Unformatted text preview: February, the strong form of the efficient markets hypothesis is violated. e. If stocks that perform well in one week perform poorly in the following week, the weak form of the efficient markets hypothesis is violated. 2. Suppose there are two independent economic factors, M 1 and M 2 . The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well diversified. Portfolio Beta on M 1 Beta on M 2 Expected Return A 1.8 2.0 29 B 3.2 -1.0 6 What is the expected return-beta relationship in this economy? 3. Evaluate the following statement: “Unlike the market return in CAPM which has a theoretical justification, the additional factors in multi-factor index models only reflect data-mining.”...
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This note was uploaded on 11/15/2009 for the course ECON 3330 at Cornell.