3330_PS7 - February the strong form of the efficient...

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Cornell University Gregory Besharov Economics 3330: Problem Set 7 Due October 27, 2008 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. If corporate insiders outperform market indexes on a risk-adjusted basis, the semistrong form of the efficient market hypothesis is violated. b. The fact that nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year is a violation of the weak form of the efficient markets hypothesis. c. If money managers that outperform the market (on a risk-adjusted basis) in one year were likely to outperform in the following year it would be a violation of the semi-strong form of the efficient markets hypothesis. d. If the stock prices of companies that announce increased earnings in January outperform the market in
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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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