1) An investor, A, sells shares that have been borrowed from their owner, C, via a broker, B, for a market price $18 each. No fee is charged for the loan of the shares, and there are no other transaction costs.

1. Investor A could gain from the short sale only if there is an arbitrage opportunity at a price of $18 per share.

2. This transaction is an example of a naked short sale, that may be treated as fraudulent in some jurisdictions.

3. Suppose that A returns the shares when their price has decreased to $16. Then the lender investor C - makes a profit of $2 per share from As short-sale.

4. Investor A is effectively making a risky bet that the share price will be lower than $18, when the shares are returned to their owner, investor C.

These is at least 1 correct answer.

5. On 1st October 2012, Kappa plc announced a 2-for-1 split of its ordinary shares, upon which the share price fell from $93 (old shares) to $44 (new shares).

   1. The evidence shows that there is an arbitrage opportunity, buy the shares imme- diately after the announcement and sell them shortly after the split has occurred.

   2. The information provided is insufficient to determine whether the market for Kappas shares is informationally efficient.

   3. The evidence from Kappas share-split shows that the market for its shares is semi-strong form inefficient.

   4. The evidence from Kappas share-split shows that the market for its shares is weak form inefficient.

   5. The evidence from Kappas share-split shows that the market for its shares is weak form efficient.

These is at least 1 correct answer.

6) An investor chooses a portfolio of just two risky assets, with 1 = 12%, 1 = 0.06, 2 = 8%, 2 = 0.02. The investor prefers more expected return relative to less, and prefers less risk (standard deviation) to more. [Notation: j : expected rate of return on asset j; j: standard deviation of return on asset j.]

1. The investor will hold only asset 2 because it has the smallest risk.

2. The investor will hold only asset 1 because it has the highest expected rate of return.

3. Theinvestorwillinvest1/3ofinitialwealthinasset1,and2/3inasset2,because the standard deviation for asset 1s return is three times that of asset 2.

4. If 1/4 of initial wealth is invested in asset 1, and 3/4 in asset 2, the expected rate of return on the portfolio is 9% irrespective of the covariance between the returns.

5. If 1/4 of initial wealth is invested in asset 1, and 3/4 in asset 2, the expected rate of return on the portfolio is 9% only if the covariance between the returns equals zero.

These is at least one correct answer.