MSc in Finance coursework

MSc in Finance coursework (60%) Max word count 2000

Question 1 (50 marks)

SupposethatEmma’sutilityfunctionisgivenby𝑈(𝐼)=√10𝐼,where𝐼representsherannualincome in thousands ofEuros.

  • Is Emma risk loving, risk neutral, or riskaverse?Explain. (10 marks)


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  • SupposeEmmaiscurrentlyearninganincomeof€40,000(𝐼=40).Thisistheonlysourceof She can earn the same amount next year with certainty. She has the chance to take a newjobthatoffersa0.6probabilityofearning€44,000(𝐼=44)anda0.4probabilityofearning




  • Giventhenewjobin(b),wouldEmmabewillingtobuyinsurancetoprotectagainstthevariable income associated with the new job? If so, how much would she be willing to pay for that insurance? (10marks)


  • Accordingtothearticle“RiskandUncertainty”,byK.FrancisParkandZurShapira1,thetheoryof expectedutilityfallsshortinaccuratelydepictingpeople’sdecisionmakinginmanycases.Choose one case or situation in which expected utility is not suitable to represent people’s decision making.Explain. (20marks)



Question 2 (50 marks)

Consider the IS-LM model to represent the economy in the short run.

  • Suppose households attempt to save more, so that consumer confidence falls. Use the IS-LM diagram to show the effect of the fall in consumer confidence on output and the interestrate.

(15 marks)


  • Discuss the effects of the fall in consumer confidence on consumption, investment, and private saving. Will the attempt to save more necessarily lead to moresaving?Explain. (15marks)


  • Go to the Bureau of Economic Analysis (US Department of Commerce) website Find the data on personal saving rate and the gross domestic product (GDP) from 2000 to2016.


  1. Create a graph (e.g. using Excel) showing the personal saving rate and the year-over-year growthrateofGDPforthatperiod.Comparetheaveragesavingrateforthreetimeperiods: from 2000 to 2007; from 2009 to 2011; and from 2009to2016. (10marks)


  1. Discuss how the data in (c) i. is related to the explanation in (b). [Hint: “Paradox of Saving” or “ParadoxofThrift”.] (10marks)




1 Risk and Uncertainty, The Palgrave Encyclopedia of Strategic Management, 2017. DOI:

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