ECN226 Capital Markets 1 – 2017 Past Paper Questions and Answers
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Course
ECN226 Capital Markets 1 (ECN226)
Institution
Queen Mary, University Of London (QMUL)
High-quality past paper questions and answers for the ECN226 Capital Markets 1 module for the Queen Mary University of London (QMUL) Economics Course. Each question is reproduced and high-quality full-mark scores are written up clearly for each one. Great for preparing for exams, studying and solid...
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ECN226 Capital Markets 1 – 2017
Questions and Answers
Question 1
a) The formula for the Sharp ratio is as follows:
𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛𝑠
𝑆ℎ𝑎𝑟𝑝𝑒 =
𝑆𝐷 𝑜𝑓 𝑒𝑥𝑐𝑒𝑠𝑠 𝑟𝑒𝑡𝑢𝑟𝑛𝑠
24 − 6
𝑆ℎ𝑎𝑟𝑝𝑒 = = 60
0.3
22 − 6
𝑆ℎ𝑎𝑟𝑝𝑒 = = 80
0.2
The Sharpe Ratio for B is higher, indicating that it is a better investment.
b) Assets with higher standard deviations typically provided higher expected average returns. The
Sharpe ratio provides an understanding of the return of an investment compared to its risk. The ratio
is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Question 2
Financialization is a term sometimes used to describe the development of financial capitalism during
the period from 1980 until 2010, in which debt-to-equity ratios increased and financial services
accounted for an increasing share of national income relative to other sectors. Financialization
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describes an economic process by which exchange is facilitated through the intermediation of
financial instruments. Financialization may permit real goods, services, and risks to be readily
exchangeable for currency, and thus make it easier for people to rationalize their assets and income
flows.
Five supporting facts are that:
1. The wage share of income has gone down.
2. The share of income going to rentiers has risen.
3. The income share of the lowest quintile has fallen.
4. The income share of the highest quintile has risen.
5. There has been an incredible rise in the income share of the top centile.
Question 3
The efficient frontier is the set of optimal portfolios that offers the highest expected return for a
defined level of risk or the lowest risk for a given level of expected return. One assumption in
investing is that a higher degree of risk means a higher potential return. Conversely, investors who
take on a low degree of risk have a low potential return. According to Markowitz's theory, there is an
optimal portfolio that could be designed with a perfect balance between risk and return.
Here, Portfolio W cannot lie on the Mean-Variance Efficient Frontier. This is because it has a lower
Expected Return and a higher Standard Deviation when compared to Porfolio Y. Therefore, it is a
strictly worse investment compared to Portfolio Y and therefore cannot be on the Mean-Variance
Efficient Frontier.
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