ECON3251

Undergraduate Programmes 2015/16

Financial Theory and Corporate Policy

FORMATIVE ASSIGNMENT
Answer all of the following questions:
1) An investor has the following utility function of wealth W:

U ( W )=W 2

Calculate the measures of absolute and relative risk aversion (ARA and RRA). Comment on
your findings.

(20

marks)
2) The investor in 1) wants to choose one out of two mutually exclusive assets A and B. The
probability distributions of their future payoffs are presented in the following payoff table.
Asset A

Asset B

Probability

Payoff ()

Probability

Payoff ()

0.5

200

0.5

100

0.5

400

0.5

500

Explain the investors asset choice based on expected utility and stochastic dominance
theory as well as mean-variance criteria. Show your work.

(30 marks)

3) There are two assets C and D in the market. Their future payoffs are presented below.
There are two equally likely states of nature.
Asset C

Asset D

State

Payoff ()

Payoff ()

12

12

Market price

10

12

Calculate and explain the prices of the pure securities.

(20

marks)
4) Suppose all market investors are risk averse and able to construct investment portfolios
with N risky assets in a frictionless market where unlimited lending and borrowing at the risk
free rate (Rf) is possible. Illustrate and explain investor choice of portfolios in terms of

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ECON3251

Undergraduate Programmes 2015/16

Financial Theory and Corporate Policy

portfolio mean return (E(Rp)) and variance ( 2p .
(30 marks)

Overall word limit: 1,500 words maximum.

SUBMISSION INSTRUCTIONS
The submission deadline is Tuesday 8th December 2015.
You need to submit a copy of your assignment on DUO no later than 12pm on the due date
so make sure you leave enough time to safely upload the document and account for
potential problems. You must also complete a Formative Front Cover Sheet, attach it to an
identical paper copy of the document and submit this into the postbox in front of the
Undergraduate Office no later than 3pm on the 8th of December.

Written assignments and dissertations/business projects must not exceed the word count
indicated in the module handbook/assessment brief.
The word count should:
Include all the text, including title, preface, introduction, in-text citations, quotations,
footnotes and any other items not specifically excluded below.
Exclude diagrams, tables (including tables/lists of contents and figures), equations,
executive summary/abstract, acknowledgements, declaration, bibliography/list of
references and appendices. However, it is not appropriate to use diagrams or tables
merely as a way of circumventing the word limit. If a student uses a table or figure as a
means of presenting his/her own words, then this is included in the word count.
Examiners will stop reading once the word limit has been reached, and work beyond this
point will not be assessed. Checks of word counts will be carried out on submitted work,
including any assignments or dissertations/business projects that appear to be clearly overlength. Checks may take place manually and/or with the aid of the word count provided via
an electronic submission. Where a student has intentionally misrepresented their word
count, the School may treat this as an offence under Section IV of the General Regulations
of the University. Extreme cases may be viewed as dishonest practice under Section IV, 5
(a) (x) of the General Regulations.

Very occasionally it may be appropriate to present, in an appendix, material which does not
properly belong in the main body of the assessment but which some students wish to
provide for the sake of completeness. Any appendices will not have a role in the
assessment - examiners are under no obligation to read appendices and they do not form
part of the word count. Material that students wish to be assessed should always be
included in the main body of the text.

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ECON3251

Undergraduate Programmes 2015/16

Financial Theory and Corporate Policy

Guidance on referencing can be found in the programme handbook and on DUO.
MARKING GUIDELINES
Performance in the formative assessment for this module is judged against the following
criteria:

Relevance to question(s)

Organisation, structure and presentation

Depth of understanding

Analysis and discussion

Use of sources and referencing

Overall conclusions

PLAGIARISM AND COLLUSION

Students suspected of plagiarism, either of published work or the work of other students,
or of collusion will be dealt with according to School and University guidelines.
END OF ASSESSMENT

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