3330%20PS6 - Cornell University Fall 2009 Economics 3330:...

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Cornell University Fall 2009 Economics 3330: Problem Set 6 Due 11/2/09 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 the semi-strong form of the efficient market hypothesis holds, a hedge fund manager will not outperform market indexes on a risk-adjusted basis other than by chance. b. The local unemployment rate would be a useful factor in a multi-factor APT model. c. The liquidity premium on small stocks is consistent with efficient markets because it does not offer returns above risk-adjusted levels. 2. Two-factor APT Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 45%. There are two well-diversified portfolios. Portfolio A has the following characteristics: the beta on F 1 is 1.5 and on F 2 is 2.0. The expected return is 31%. For Portofolio B, the beta on F
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This note was uploaded on 12/22/2009 for the course ECON 3330 at Cornell University (Engineering School).

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3330%20PS6 - Cornell University Fall 2009 Economics 3330:...

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