Question 1

•   Suppose Sinan deposits $100 into the bank, and the interest rate of the deposit is 5% per annum.

•   If the bank pays interest annually, the end-of-year value of the deposit is

_________ .

•   If the bank pays interest semi-annually, then the end-of-year value of the deposit is_________.

•   In general, if the bank pays interest n times a year, then the end-of-year value of the deposit is_________.

•   What is the end-of-year value of the deposit if the 10% annual interest rate is paid continuously, when n → ∞?

5%  n

lim $100×    1  +                  = $100×e5%

n → #                                         n

•   the continuous compounding will yield the end-of-year value________.

Question 2

-    Suppose Woolworths has an average monthly expected return of 1.5% and a standard deviation of 8%. Coca-Cola has an average monthly   expected return of 2% and a standard deviation of 10%. Their          correlation coefficient is 0.4. If you have equal weights in each stock,   what is the expected return and standard deviation of your portfolio?

Question 3

•   The risk-free rate is 3% p.a., and the expected return on the market portfolio is 11%. Shares in company A have a beta of 1.2 and are currently priced to provide a return of 13%. Which of the following statements is correct?

•   a) A is underpriced and lies below the security market line

•   b) A is overpriced and lies above the security market line

•   c) A is correctly priced and lies on the security market line

•   d) A is underpriced and lies above the security market line

•   e) A is overpriced and lies below the security market line

Question 4

•   The fixed-income manager collects the following information and uses it, along with the international parity conditions, to estimate investment      returns and future exchange rate movements.

•   If covered interest rate parity holds, what is the all-in one-year investment return to a Japanese investor whose currency exposure to the GBP is fully hedged?

Question 5

•   Principle: $100

•   Company A: Fixed rate payer, pay 5% per annum with annual compounding.

•   Company B: Floating rate payer.

•   Floating rate in 6 years:

•   Which firm had benefited from the interest rate swap?