Final Exam Questions, Student Proposed

8/3/2019 Final Exam Questions, Student Proposed

1/15

1.Assume you have several stocks in the portfolio. How the CAPM beta of this portfoliodepends on betas of each asset. If it is possible provide exact formula.

2.What puzzles of CAPM do you know? List them and their possible explanations.3.List the measures of risk adjusted returns. Provide rationale for each, indicate

advantages and disadvantages of using them

1) What is the difference between unit trust, closed-end fund, and

exchange traded funds?

2) What is implied by "walks like a duck" style analysis?

3) What is the main statement of the prospect theory?

1. Descibe forms of Efficient Market Hypothesis (EMH). Does the fact

that one always outperforms the market violates one of the EMH form?

2. What is the goal of event study? Where it was used?

3. Why do hedge fund managers close their funds after just one yearof losses, while the previous performance and investors` confidence

in hedge fund are strong?

Question: What is an advantage of SPIDER mutual funds over simple mutual funds?

Answer: The advantage is a tax consideration. When you sell a share to a mutual fund, a

manager should sell a part of the portfolio on the market and pay taxes, if he or she sells it at

a profit. Thus, all the members of a fund pay these taxes. When you want to sell a share of

SPIDER, a manager simply gives your share and you sell it by your own and thus pay taxes.

You admit such a condition since you usually sell a share at a profit and when you need it.

Question: List and briefly describe at least three trading strategy which may be used to

measure market efficiency. In what types of markets (emerging or developed) these strategieswill work?

Answer:

1. Short-term reversal strategy. The strategy is in the following. Buy last week losers and sell

last week winners after waiting for a week to control for microstructure effects. This strategy

will work on both types of markets.

2. Momentum strategy. The stocks that performed well during previous six months will likely

perform well in the next months. And vice versa: the stocks that performed bad will do the

same in the following months. Thus, the strategy is to sort stocks and choose top - 10% and

bottom 10%. After 6 months buy winners and sell losers and keep for the next 6 months. It

seems that on emerging markets this strategy will not work.

3. Exploiting the incomplete incorporation of earnings into stock prices. It is found (Griffin,

Kelly, Nardari 2010) that there is a price drift after the announcement of earnings which is

present in both emerging and developed markets.

1Question: What are the main difficulties with long horizons event studies? Answer:

Risk adjustment. Even a small error in the estimation of risk may be crucial since over long

period it becomes huge because of compounding. Moreover, the choice of a condi- tional

mean specification is very important because our estimates of abnormal returns depend on

the model. If we specify the model incorrectly then we will get unreliable results.


2/15

Cross-sectional correlations. If one ignores the cross-sectional correlations then he or she

will too small variance of the estimates and thus get a wrong size of a test.

Question 1.

Using riskless asset and the efficient frontier without riskless

asset, prove that Capital Allocation Line is in fact a straightline, tangent to that frontier. What is the frontier if we cannotborrow at risk free rate? What does it imply about CAPM relation?Provide some ideas on how to organize a test under these conditions,whether some portfolio is indeed a market portfolio.

The idea is that to the right of market portfolio, frontier would goalong efficient parabola. It will no longer be a straight line, andtherefore a test should change. One possible solutions is to testseparately two parts:

a)to the left of market portfolio (when CAL is a straight line).Here the test should be similar (only the we should restrictourselves to those assets that has variance less than the variance

of market portfolio)b)to the right of market portfolio. This one is a little bittrickier, because the regression is no longer linear (but we know

that it is a parabola, so we can still test it using a nonlinearregression)

Probably there's a better way to test it but it's just off the topof my head.

Question 2. (this one would be easy for those who attended thelectures, but it has a really nice intuition)

Desribe what is Sharpe ratio and Treynor ratio. Suppose you own onlya few shares and want to add one more. What measure is better to use

when you decide which asset to add? What if you already own a well-diversified portfolio?

