GHANA INSTITUTE OF MANAGEMENT AND PUBLIC ADMINISTRATION (GIMPA) SCHOOL OF LIBERAL ARTS AND SOCIAL SCIENCES DEPARTMENT OF ECONOMICS END OF SECOND TRIMESTER (COHORT 4) EXAMINATIONS ‘TITLE OF PAPER: ECO 746B: ASSET PRICING THEORY AND MANAGEMENT LEVEL; MASTER LEVEL STUDENTS IN ECONOMICS DEPARTMENT DATE: JUNE11,2022 EXAMINER: DR FRANCIS ATSU ‘TIME ALLOWED: THREE HOURS 4 INSTRUCTIONS Close book exam. "Answer ALL questions in Section A and any other FOUR questions in Section B. Supply the examiner with only one answer to each question. All cell phones must be switched off for the duration of the test ~ note ~ nat on silent, but switched off ‘You may not communicate by any means with any person inside or outside the exam venue for the duration of the exam.SECTION A: ANSWER ALL THE Ql B [ANSWER ON THE QUESTION PAPER [30 MARKS @ 1 ) 3) 4) STIONS BY CIRCLING THE CORRECT, aN MARK FOREACH QUESrigq, \TION Over the past year you eamed a nominal rate of interest ef 1 se YoU me Thelin rte wes 5% oer the same period. Celulte the dies mi exact actual and approximate growth rate of your purchasing p* A)1S%, B) 10.0%. C) 5.0%. D) 4.8%, E) 024%, Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of retum of 10% and a variance of 16%. B has an expected rate of retum of 8% and variance of 14%. The weights of A and B in the global minimum variance portfolio are__and_, respectively. A) 0.24; 0.76 B) 0.52; 0.48 ©)0.57; 0.43, D) 043; 0.57 E) 0.76; 0.24 A standardized statistic that measures how the retums of two risky assets move together is: A) variance. B) standard deviation, ©) covariance ) correlation, covariance and correlation Security X has expected retum of 12% and standard deviation of 18%, Security Y has expected return of 15% and variance of 26%, Ifthe two securities have correlation coefficient of 0.7, what is their covariance? A) 0.038 B) 0.064 ©)0.018 D) 0.033, ) 0.054r 5) Acomt ‘i monly used adjustment technique provides an adjusted beta of 97. Wink is the estimated b ; eta of F, ‘, ; - oie ee oe rearession analysis on a sample A) 2.46, B) 1.87. ©)2.13 D) 1.66 6) A trader buys @ call and sells a put with the same strike price and maturity date. ‘What is the position equivalent to? 7) You invest $600 in a security with a beta of 1.2 and $400 in another security ‘Which mitvors the volatility ofthe mazket index (move exactly inthe seme direction). The beta of the resulting portfolio is A) 140. B) 1.12, ©)036. D) 1.08. ) 080. 8) The capital asset pricing model does not assume ‘A)all investors are price takers. Ball investors have the same holding amount ) investors have homogeneous expectations. 1D) all investors are price takers and have the same holding period. Il investors are price takers, have the same holding period, and have smogeneous expectations. 49) Given an optimal risky portfolio with expected return of 6% and variance of Soy and a risk-free rate of 3%, what isthe slope ofthe Pest feasible CAL? A) 0.64 B)039 ©) 0.08 D) 0.13 B) 0.06inion is that CSCO has an expected rate of inflation of 0.13. It has a beta 10 EI ne kee sate a 0.04 and he markt expected vate of etm is 0.115 According to the Capital Asset Pricing Model, this security is A) underpriced. B) overpriced. ©) fairly priced, D) Cannot be determined from data provided. 11) According to the Capital Asset Pricing Model (CAPM), overpriced securities have A) positive betas B) zero alphas, C) negative alphas. D) positive alphas. 12) The price of a stock on February 1 is $84. A trader buys 200 call options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is A) Loss of $1,000 B) Loss of $2,000 C) Gain of $200 D) Gain of $2000 13) Margin accounts have the effect of A) Reducing the risk of one party regretting the deal and backing out B) Ensuring funds are available to pay traders when they make a profit C) Reducing systemic risk due to collapse of futures markets D) All of the above 14) A company enters into a short futures contract to sell 50,000 units of a commodity for 74 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? A) 78 cents B) 76 cents C) 74 cents D) 72 centsf “= 15) The spot Price p of an inveg maturities is 1994 ith EM asset i $30 ang the tisk-free rate forall cents a the cl ontnious can POUing, The asset provides an income the three., e first ye, = ‘ Ay Sane 8 own te! anda the end ofthe second year, What is B) $35.94 ©) $3933 D) $40.50 16) aa of the following is the Put-call