Download Volatility of Stock Prices - Economics of Financial Markets - Exam and more Exams Financial Accounting in PDF only on Docsity! Autumn Examinations 2008 Ollscoil na hÉireann, Gaillimh GX_____ National University of Ireland, Galway Autumn Examinations 2006 Exam Code(s) 3BA1, 3BA5, 4BA4, 3BC1, 4BC2, 4BC3, 4BC4, 3FM2, 1EM1, 1OA1, 1EK2, 1EK3 Exam(s) B.A., B.Comm., B.Comm. International, 3rd B.Sc. in Financial Mathematics and Economics, Erasmus, Visiting Students Module Code(s) EC362 Module(s) ECONOMICS OF FINANCIAL MARKETS Paper No. 1 Repeat Paper Special Paper External Examiner(s) Professor C. Ryan Internal Examiner(s) Professor M. Cuddy Mr. C. Twomey Instructions: Section A – answer 2 out of 3 questions (25 marks) Section B - answer 3 out of 5 questions (75 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 4 Department(s) Economics Page 1 of 5 Autumn Examinations 2008 SECTION A Answer TWO questions. All questions are worth 12.5 marks. A1. Explain, using diagrams, what happens to the demand for and/or supply of bonds and the interest rate if: (a) There is a sudden increase in the volatility of stock prices; (b) An economy begins to experience a recession. A2. In a recent issue of the Value Line Investment Survey, you note the following beta values for these US equities: Coca Cola (0.83); Microsoft (1.25); GE (1.00); Wal Mart (0.80) i) What does a stock’s beta measure? ii) Is it reasonable to assume that the expected return on Wal Mart is less than that on Microsoft? Explain your reasoning. iii) “Given that GE has a beta of 1.00, one can mimic the performance of the stock market as a whole by buying only these shares.” Do you agree? Explain. A3. The Economist’s Big Mac index offers an informal guide as to whether currencies are at their correct levels, according to the notion of purchasing-power parity. Use the data in the following table to answer the questions below: Country Big Mac Price Actual Exchange Rate Argentina 8.25 pesos 3.09 pesos/$ Canada C$3.88e C$ 1.05/$ South Korea 2,900 Won 923 Won/$ (a) Explain briefly the difference between absolute and relative purchasing-power parity (PPP). (b) For each country, compute the implied purchasing-power parity exchange rate of the local currency per U.S. dollar if the U.S. price of a Big Mac was $3.41 and the percentage under- or overvaluation of each currency versus the U.S. dollar according to the Big Mac version of purchasing-power parity. Page 2 of 5
