FINAL EXAM ________ FINANCIAL ECONOMICS ____ _ __ OPTION A

NAME….…....................…………………………………………………………………………………………………………..
GROUP.…………………………………………………………………………………………………………….……………………
DEGREE.………………………………………..……………………………………………………………………………………….
INSTRUTIONS

A- Correct answer: +1.00; Incorrect answer: -0.25; No answer: +0.00.

B- There are 24 questions. Just one correct answer per question. Time: 2h30min.
C- Mark your answers in the optical sheet. Student must hand the exam and optical
sheet out to teacher.
D- Write all your calculus in the exam sheets.
E- Mobile phones are strictly forbidden.
F- Remember that you must obtain a score of 4.0 out of 10.0 in the final exam to pass
this subject.

1. Determine the minimum variance portfolio of a portfolio composed by two risky

assets whose correlation is -1. Asset 1: expected return del 5% (annual); standard
deviation is 10% (annual). Asset 2: expected return 10% (annual); standard deviation
is 20% (annual).
a) w1=200.00%; w2=-100.00%
b) w1=100.00%; w2= 0%
c) w1= 50.00%; w2= 50.00%
d) w1= 66.67%; w2= 33.33%

2. Considering the previous data on return and risk, and assuming now a correlation of
-1, mark the correct answer:
a) With correlation +1, it’s possible to eliminate the portfolio risk by short
selling asset 1.
b) With correlation +1, it’s possible to eliminate the portfolio risk by short
selling asset 2.
c) With correlation +1, the minimum risk portfolio is an equally-weighted
portfolio of assets 1 and 2.
d) With correlation +1, you can reduce but not eliminate the risk of the
portfolio.

3. Mark the correct answer. Note: SML stands for Security Market Line; CML refers to
the Capital Market Line.
a) The slope of the SML (CML) is the beta (Sharpe’s ratio).
b) According the mean-variance framework, the CML with lower slope leads
to the investment opportunity set more efficient.
c) The slope of the SML (CML) is the market risk premium (Sharpe’s ratio).
d) The slope of the CAL increases when the risk-free rate increases.
4. The expected return of the market (S&P500 index) is 10%. The return of the risk-free
rate is 1%, and the beta of Santander stocks’ is equal to 1.2. The expected return of
Santander, according the market, is 10%. Under the CAPM, this data suggests
a) Santander’s stock is overpriced.
b) Santander’s stock is underpriced.
c) Santander’s stock is correctly priced.
d) There is not enough data for answering.

5. Mark the correct answer:

a) The higher the maturity of the bond, the lower its duration is.
b) The lower the duration of a bond, the higher its price variation because of
changes in market interest rates.
c) Bonds with lower creditworthiness (say, BBB) will exhibit a higher
duration than bonds with better creditworthiness (say, AAA).
d) Given two bonds (one with coupon, the other is a zero-coupon bond)
with the same maturity and creditworthiness, the zero-coupon bond will
exhibit a higher variation in price because of changes in market interest
rates.

6. Consider the following term structure: 0R1 = 8%; 0R2 = 7%; 0R3 = 6%; 0R4 = 5%.
Compute the forward rate for a two-year loan that starts in one year (0F1,3).
a) Between 3.00% and 3.50%.
b) Between 4.00% and 4.50%.
c) Between 5.00% and 5.50%.
d) None of the above.

7. An investor is long in a forward contract purchased three years ago. This contract
obliges you to buy stocks of firm Z in two years at K=40. Today, the (annual) risk-free
rate for 2 years is 5%, and the stock price in the market is EUR 49.00. What is the
price of your forward contract?
a) €12.71
b) €54.02
c) €36.28
d) Not possible to compute. There are not enough data.

8. Mark the correct answer:

a) You have an out-of-the money long call position. This means that you will
earn money if you exercise the option.
b) The seller of a call option will lose the option’s premium in the worst case.
c) The seller of a put option will lose the option’s premium in the worst case.
d) All previous answers are incorrect.
9. Mark the correct answer. The premium of a call option:
a) Increases when the volatility of the underlying increases.
b) Increases when the volatility of the underlying decreases.
c) Diminishes when the option maturity increases.
d) Increases when the strike price (K) increases.

10. An investor wants to immunize her portfolio of two bonds. Her investment horizon is
5 years. Determine the portfolio weights. Bond 1 has duration equal to 2 years; bond
2 has duration equal to 10 years.
a) W1 = 62.50%.
b) W1 < 50.00%.
c) W1 > 79.00%.
d) W2 = 5.00%.

11. Mark the correct answer. According Markowitz, the optimal risky portfolio:
a) Maximizes risk and return.
b) Minimizes market risk and return.
c) It’s always the minimum variance portfolio.
d) All previous answers are incorrect.

