Can you answer for questions below, please! Thank you!
Section A (Compulsory) Answer True or False to each of the 24 statements; 1 mark will be given for each correct answer. For each false statement, also explain why the statement is false; 2 marks will be given for each satisfactory explanation. I. The Arrow risk premium is how much we need to change the assets return in order to make an inwstor indifferent between purchasing or not purchasing. In a factor model the return on any security can be explained by all the factors. The value of a European call option increases if the risk-free rate r decreases. In a risk neutral world all individuals are indifferent to risk. P'PW.\" When a dividend is paid the value of the call option increases, and the value of the put option increases 6. The current risk-free rate is 0.5%. The Capital Asset Pricing Model states that it is possible to have an asset with a standard deviation of returns of 15% per year and an expected annual return of 0.5%. 7. A risk-averse investor is indifferent between playing a fair lottery and having a guaranteed specied payoff. 8. A quadratic utility function exhibits increasing absolute risk aversion and increas ing relative risk aversion. 9. Ordinal utility functions preserve preferences under all strictly increasing trans- formations. 10. The continuity axiom states that, for three choices as, y and 2, if r t y and y t 2 then there exists a A such that y >_- Aa: + (1)02. 11. If two assets have exactly the same payos in one year, they must have exactly the same value today, if there is no arbitrage opportunity. 12. Risk-neutral probabilities are special probabilities under which all assets have expected returns equal to the risk free rate. 13. According to the First Theorem of Finance, there exists a risk-neutral probability measure if and only if there are no arbitrage opportunities. 14. Roll's critique of tests of the CAPM is based on the fact that the true market portfolio is unobservable. 15. The separation theorem is concerned with the choice of a mean variance efcient portfolio of risky assets and a risk free asset. 16. Systematic risk is the part of the asset risk that comes from the market portfolio and can be diversied away by adding more and more assets to the portfolio. 17. 18. 19. 20. 21. 22. 23. 24. Fama and French (1996) present a three factor model, in which the difference between the returns on a portfolio of small stocks and large stocks is signicant. A call option offers the purchaser limited upside gain. A riskless portfolio will be a portfolio which has the same return whether the stock price goes up or down. An investor is indifferent between the random payoff, i and its certainty equiva- lent, C(i). According to the absolute risk aversion concept, very risk-averse individuals may be unwilling to pay large amounts for insurance if they have high marginal utility. The line of the possible efcient portfolios, that consist of investments in either the market portfolio and the risk free asset, is called the Security Market Line. Going long on a. call means that you are going to sell the right to buy. The choice of the probability set (risk neutral or subjective probabilities) does not affect the calculation of the price vector P, and the payoff matrix, D. (Total for Section A: 50 marks)
