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DEPARTMENT OF ECONOMICS
TUTORIAL SET 1
2. What are the principal functions of the global financial system? How do the
financial markets fulfill those functions?
3. Distinguish between:
a. money market and capital markets
b. open and negotiated markets
c. primary and secondary markets
d. spot, forward and futures markets
e. perfect and efficient markets
7. Which is the riskier claim, equity or debt, issued by a company? What are the
implications for required rate of return on the 2 types of claims?
10. What is the difference between ‘life insurance’ and ‘general insurance’?
11. What is the difference between an investment trust and a mutual trust?
12. Briefly explain the main roles played by venture capitalists in the financial
system.
16. You have the following 6 years of data covering share A and the market
portfolio:
1997 10 % 3%
1998 18.5 21.29
1999 38.67 44.25
2000 14.33 3.67
2001 33 28.3
a. Calculate the average rate of return for each stock during the period
1997 through 2001. Assume that someone held a portfolio consisting
of 50% of stock A and 50% of stock B. What would have been the
realized rate of return on the portfolio in each year from 1997 through
2001? What would have been the average return on the portfolio
during this period?
b. Calculate the standard deviation of returns for each stock and for the
portfolio.
10. If a risky asset trades at a higher price than a riskless asset, then
A. the risky assets must offer investors higher future cash flows than
the riskless asset
B. the risky asset must offer investors lower future cash flows than the
riskless asset
C. the risky asset must have a discount rate that is lower than the
riskless asset
D. none of the above
11. What is the main characteristic of a well-diversified portfolio?
12. A financial adviser claims that a particular stock earned a total return of 10%
last year. During the year, the stock price rose from P30 to P32.50. What
dividend did the stock pay?
14. One difference between a forward exchange contract and a futures contract
in foreign exchange is:
16. The difference between the expected return on the market and the risk free
rate is called____________
18. You are planning to invest P300 000 in either security A or B or both.
Following probability distributions are applicable:
SECURITY A SECURITY B
Probability A Return A Probability B Return B
0.1 -10% 0.1 -30%
0.2 5 0.2 0
0.4 15 0.4 20
0.2 25 0.2 40
0.1 40 0.1 70