FINAL EXAM– FINANCIAL ECONOMICS – OPTION A

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

INSTRUCTIONS

A- Correct answer: +1.00; wrong: -0.33; No answer: +0.00.

B- The exam consists of 24 questions. Just one answer per question.
C- Mark your answers in the answer sheet. You must provide the exam copy and
the answer sheet. Numerical answers must be justified by their corresponding
calculus.
D- There is no scratch paper. Please, write your calculus in the exam copy.
E- Mobile phones are strictly forbidden.

1.- According to the Markowitz model, assume that the market portfolio has an expected
return of 15% and a volatility of 25%; the risk-free asset offers a return of 2%. How would
you distribute the weights of the two asset classes to obtain an expected return of 20%
in your portfolio?

a. 25% in the risky asset

b. 50% on the risk-free asset
c. 80% in the risk-free asset
d. 138% in the risky asset

2.- You can build a risk-free portfolio if the correlation coefficient between the assets,

a. It’s equal to zero.

b. It lies in the interval (-1,1)
c. It’s equal to 1 and there are short-sale bans.
d. None of the above.

3.- Marta plans to retire in 10 years. She is thinking about a pension fund that will allow
her to live comfortably after retirement. When she retires, she would like to have a total
capital of 200,000 euros. If the annual interest rate is 3%, determine what amount you
must deposit monthly to achieve that final capital if you deposit that amount just at the
end of this month.
a. Between 1,000 and 2,000 euros.
b. Between 2,000 and 3,000 euros.
c. Between 3,000 and 4,000 euros.
d. None of the above.
4.- Assume two assets with the following characteristics: Asset A offers an expected
return of 10% and has a volatility of 20%. Asset B offers an expected return of 15% and
has a volatility of 40%. Its correlation coefficient is +1. Calculate the weighting to be
invested in the two assets to eliminate the portfolio risk.

a To invest 200% in asset A

b. An equally-weighted portfolio
c. It is imposible to eliminate portfolio risk with two assets and correlation +1.
d. None of the above.

5.- This investment strategy consists in:

a. Short put with price 20, long call with price 20, both on the same underlying, maturity
and strike price (K=100).
b. Long put with price 20, long call with price 20, both on the same underlying, maturity
and strike price (K=100).
c. Long put with price 20, short call with price 20, both on the same underlying, maturity
and strike price (K=100).
d. Short put with price 20, short call with price 20, both on the same underlying,
maturity and strike price (K=100).
6.- Roberto has a 10-year mortgage (with quarterly periodic payments) with an initial debt
of €300,000 with Banco Santander. This bank charges him an annual interest rate equal
to EURIBOR plus a 1% spread. If the Euribor is currently at 2.5%, determine the fixed
amount that Roberto should pay every quarter.
a. Between 8,000 and 9,000 euros.
b. Between 9,000 and 10,000 euros.
c. Between 10,000 and 11,000 euros.
d. None of the above.

7.- Determine the value within 6 years and 6 months of an amount equal to 10,000€ paid
today (t0). Assume that compound capitalization rules, the compound interest rate is 5%
per annum.

a. 46,181.77 euros.
b. 13,731.89 euros.
c. 44,187.51 euros.
d. None of the above.

8.- Calculate the volatility of an equally-weighted portfolio consisting of three securities,

with the following variance/covariance matrix:

Rollins Ambross Reigns

Rollins 0.04 0.08 0

Ambross 0.08 0.0225 0.003

Reigns 0 0.003 0.0625

a. Between 10% and 15%.

b. Between 15% and 20%.
c. Between 20% and 25%.
d. None of the above.
9.- Is there an arbitrage opportunity if I observe in the market that the premium of a call
option is worth €5, the premium of a put option is worth €3, the strike price is €120, the
share price (underlying) is 110, the annual interest rate is at 5% and there is one year
left for the expiration of the option?

a. Yes. Short call and a zero-coupon bond with face value 120, and buy the
put and the underlying.
b. Yes. Short put and underlying, go long in the call and a zero-coupon bond with
face value 120
c. There is no arbitrage opportunity
d. Short the call option and long put

10.- A forward contract on Telefonica starts today. It is known that the exercise price in
a year of this contract is 10€. Currently, Telefonica is quoted at 9.71. If it is assumed that
the term structure of interest rates is flat, what will be the return of an investment at the
risk-free rate for 2 years assuming compound capitalization?
a. Between 2% and 4%
b. Between 8% and 14%
c. Between 5% and 7%
d. None of the above

11.- If the spot interest rates according to the term structure for the 1, 2, 3 and 4 year
maturities are respectively 5%, 5.5%, 6% and 6.5%, determine the forward interest rate
for the period between t=2 and t=3.

a. 6%
b. 7%
c. 4%
d. 5%

12.- If the duration of a financial asset is 9.1 years and interest rates rise from 2.1 to 4%,
the price of the asset:

a. Increases approximately between a 12-13%.

b. Decreases approximately between a 16-17%.
c. Decreases approximately between a 12-13%.
d. Increases approximately between a 16-17%.