parity result for a non-dividend-paying A) The European Put price plus. the European call Price must equal the stock Tice Plus the present value ofthe strike price ) The European put price Plus the stock price must equal the European call Biice plus the present value of the strike price ©) The European put price Plus the present value ofthe strike Prive must equal the European call price Plus the stock price D) The European put price plus te Stock price must equal the European call Price plus the strike price 17) The price of a European eall option on ‘non-dividend-paying stock with a strike Drice of $50 is $6. The stock price is 1, the continuously compounded risk-free ‘ate (all maturities) is 6% and the time to ‘maturity is one year. What is the price of a one-year European put option onthe stock wit A)S9.91 tha strike price of $502 B) $7.00 ©) $6.00 D) $2.09 18) The current price of non-divider it is expected to rise to $36 or fal nd-paying stock is $30. Over the ll to $26. Assume the risk-free Next six months rate is 800 basis, ong nats the risk-neutral probability of that the stock price wil be $362 A) 06 B) 0.5 Coa D)03 i cI a lective put? ‘hich of the following describes a protecti pe Pe DU nteene ete ear Ear pati Kk B) A short put option oma stock plus shor call aca fs ©) Along put option ona tack plas fog positon in he took D) A short put option ona stock plus a long positon in the st 20) Which of the following describes a covered call? é A) A long. call option ona stock plus along esti nt B) A long call option ona stock plus a short put option on the st ©) A short cll option ona stock pls a shor postion in the stock D) A shot call option on a stock plus along positon in the stock 21) Ina multifactor APT model, the coefficients on the macro factors are often called A) systemic risk B) factor sensitivities, ©) idiosyncratic risk D) factor betas E) factor sensitivities and factor betas, 72) Consider an investment opportunity set formed with two securities that are perfectly positively correla ted. The portfolio has a standard deviation that is always A) greater than zero, B) equal to zero, C) equal to the weighted sum of the secutites standard deviations, D) equal to -1 Use the information i below to answer questions 23 to 25 Consider the followin, Cons ' probability distribution for stocks of FANMILK and GCB ark: State Probability | FANMILK stock |G 1 02 10% ee eee e ae a i ie fasta eee ara aE 23) The expected rates ofretum of stocks FANMILK and GCB are_ _ “and respectively reoes A) 12.3%; 7.1% B) 14%; 10% ©) 13.2%; 7.7% DY) 7.7%; 13.2% and__, 24) The standard deviation of stocks FANMILK and GCB are respectively, A) 1.5%; 1.03% B) 12%; 0.9% 12%; 1.76 D)0.7%; 1.2% 25) You invest $100 in a risky asset with an expected rate of return of 0.12 and a variance of 0.0225 and a T-bill with a rate of return of 0.05. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.03? A) 20% and 80% B) 50% and 50% C) 60% and 40% D) 40% and 60% E) Cannot be determined 26) You invest $100 in a risky asset with an expected rate of return of 350 basis points and a standard deviation of 0.15 and a T-bill with a rate of return of 0.02. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to A) 0.47. B) 0.80. ©)2.14. D)04 F) 0.10 27) You invest $100 in a risky asset with an expected rate of return of 0,12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.071? A) 30% and 70% B) 75% and 25% C) 67% and 33%D) 57% and 43% - F) Cannot be determined ining the same, which of the 28) When the stock price increases with all else remaining the following is true? A) Both calls and pats increase in value B) Both calls and puts decrease in value : C) Calls increase in value while puts decrease in value D) Puts increase in value while calls decrease in value 2 rice of a stock is $64. A trader buys | call option contract on the stock with e a price of $60 when the option te is $10. When does the trader make a profit? ‘A) When the stock price is below $60 B) When the stock price is below $64 ©) When the stock price is below $54 D) When the stock price is above $70 30) The price of a stock, which pays no dividends, is $30 and the strike price of a ‘one-year European call option on the stock is $28. