3330 PS7 sol - Cornell University Fall 2010 Economics 3330:...

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Cornell University Fall 2010 Economics 3330: Problem Set 7 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. Finding values of alpha not equal to one in the single factor index regression is clear evidence that CAPM is wrong. False. Finding any particular value of alpha is not clear evidence that CAPM is wrong because it is a statement about expected returns, not historical returns, and it is the historical returns used in regression analysis. b. On average, mutual funds underperform the market when adjusted for risk. True. The average alpha for actively managed mutual funds is negative. 2. Question 6 of Chapter 9 of Text Two investment advisors are comparing performance. One averaged a 19% rate of return and the other a 16% rate of return. However, the beta of the first investor was 1.5, whereas that of the second was 1. a. Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? To determine which investor was a better selector of individual stocks we look at abnormal
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This note was uploaded on 04/06/2011 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell University (Engineering School).

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3330 PS7 sol - Cornell University Fall 2010 Economics 3330:...

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