UGBA103_Problem_Set+_6 - Problem Set #6 GSI: Florent...

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Problem Set #6 GSI: Florent Rouxelin 13-1. Assume that all investors have the same information and care only about expected return and volatility. If new information arrives about one stock, can this information affect the price and return of other stocks? If so, explain why? 13-2. Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks: a. At current market prices, which stocks represent buying opportunities? b. On which stocks should you put a sell order in? 13-4. You know that there are informed traders in the stock market, but you are uninformed. Describe an investment strategy that guarantees that you will not lose money to the informed traders and explain why it works. 13-5. What are the only conditions under which the market portfolio might not be an efficient portfolio? 13-8. Why does the CAPM imply that investors should trade very rarely? 13-11.
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UGBA103_Problem_Set+_6 - Problem Set #6 GSI: Florent...

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