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? A) $5.00 B) $5.98 C) $4.98 D) $3.61SECTI EQUAL Me ANSWER ANY THREE QUESTIONS. ALL QUESTIONS CARRY KS [20 MARKS FOR EACH QUESTION] QUESTION ONE @ The forecasts of the Senior Investment Analyst of QuantRisk Analytics, an investment company, show that the equity market will experience sharp changes in the prices of the listed firms. Against this background, QuantRisk Analytics is Considering protecting their equity portfolio. Suppose that put options on a stock with strike prices GHS50 and GHSSS cost GHS10 and GHS12, respectively. As the Senior Risk Analyst, use the options to create (a) a bull spread and (b) a bear spread. Construct a table that shows the payoffs for both spreads (Hint: for the stocks values, use terminal values of GHS46 and GHS64 in the increment of GHS2). Further, Present the profit margins on a graph and comment appropriately on the attractiveness of these investment strategies. [20 marks} QUESTION TWO (2) a) FANMILK and PBL Limited have been offered the following rates per annum on a GHS100 million five-year loan: Firm Fixed Rate Floating Rate FANMILK 16.0% MPR+2% ALUWORKS, 28.0% MPR+5% FANMILK requires a floating-rate loan; ALUWORKS requires a fixed-rate loan. Design a swap agreement that will appear equally attractive to both companies where GCB Bank will be acting as an intermediary for a fee of 3% per annum. [12 marks] b) An investor is considering buying a European put on a share for $3. The stock price is $42 and the strike price is $40. As a trader, concisely explain to the investor under What situation does he/she makes a profit? Use a diagram to show the variation of the investor's payoff with the stock price at the option’s maturity. [4 marks} ©) Explain carefully the difference between protective put, covered call, and collar strategy. [4 marks}QUESTION THREE (3) ) Suppose that you have rece ily been appointed as the Lead Arbitrageur of is considering a Quantum Analyties. Suppose further that ies oe, pd : forward contract to purchase a coupon-bearing bond wl fe eure GHS1000 which matures in 10 months. A coupon Lae re pee ‘on the bond after 3 months. The 3-month and 10d be ee (Continuously compounded) are, respectively, 5% and 6% pi are Lead Arbitrageur, show how you can exploit the arbitrage opportuntt swale) ii) 10 (Hint: Be concise with your forward price is (i) GHS1200 and (ii) GHS900 (Hint: it igi information) strategies by avoiding the habit of throwing in unnecessary ate b) Calculate the price of a three-month European put option on a esi paying stock with a strike price of $50 when the current stock price is $50, risk-free interest rate is 10% per annum, and the volatility is 30% per annum. [3 marks] QUESTION FOUR (4) a 4) Caleulate the price of a 6-month European put option on a non-dividend-paying stock with a strike price of $50 when the current stock price is $60, the risk-free interest rate is 10% per annum, and the volatility is 30% per annum. [8 marks] b) A trader buys a call and sells a put with the same strike price and maturity date. ‘What is the position equivalent to? [4 marks} ©) Suppose that the price ofa six-month call option on a non-dividend-paying stock when the stock price is $30, the strike price is $27, and the risk-free interest rate is 800 basis points per annum, Provide the lower bound for the option and comment on the possibility of an arbitrage opportunity [5 marks} @) A stock index currently stands at 350. The risk-free interest rate is 4% per annum (with continuous compounding) and the dividend yield on the index is 306 per annum. What should the futures price for a four-month contract be? 1 marks}QUESTION Five 9) ie ‘hat Efo Ganyo Farms is considering (i) buying 1000 bags of Cashew, nd (i) selling 2000 bags of rice, Given the price volatility over the next six months, as the front office trader for the Farms, explain to the Farm Manager ‘under what circumstances are (a) a short hedge and (b) a long hedge appropriate? [6 marks] ) The standard deviation of monthly vatiations inthe prices ofa commodity is GHS 0.75, the standard deviation of monthly variations in a futures price on the commodity is GHS 0.91, where the correlation between the variations is 0.9 Compute the optimal hedge ratio forthe one-month contract. Explain succinctly the meaning of your answer to an amateur trader. {7 marks] ©) The price of a non-dividend paying stock is $19 and the price of a three-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of a three-month European put option with a strike price of $202 [7 marks} Good Luck