FIN 42000: Financial Theory - How The Classical Financial Asset Pricing Models Perform - Accounting and Finance Assignment Help

Assignment Task:

Task:

Description of the task
Part A
Your task is to compare how the classical financial asset pricing models perform in countries with different cultural background. Please answer the following questions:
• Choose two contrasting countries (the countries should have different cultural backgrounds) for your study.
• Provide a brief description of the state of economy in the two countries you have chosen and describe the financial markets present in those countries. Keep in mind that there are different types of financial markets (stock, bond, commodities, derivatives markets).
• Choose two financial asset pricing models and provide a brief description of them and outline their underlying assumptions.
• Research how do the models chosen perform in your chosen financial market (you can choose which type of financial market to examine, but stick with the same type of market for both countries).

Part B
Question 1
Consider a pure exchange economy with 2 consumers (labelled A and B) and 2 goods (labelled 1 and 2). Find the equation that characterises the contract curve and the equilibrium when

&
with the initial endowments being wA = (10,20) and wB = (20,0).
Explain why the competitive equilibrium should be on the contract curve.

Question 2
An individual has a utility function described by U(Y ) = ln(Y). There exists a risky asset that is forecasted to pay either of two returns ?# > ?" with probabilities ? and 1-? respectively. Let us assume that ?# > ?' > ?" and that ?(??) = ??# + (1 ? ?)?" > ?'. The individual invests the amount a out of his initial wealth Y0 in the risky asset.
Write down the expected utility to be maximized by the individual investor.
Write down the first order condition solved by the optimal amount invested in the risky asset. Rewrite the FOC such that

?
?)
= ?11 + ?'23?[??] ? ?'6
1?" ? ?'21?# ? ?'2 > 0.

When would the investor want to borrow at the risk free rate in order to reinvest the proceeds in the risky asset?
Question 3
What is the difference between the relationship implied by the Capital Market Line and the Security Market Line? Consider a particular portfolio P with risk ?*. Under what circumstances will the CML and the SML give the same expected return on the portfolio?

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