Economics 395 Final Exam Spring 2002
You have until Monday May 6 to complete this exam. Please write clearly (typed is preferred) and concisely—try to organize your answer so it reads well. Points will be given for clarity and accuracy/relevance.
1. Describe how to identify the optimal portfolio in the Capital Asset Pricing Model (CAPM). Be sure to describe the efficient portfolio frontier, the market portfolio, the capital market line and the riskless asset.
2. Describe the efficient market hypothesis (the 3 variants). Discuss the evidence both in support of, and against, each variant. How does this theory stand currently?
3. The School’s Brief from The Economist I handed out in class shows, in figure 5, the payoff profile for a “long condor.” Explain how such a profile may be created.
4. A stock is currently selling for $150. In 1 year it is expected to rise to $175 or fall to $125 with equal probability. A call option expiring in 1 year has an exercise price of $150. The riskless rate of return is 8%. What is the return on a hedged portfolio if the option sells at $18?