seminar in financial economics

    Order Description       Section A   Question 1. [20%] A company wants to assess whether its cost of capital has changed following the acquisition of a key strategic supplier in January 2013. In both the pre and postacquisition period the risk-free rate of return was 2% and the market portfolio rate 7%. The monthly rates of return minus the risk free rate are shown in worksheet Question1 for both the company and the market. a) Calculate the CAPM rate of return for the period up to January 2013 and then after the acquisition of the supplier in January 2013. b) What does the analysis indicate about the company’s cost of capital before and after the acquisition? Question 2. [20%] Let the initial endowment be . The utility function of the individual is defined as ( ). Suppose that the production possibility frontier (PPF) is given by ( ) for ( ) Assume that the interest rate to be 10 per cent. (i) Derive the opportunity set (capital market line)? (ii) Derive the optimal consumption bundle (   )? (iii) Calculate the marginal rate of return.   Question 3 [20%] Download a short and long-term bond yield series for a country of your choice with at least 50 observations. (Lecture 1 will help if you are stuck for sources). a) Plot the data. b) Are the data consistent with the “stylised features” of bond markets outlined in my lecture 1? Use statistical summary measures such as correlations and standard deviations to justify your answer. c) Has the introduction of Quantitative Easing affected the yield curve you have selected?   Question 4 [20%] The following table shows information on the standard deviation (?j) in returns of two assets X and Y, and the overall market; and the correlation coefficient (?jm) between the market and the two assets. You are told that last year the mean rates of return for X and Y were 5.5% and 6.9% respectively. The risk-free rate of return was 3% and the market portfolio rate 8% in this period. What would you infer in terms of undervaluation or overvaluation of these assets from their predicted CAPM return? Section B   Question 5 [40%] Answer one of the following two essay questions. a) You have been asked to provide a company a short research note setting out the latest academic thinking and empirical evidence underlying the CAPM approach. The regulated company is increasingly concerned that the CAPM procedure used to calculate its cost of capital is outdated. Your conclusion should state what your view is on CAPM as a measure of the cost of capital. -orb) You have been asked to provide a finance ministry with a short research note on the latest academic thinking and empirical evidence on the yield curve’s ability to forecast the future path of the macro-economy. The finance ministry is considering whether to add a yield curve measure to the existing variables they use to forecast the economy. Your conclusion should state a clear view on the information content of the yield curve historically and in more recent times.