12. Compute the beta of this Telefonica bond. Maturity: 15 years; coupon: 5% (annual
payments); price of issuance under par (70% of principal); the covariance of bond
returns with market index Ibex-35 is equal to 0.020; volatility of bond returns: 5%;
and market index volatility: 25%.
a) Impossible to compute the beta with these data.
b) Any fixed income bond has a beta equal to 0.
c) Bond’s beta is between 0.2 and 0.4.
d) Bond’s beta is between 0.01 and 0.17.

13. Mark the correct answer.

a) A portfolio constituted by too many stocks eliminates systematic risk by
diversification.
b) A portfolio constituted exclusively by aggressive stocks will have a beta
higher than 1.
c) A portfolio constituted exclusively by aggressive stocks will have a beta lower
than 1.
d) An example of systematic (or market) risk is an information that only and
specifically affects one unique firm.

14. The variance of an equally-weighted portfolio constituted by two assets with zero
correlation is:
a) The sum of individual variances, without including the assets’ weights.
b) The variance of the portfolio will be equal to zero.
c) All previous answers are correct.
d) All previous answers are incorrect.
15. An investor would like to get retired in 10 years. At that moment, she would like to
have EUR 500,000. Compute how much the monthly annuity must be to reach this
quantity in her bank account. The annual interest rate of this deposit is 2%. First
payment will be due in one month.
a) Between EUR 1800 and EUR 2400.
b) Between EUR 2400 and EUR 2800.
c) Between EUR 2800 and EUR 3200.
d) Between EUR 3200 and EUR 3800.

16. Fernando has bought a brand-new car. Its price is EUR 25,000, to be financed in 10-
years by monthly (constant) payments, and 5% annual interest rate. What is the
pending amount after 5-years?
a) Less than EUR 12,350.
b) Between EUR 12,400 and EUR 12,550.
c) Between EUR 14,000 and EUR 14,100.
d) Between EUR 15,800 and EUR 15,900.

17. Georgina has been enrolled in a master. The master’s fee is EUR 135,000 euros. Once
finished the master, she expects to get hired with an annual salary of EUR 45,000.
Given the payback rule, the payback time will be (use two decimals)
a) 1.50 years
b) 3.00 years
c) 2.80 years
d) 4.00 years

18. Determine the theoretical stock price of this company. The expected benefits will be
EUR 3,375 million (t=1), and EUR 4,000 million (t=2). Then, it is expected that firm’s
benefits increase at 7% annual rate. The ratio pay-out of dividends is 80%, and it is
always constant. Moreover, the number of stocks is 65 million. The risk premium on
the risk-free asset is 10%, and the risk-free return is 0.50% (annual). Note: if your
calculus is not exact, mark the closest number.
a) EUR 1,310.53
b) EUR 1,530.30
c) EUR 4,792.85
d) EUR 1,057.69

19. The market price of a call (put) option is EUR 7.00 (5.00). Both options have the same
strike price (K=100) and underlying. In both cases, the maturity is 1-year. Then,
a) Call option is overpriced, according the put-call parity.
b) Stock price is EUR 12.00.
c) Put option is overpriced, according the put-call parity.
d) The price of a forward contract on the same underlying, maturity and
K=100, will be EUR 2.00.
20. Your portfolio is constituted by Repsol (20%), Iberdrola (20%), and the rest in
Telefonica. Given the following variance-covariance matrix, compute the covariance
of Repsol and your portfolio.
REP IBE TEF
REP 0.003 0.090 0.330
IBE 0.090 0.020 0.099
TEF 0.330 0.099 0.040
a) 0.2166
b) -0.3342
c) 0.0890
d) Impossible to compute. More data is needed.

21. Warren Buffet’s portfolio is constituted by risk-free asset and optimal risky portfolio.
The (annual) volatility of his portfolio is 14%, and the (annual) volatility of the
optimal risky portfolio is 18%. Compute the weight of the risk-free asset in Warren
Buffet’s portfolio.
a) 60.49%.
b) 22.22%.
c) 165.30%.
d) -65.30%.

22. The expected return on Amazon and Netflix stocks is 14% and 15%, respectively. The
annual volatility of Amazon (Netflix) is 23% (35%). The return of the risk-free asset is
5% annual. The CAL equation for the risk-free rate and Netflix is,
a) E(Rp)=0.05 + 2.0460*Sigma(Rp)
b) E(Rp)=0.05 - 0.3913*Sigma(Rp)
c) E(Rp)=0.05 + 0.2857*Sigma(Rp)
d) None of the above.

23. If you produce oranges, how could you guarantee a minimum profit for your
harvest?
a) With a long forward position on the oranges.
b) With a simultaneous long call and long forward positions.
c) With a simultaneous long call and short put positions with the same strike.
d) None of the above.

24. Your financial advisor suggests you three investment alternatives: bond A, with 4%
coupon and rating AAA; bond B, with 6% coupon and rating BBB; bond C, with 5%
coupon and rating CCC. Maturity is equal in all cases. If bonds are all priced at par,
what would you discard?
a) Bond A
b) Bond B
c) Bond C
d) Bonds A and C must be discarded, because they offer a lower return.