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3. What is meant by the expression "excess sensitivity" of consumption? How do the assumptions of the simple PIH have to be amended to account for this finding?7) Consider a portfolio of four stocks as displayed in the following table: Stock Weight Beta 0.1 1.3 2 0.2 -0.6 3 0.3 4 0.4 1.1 Assume the expected return of the portfolio is 0.12, the annual effective risk-free rate is 0.05, and the market risk premium is 0.08. Assuming the Capital Asset Pricing Model holds, calculate By . A) 0.80 B) 1.06 C) 1.42 D) 1.83 E) 2.1713. A small open economy has a government budget surplus and a trade deficit. Explain whether there is a private sector surplus, deficit or balance. Examine the consequences in the short run for output, the trade balance and the budget balance of a sudden fall in private consumption in this economy under (a) fixed exchange rates, (b) flexible exchange rates.29) Determine which one of the following statements about debt financing is FALSE: A) Corporate notes are unsecured debt. B) Holders of mortgage backed securities face prepayment risk. C) The coupon of a floating-rate municipal bond is periodically adjusted. D) Income from U.S. Treasury securities is taxed at the state level. E) Most debentures contain clauses restricting the company from issuing new debt with equal or higher priority than existing debt.42) A firm's portfolio is currently valued at 50 million. The portfolio has an annualized expected rate of return of 7% and a volatility of 10.5%. Assume the returns are normally distributed, and that the portfolio pays no dividends. Calculate the 5% annual Value-at-Risk (VaR) for the firm's portfolio investment gain after one year. (A) -2,500,000 (B) -5,135,000 (C) -5,250,000 (D) -12,135,462 (E) -23,149,61621. What is the difference between the wage-setting real wage curve in the open and closed economies; what is the difference between the price-setting real wage curve in the open and closed economies?9. Why might the cash/deposit ratio and the reserve asset ratio be decreasing functions of the rate of interest? How does an interest sensitive money supply affect the LM curve? Illustrate using an example, comparing the new LM with the standard LM.Problem 7.20 (a) Company A has been offered the rates shown in Table 7.3. It can borrow for three years at 6.45%. What floating rate can it swap this fixed rate into? (b) Company B has been offered the rates shown in Table 7.3. It can borrow for 5 years at LIBOR plus 75 basis points. What fixed rate can it swap this floating rate into
