Section A (Compulsory) Answer True or False to each of the 24 statements; For each false statement, also explain why the statement is false; 16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an investment strategy yielding strictly negative net gain today and no loss in any state of the world in the future. 23. If two assets have exactly the same payoffs in one year, their value must be the same today, if and only if there is an arbitrage opportunity. 24. The call option value decreases with time to maturity.
Section A (Compulsory)
Answer True or False to each of the 24 statements;
For each false statement, also explain why the statement is false;
16. The market consists of only two assets, A and B, with
17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential.
18. The return earned on a risk free portfolio must be equal to the risk free interest rate.
19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio.
20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance.
21. The market portfolio of all available assets is the supply of risky assets.
22. An arbitrage opportunity is an investment strategy yielding strictly negative net gain today and no loss in any state of the world in the future.
23. If two assets have exactly the same payoffs in one year, their value must be the same today, if and only if there is an arbitrage opportunity.
24. The call option value decreases with time to maturity.
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