3330%20PS6%20solution - Cornell University Fall 2009...

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Cornell University Fall 2009 Economics 3330: Problem Set 6 Solutions 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 semistrong form of the efficient market hypothesis holds, hedge fund managers should not outperform market indexes on a risk-adjusted basis other than by chance. False. In addition to the fact that some will outperform by chance, as we have discussed, some have access to private information. b. The local unemployment rate would be a useful factor in a multi-factor APT model. False. To the extent that local unemployment represents local factors, it should not generate a risk premium for assets. c. The liquidity premium on small stocks offers returns above risk-adjusted levels. False. The additional return is compensation for liquidity risk. 2. Two-factor APT Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 6%, and
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This note was uploaded on 12/22/2009 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell University (Engineering School).

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3330%20PS6%20solution - Cornell University Fall 2009...

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