HW7

1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.

In the futures markets, arbitrageurs are mainly interested in: a. reducing their exposure to risk of price changes. b. increasing market liquidity. c. reducing the spread between the bid and ask prices on bonds. d. attempting to make a profit by taking advantage of price differentials between different markets.

1. According to the efficient market hypothesis (EMH), in a perfect market, the security prices reflect the true and fair value of all the underlying securities' assets at any time. On the contrary, an inefficient market is a market whose security price at any time does not entirely reflect the value of its assets. In this form of market, traders can beat the market because they can employ strategies like arbitrage and speculation. Explain with example, the price reactions towards the bad news that indicate market is inefficient.

Explain these three 1. PURCHASING POWER RISK - is perhaps, more difficult to recognize than the other types of risk. It is easy to observe the decline in the price of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you have earned on investment has declined (risen) as a result of inflation (deflation). 2. INTEREST RATE RISK - Because money has time value, fluctuations in interest rates will cause the value of an investment to fluctuate also. Although interest rate risk is most commonly associated with bond price movements, rising interest rates cause bond prices to decline and declining interest rates cause bond prices to rise. 3. BUSINESS RISK - refers to the uncertainty about the rate of a return caused by the nature of the business. The most frequently discussed causes of business risk are uncertainty about the firm's sales and operating expenses.

Which is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the above

Tick all those statements on arbitrage that are correct (and don't tick those that are incorrect). a. When constructing suitable betting strategies, the number m of outcomes of an event and the number of possible wagers are always the same. O b. In real markets there are ocasionally small arbitrage opportunities due to lack of information. c. The arbitrage theorem essentially tells us that either there exists a risk-neutral distribution or there is an arbitrage opportunity. Od. If there is an arbitrage opportunity then this implies that a risk-neutral distribution exists. O e. If there is a sporting event with 3 different outcomes which have the odds 0₂ = 1, 2, 3 then there is an arbitrage opportunity for a suitable betting strategy.

7. When you use a historical risk premium as your expected future risk premium, what are the assumptions that you are making about investors and markets? Under what conditions would a historical risk premium give you too high a number (to use as an expected premium)?

Which of these statements below are correct? (a) Small arbitrage opportunities may occasionally exist in real markets due to lack of information. (b) If there is an arbitrage opportunity, it means one can make a risk-free profit. (c) Arbitrary investments and arbitrage generating investments are basically the same (d) The no-arbitrage price of a bond is equal to its present value. (e)The law of one price is based on the no-arbitrage assumption.

1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.

Investors choose derivatives to invest directly in the asset. to reduce risk by hedging against losses. to take on additional risk by speculating. both to reduce risk by hedging against losses and to take on additional risk by speculating.

I need all the answers just tell me if it true or false please

One can use Black-Scholes model to price any financial derivatives. true or false

What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether they will succeed morally and academically, etc.) in the real world are not tradable, some risks (e.g., stock price risk, credit risk, interest rate risk, currency exchange rate risk, risks that insurance policies cover, etc.) are actively traded in the market. What determine the equilibrium price of tradable risks?