Assessment Guidelines and Questions for Investment and Finance

1. This assessment was designed to be completed within 3 Hours under examination conditions. You are not expected to need 24 hours to complete this assessment

2. As this is a coursework assessment there is no extra time allocated for students with a SOSN.

3. If you experience technical difficulties, e.g. access and upload issues, or identify a potential error in a question please email the module leaderwho will be available.

4. This is an open book assessment so you may consult your notes, textbooks and the internet.

5. You must not collaborate with someone else on this assessment, it should be wholly your own work. Your work will be checked for evidence of plagiarism and/or collusion using Turnitin.

6. Any written work in excess of the word limit will not be marked. Additional answers to those required will not be marked.

1. You should submit your answers as a single Word document via Canvas. Indicate the questions you have answered on the first page of your document.

2. If you include graphics in your answer, please embed these into the word document (e.g. a photograph of a hand-drawn graphic). The source of any copy and pasted should be cited.

3. Please make sure to regularly save your work and leave plenty of time to upload your work before the deadline. All late submissions will score zero.

4. If you experience technical difficulties contact the module leader [email protected] who will be available at his email account on 15.05.2020, 09:00-10:00 only for

This paper contains 9 questions.

Answer ALL questions.   

KU tables may be accessed on BOX

Reference all Sources.

1.In this question, you may state results – with references.

An investor with wealth invests using a utility function.

(i)Show how the investor is never satisfied.

(ii)Show how the investor is risk averse.

(iii) Describe how the investor will invest as their wealth increases both as the amount of wealth they invest and as a proportion.

(b)The investor is presented with an opportunity to invest a proportion of their wealth in a risky investment which pays with probabilit.

(i)Show that the proportion  giving maximum expected utility is independent of initial wealth

(a)Estimate the values  and  that estimate  and , respectively, from the following data. Copy and complete the following table. Use 5 significant figures (5sf).

(b)Use the Residual Variances to construct the covariance matrix for the market under this model. Again, use 5 significant figures.

(c)The actual covariance matrix for the assets is given in the table below. Why the two matrices differ?

(d)Is the independence of the error terms from the index and error terms for other assets a reasonable assumption compared with reality? Give two reasons to back up your answer.

3.(a) Define the term equilibrium in the market in your own words.

(b)Assume that the following two-index model describes returns:

Assume that the following three diverse portfolios are observed: