Financial Econometrics

Sogang University
In Choi
Spring 2010
Midterm Examination
Time: 9:00-10:15 AM
Total points: 120 points
Instructions: (i) Consulting an A4-sized sheet of paper on which you wrote down necessary
information is allowed.
(ii) Write either in English or in Korean. (Sorry! The instructor and TA do not under-
stand Chinese and French well.)
(iii) Leave quietly if you nish the exam before others.
1. (10 points) The CPIs for this year and the next are 106 and 110, respectively. If an
asset, that is held for a year from this year, has nominal return 0.05, what is its real
return?
2. (10 points) An assets value will be $10 million 5 years later. If the discount rate is
0.04 per annum, what is its present value?
3. (10 points) The simple net returns of an asset are 0.01, 0.04 and 0.05 for a three-year
period. What is its continuously compounded three-year return?
4. (10 points) Comments on the following statements.
(a) Stock return data tend to have high kurtosis as the sampling frequency increases.
(b) As the forecast horizon increases, variance of the forecast error also increases.
5. (10 points) Consider the AR(1) model
:
t
= c:
t1
+c
t
. (t = 1. 2. .... 1).
c
t
\`(0. o
2
).
(a) Suppose that c = 1 and
0
= 0. Is the process stationary?
(b) Explain how we can test the null hypothesis H
0
: c = 1.
6. (10 points) Derive the autocovariance function of the following process
:
t
= c
t
+c
t1
+c
t2
. c
t
iid(0. 1).
7. (10 points) Comment on the following statements.
(a) In a long-horizon predictive regression, value of the coecient estimate increases
as the horizon increases.
(b) If a variance ratio calculated by using stock returns is less than one, one may say
that the stock is safer for long-run investors who can tolerate ups and downs of
the market.
8. (20 points) Suppose that the optimal portfolio involving only risky assets is .
q
with
return 1
q
and that there is a risk-free asset with return 1
f
. Using this information
derive the capital market line. If an investor is extremely risk-averse, where would she
reside along the capital market line?
9. (20 points) Comment on the following statements.
(a) When the yield spread is high, the short rates are expected to rise.
(b) When the yield spread is high, the long rates are expected to rise.
10. (10 points) A ten-year zero-coupon bond has the following annual prices: 1
(10)
1
= $9200
and 1
(9)
2
= $9300. What is the holding period (one year) return of this bond?
2