 4. According to the Dow Theory there are ______ key forces which simultaneously affect stock prices. A. 2 B. 3 C. 4 D. 5 5. If investors overweight recent performance in forecasting the future they are exhibiting: A. representativeness bias B. framing error C. memory bias D. overconfidence 6. If you expect a stock market downturn, one potential defensive strategy would be to: A. buy stock index futures B. sell stock index futures C. buy stock index options D. sell foreign exchange futures 7. The holding period return on a stock was 32%. Its beginning price was $25 and its cash dividend was $1.50. Its ending price must have been: A. $28.50 B. $33.20 C. $31.50 D. $29.75 EC362 Autumn 2012 Page 5 of 6 16. A firm is planning on paying its first dividend of $2 after two years. Then dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A. $25.00 B. $16.87 C. $19.24 D. $20.99 17. Grott and Perrin, Inc. has expected earnings of $3 per share for next year. The firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A. $20 B. $70 C. $90 D. $115 18. You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $300 profit B. $300 loss C. $500 loss D. $200 profit 19. At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration. A. Max(0, ST - X) B. Min(0, ST - X) C. Max(0, X - ST) D. Min(0, X - ST) 20. If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract NB: Write your answers in the answer book, not on the exam paper. EC362 Autumn 2012 Page 6 of 6 SECTION B Answer 3 questions. All questions are worth equal marks. This section counts for 60 marks. B1. (a) List the key assumptions underpinning technical analysis. Discuss how using technical analysis differs from using fundamental analysis. (10 marks) (b) Explain clearly any two technical indicators with which you are familiar. (10 marks) B2. (a) What is the difference between a company’s return on assets (ROA) and its return on shareholders’ equity (ROE)? Why should investors be sceptical of seemingly extraordinary ROE? (4 marks) (b) Suppose a share you have found on the stock exchange has $7.6 million in sales, $6.4 million in expenses, $9 million in total assets, and $5.4 million in total liabilities. For simplicity, assume a 25% state plus federal tax rate. Calculate net income, stockholders’ equity, profit margin, total asset turnover, leverage, ROA, and ROE for the company. Is this a highly profitable company? (6 marks) (c) Empirical research has uncovered a series of stock market anomalies. Discuss the magnitude and alleged sources of any two stock-return anomalies. (10 marks) B3. Behavioural finance research has uncovered a catalogue of biases among investors that appear to contradict market efficiency. Describe clearly any 4 of these biases and critically evaluate the evidence that has been put forward by behavioural financial economists to explain these biases. (20 marks) B4. (a) Explain any two tests for the semi-strong form of the Efficient Markets Hypothesis (EMH). Describe the evidence found from these tests. (10 marks) (b) Are stock market bubbles consistent with the Efficient Market Hypothesis (EMH)? Use any example with which you are familiar. (10 marks) B5. (a) Why do bond markets typically react favourably to forecasts of an economic downturn or recession? (4 marks) (b) Describe briefly the differences between bond yield spreads as against the term structure of interest rates. Also, explain why yield spreads vary. (8 marks) (c) Suppose Ryanair plan to issue £500 million of new corporate bonds. Describe the main factors that Standard & Poor’s (S&P) would use to determine the credit rating that would attach to the new bond issue. (8 marks)