Question 1

What is the relationship between forward rates and the market's expectation of future short rates? Explain in the context of both the expectations theory of the term structure of interest rates.

Question 2

What is the difference in cash flow between short-selling an asset and enter a short futures position?

Question 3

What sorts of factors might limit the ability of rational investors to take advantage of any "pricing errors" that result from the actions of "behavioural investors"?

Question 4

What is another name for unsystematic risk and why does it have that name?

Question 5

What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return?

Question 6

Explain each of the determinants of the value of a call option? Is there a direct or indirect (inverse) relationship between this determinant and the value of a call option?

Question 7

Consider the futures contract written on the S&P 500 Index and maturing in 6 months. The interest rate is 3% per 6-month period, and the future value dividends expected to be paid over the next 6 months is $15. The current index level is 1,425. Assume that you can short sell the S&P index. Suppose the future price is 1,422. Is there an arbitrage opportunity here ? If so, how would you exploit it ?

Question 8

Is a put option on a high-beta stock worth more than a low-beta stock ? The stocks have identical firm-specific risk.

Question 9

What are the P/E effect and Momentum effect considered efficient market anomalies? Are there rational explanations for any of these effects ?