Finance

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Faculty of Economics and Business

|On this first page, you will find important information about the examination. |
|Before starting with the examination you should read this information! |
|Examination: Finance 203BE|
|Date and time of the examination: January 19 |
|Duration examination: 2 hours |
|Youmust identify yourself with the UvA-identification card or your UvA student card and passport or driver' licence or any other valid proof of |
|identification for students containing a photograph. |
|If you did not register for this examination, your exam will not be marked. If you believe that yourexamination should be marked despite this |
|omission, you can write a letter to the Director of the Teaching Institute specifying arguments and containing proof of your claims. |
|Write your name and student number on your answer sheet. |
|Warning against cheating: Do not cheat! In the case ifcheating the maximum punishment from exclusion to all examinations for one year. |
|Your mobile phone should be switched off and should be put in your briefcase. Your briefcase should be closed and placed on the floor to the left|
| of your desk. |
|During the examinationyou are not allowed to go to the toilet unless the co-ordinating invigilator gives you permission to do so. |
|Tools allowed: pencil, pen, eraser, non-programmable calculator |
|Specific information on this examination: There are 10 questions|
|The result of this examination will be published within 15 working days after the date of the examination. If the re-sit is scheduled within 6 |
|weeks of this examination, the results will be published within 12 days. |
|Reviewing the examination: A date and location will be announced onblackboard |

Good luck!

Question 1 (Portfolio theory, CAPM, 15 points)

Suppose that you are considering investing your full wealth in TOP corporation. TOP is having a volatility of 34% and a correlation with the market of 0.57.
The expected return on the market is 14% and the market has a volatility of 17%. Assume a risk free rateof 4%. Base you answers on the CAPM assumptions.

a. What is the beta of equity of TOP corporation? What is the expected rate of return for TOP corporation?

b. The expected rate of return on TOP corporation is higher than the expected return on the market portfolio. Does this mean that you should invest in TOP rather than in the market portfolio? Why or why not?

Consider anotherfirm: XYZ corporation. XYZ has volatility of 23% and a beta of 0.34.

c. What is the expected return of a portfolio that consists for 70% of XYZ corporation and for 30% in TOP corporation?

Question 2 (Options, 15 points)

Assume that the common stock of KPN is currently traded at €12. A 13-week call option written on KPN’s stock is sold for €1. The call’s exercise price is €15. The...