13. An asset’s beta is:

a. The slope of the regression line between asset return and market return
b. The slope of the CAPM equation
c. The independent variable in the CAPM equation
d. ayc
14.- If (1+oR2)^2/ (1+oR1) = (1+oR1), then

a. oF1,2 > oR1

b. oF1,2 > oR2
c. The term structure of interest rates is flat between 1-year and 2-year
maturities
d. That result is impossible.

15.- Gerardo often thinks that the stock market is going to collapse and would like to take
advantage of those possible price falls without assuming potentially unlimited losses. For
this reason, Gerardo should

a. Short stocks
b. Short call options
c. Long put options
d. Wait and see (you can’t make money when market decreases)

16.- An investor who believes that the price of natural gas will fall over the next few years
buys 100 European put options on natural gas maturing within two years and an exercise
price of €120/litre for a premium he pays to the bank selling him the option of €23 per
option. What is the position or final net profit of this investor (ignoring the time value of
money) if within 2 years the price of natural gas has fallen to 100 € / litre?

a. The option is exercised and the investor makes 2,300€

b. The option is exercised and the investor makes 2,000€
c. The option is exercised and the investor loses 300€.
d. The option will not be exercised and the investor losses her investment of 2,300€
(23€*100 options)

17.- Assuming you are a manager of the Universidad Carlos III fixed income fund, and
hold the following securities in your portfolio:
- Securities 1 (S1): 2-year bonds with an annual coupon of 5% and a nominal
amount of €1,000.
- Securities 2 (S2): Spanish Treasury bills redeemable in 12 months.
- Securities 3 (S3): 3-year strips, 110% redeemable and €10,000 nominal.
Assuming a flat term structure and equal to 4%, it is requested: calculate the modified
duration of each of them.

a. S1: 1.87; S2: 0.96; S3: 2.80

b. S1: 1.95; S2: 1.00; S3: 3.00
c. S1: 1.85; S2: 0.92; S3: 2.82
d. S1: 1.87; S2: 1.00; S3: 3.00
18.- Mark the correct answer. According to the figure,
a. Portfolio C is more efficient than B.
b. CAL (A) (which combines risk-free asset and portfolio A) dominates CAL
(B) and CAL (C).
c. Portfolio A has a lower Sharpe ratio than B.
d. None of the above.

19.- Assume that Fedex's expected return is currently 5% in the market. The Beta for
this asset is 0.9, the expected return for the market index is 8% and rf=0.30%. Under the
CAPM model,

a. Fedex is overpriced.
b. Fedex’s price is fair.
c. Fedex is underpriced.
d. None of the above.

20.- Assume an economy where all investors have access to the same set of investment
opportunities that includes risky assets and a risk-free asset. According to the mean-
variance model (Markowitz), choose to the right answer,

a. The optimal portfolio will depend of investor’s risk aversion.

b. In absence of risk-free asset, there is an efficient portfolio set, but no optimal
portfolio.
c. Dominated portfolios are efficient portfolios within the mean-variance framework.
d. The mínimum variance portfolio is the optimal portfolio, independently of
investor’s risk aversión.
21.- You sell kitchens, and it takes 3 months to install them. Today, you have sold a
kitchen for 18.000€ with the following payment method: today, you charge 20% of the
total; within 2 months, 40%; and on delivery (month 3), the rest. After one month from
the beginning of the installation, the client offers to pay us all the outstanding amount
that same day if we make a discount. What would be the maximum discount (in euros)
that we could apply? The discount rate is 10% per year.

a. Between 100€ and 110€

b. Between 170€ and 175€
c. Between 220€ and 225€
d. Between 14,220€ and 14,230€

22.- Which of the following graphs indicates the change in the probability of default when
a company's credit rating changes?

a. Figure I
b. Figure II
c. Figure III
d. Figure IV
23.- You have 12,500 euros, and you must choose between two fixed-term deposits of
one year's maturity. One offers daily capitalization at 2% per annum, and the other
continuous capitalization at 1.5% per annum. Which one are you most interested in?
a. The one of daily capitalization
b. The one of continuous capitalization
c. Either of the two as they are equivalent
d. Impossible to calculate.

24.- Choose the correct answer.

a. A call option will be acquired by an investor when he expects the price of the
underlying asset to fall in the future.
b. A call option can provide infinite benefits to the seller of the option and benefits
equal to the premium for the buyer of the option.
c. Futures are similar to forwards but quoted on an organised market.
d. In a put option the maximum loss to the option buyer would be the price of the
underlying at the expiration of the option.