# Typical Questions

##### Financial Markets and Capital Market Theory
###### Sample Question #1
1. A consumer with utility function 𝑈(𝑐0, 𝑐1) = ln(𝑐0) + 1.2 ln (𝑐1) is confronted with endowments 𝐸0 = 500 and 𝐸1 = 550. Calculate the optimal consumption in both periods using the Lagrangian approach if the market rate of interest is 8%.

2. Now assume the economy consists of only two consumers; the consumer from above (consumer #1) and consumer #2 with utility function 𝑈#2(𝑐0, 𝑐1) = ln(𝑐0) + 1.05 ln (𝑐1) and respective endowment position 𝐸0 = 300 and 𝐸1 = 400. (i) Describe the equilibrium in the capital market of this economy. What are the conditions for equilibrium? (ii) Calculate the equilibrium market rate which clears the capital market.

###### Sample Question #2
1. Explain on the basis of an appropriate diagram the Tobin separation.

2. In a capital market the risk-free rate is rf = 0.03 and the parameters for the market portfolio are 𝜇𝑚=0.08 and 𝜎𝑚=0.2. Calculate the firm’s standard deviation of the rate of return if the firm i has the same systematic risk as the market and standard deviation of the firm specific risk is 𝜎𝜖=0.369. Sketch the result a graph in relation to the capital market line (CML) and give a clear interpretation!

3. Depict in a 𝜇−𝜎 diagram the efficient portfolios consisting of the following two assets which are assumed to be perfectly positively correlated.

 Asset #1 Asset #2 𝜇 10% 10% 𝜎 25% 45%
##### Principles of Corporate Finance
###### Sample Question #1

Show that in the Modigliani-Miller (MM) framework, the weighted average cost of capital is a constant. Point out at which steps of the reasoning you need to make use of the value invariance result and the assumption of risk classes.

###### Sample Question #2

Assume company ABC’s stock has a market value of 8 with corresponding equity costs of 18%. ABC has also riskless debt outstanding with market value of 4 and debt costs of 6%. The firm has a project which is expected to yield 17%, but which is 40% more risky than existing assets. Assume that the CAPM holds. Is the project profitable? Explain your answer.

###### Sample Question #2

Explain the Miller (1977) equilibrium. Point out the relevance of taxes on the personal level. Explain the significance of the result for the optimal leverage choice.

##### Principles of Behavioral Finance
###### Sample Question #1
1. What are the key aspects of cumulative Prospect Theory?

2. In the Prospect Theory framework there is a distinction between the integration and the segregation of decisions. Explain the difference between the break even effect and the house money effect.

###### Sample Question #2

Is the following statement true or false?

1. The favorite-longshot bias (or longshot-favorite bias) states that people bet too much on favorites.

2. For short-term intervals (3-12 months) there is usually momentum.

3. According to the status-quo bias people are less willing to leave the status-quo because of loss aversion.

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