FINANCE 720 Practice 3
9. (12 points) List three violations of any of the assumptions underlying ordinary least
squares. Describe what the violation is and what effect it may have on your estimation.
For each one, describe how you might test for its prese
FNCE 720 Notes 1
Topic 2: Statistics and Econometrics * Skewness 1. large positive vs. large negative
deviations relative to the central tendency 2. It is asymmetric see the direction of the variance
(positive or negative) 3. Skewness are connected * Kurt
FNCE 720 Notes 2
CAPM Empirics: Market Model specifies the analog of CAPM relationship with a
disturbance term * Characteristic line: graphical representation of the regression model
(excess return of stock against excess return of model) * Under CAPM inv
FNCE 720 Notes 3
Market efficiency: Selection bias only judge rules that are made public. Back test rule. Price
response to NBC Morning negative shoots down. Midday negative goes down, but half way.
Midday positive shoots up. Midday positive stays the sam
FNCE 720 Notes 4
Topics in the study of mutual funds: 1. Funds hold less extreme losers and winners. 2. Funds
avoid small stocks 3. Funds trade losers more frequently. * Sales and Purchases: Purchases
1. Contrarian behavior in funds 2. Underbuy winners.
FNCE 720 Notes 5
International Investing: Correlation: US, UK have high correlations with the world market -Diversify international stocks diversify a portfolio to a greater extent - difference between
geometric, and arithmetic means. - CAPM fails on a pe
FNCE 720 Notes 6
Fama and French conclude that Beta is not sufficient to explain the cross-section of expected
stock returns. In fact, expected returns are weakly negatively related to beta when firm size is
accounted for (although not statistically clear
FINANCE 720 Practice 2
5. (3 pts.) What would be the dollar value of your position in X, Y, and the T-bills,
respectively, if you decided to hold a portfolio that has an expected outcome of
$1,080? _b_
a. cannot be determined
b. $243; $162; $595
c. $595;
FNCE 720 Practice Problems
1. (5 pts.) A portfolio has an expected rate of return of 0.15 and a standard deviation of
0.15. The risk-free rate is 6 percent. An investor has the following utility function:
U = E(r) (A/2)sigma^2 . What value of A makes this
FNCE 720 Practice
1. (5 pts.) A portfolio has an expected rate of return of 0.15 and a standard deviation of
0.15. The risk-free rate is 6 percent. An investor has the following utility function:
U = E(r) (A/2)sigma^2 . What value of A makes this investor