And since the exam is A4,Question 3:

Describe different test statistics used in multiple event studies.Discuss how they differ from each other. Present at least one

example where each of these statistics is well suited.


3/15

1) [picture from slide 14 of event study lecture]Please describe the study showing us that picture. What is the aim

of this study? What are the conclusions?

2)Comment the following statement"Advanced investors do not use mutual funds because they do not findany value added by funds managers"

3) Provide several mutual funds performance measures and briefly

describe their essence.

1. For which kind of portfolio it is possible to improve its risk-return ratio? How one can do it?

2. Is it possible to fully diversufy away all firm-specific risk?How?

3. What is "small firm" effect? What is explanation for it?

1. Suppose you evaluate anevent studyanalysisof some eventofone firm.Abnormal

returnfordate0ispositiveandsignificant.Butotherabnormalreturnsareinsignificant.

Please,interpretyourresults.

2. Furthertoquestion1supposethatcumulativeabnormal returnsareinsignificant.Can

weconcludethatthatnewshadnotimpactonthevalueofthefirm?

3. Supposeyouareamanagerofonecompanyandyouhavebadnewsforinvestors.At

whatdayoftheweekdoyouprefertoreleasethisinformationtominimizeimpacton

pricesofyourcompany?Why?

Final exam questions

1) Propose some measure that could be used to measure liquidity of a company

stock

2) What is abnormal return and propose at least two models for normal returns3) Why can alpha significantly different from zero mean inefficiency of the

market portfolio in CAPM? Does alpha significantly different from zero always

mean inefficiency?

1. WhatarerationalexplanationsfortheSmallFirmEffectsanomaly?

2. Whatperiodreturnsarethebestforestimatingbetaofaparticularstockin

MarketModelandwhy?

3. Whydonotthemutualfundswithhighreturnsinpastseveralyearsattract

newinvestors?


4/15

1) What is Small Firm in January effect? What rational explanation has it?

2) What is Rolls critique about?

3) Describe briefly general event study methodology.

4) What is Head-and-Shoulders pattern in technical analysis? Can we use it to get risk-

free profit? Why or why not?

5) Why is it important to ground proposed behavioral finance model in the psychological

literature? If our behavioral finance explains some fact known beforehand, what should

we do to provide additional evidence for our theory? Why is providing additional

evidence in such cases especially important for behavioral models?

ExtraCredit:3Finalexamquestions

1) HowaretheRW1,RW2andRW3hypothesesrelated?Whichistheweakestformofthe

randomwalkhypotheses?(questionfor3-grade)

2) Describethreemainapproachesusedtoconstructmulti-factormodelsofstockreturns.

Which seemsmost suitable for theRussianmarket, taking into account itsspecifics?

(questionfor4-grade)

3) WhyaretestsusuallybasedonCARsratherthanARsineventstudyanalysis?(question

for4-grade)

4) How to solve the problem of thin trading in the event period (infrequently traded

stocks)ineventstudyanalysis?(questionfor5-grade)

1. Why are there more mutual funds than stocks, especially while

most of the funds follow indexes (to some extent)?2. How is the effectiveness of markets (as well as procedures for

its estimation) affected by the descreteness of prices?3. Why historically the empirical distributions of stock prices areright-skewed?

1) Youaresurelyunderstandhowimportantthenewsaboutsomeeventsarewhenexaminingthevalueofthefirm.Butwhatdoyouthinkwhetherthese


5/15

newhavethesamedegreeofimportanceifitisoccurredthatitisjust

rumours?Ifthereisadifferenceexplainwhy.2) Supposeyouareaninvestorwhoisgoingtobuyashareinanymutualfund.

Whichparametersaremoreimportantforyouwhilechoosingthepreferablefund:Sharpratio,TreynorratioorJensensAlpha?

3) Howskewnessofdistributioninfluencetheresultswhenanalyzingrisks?

Question1:a)Whatisthedispositioneffect?b)Whyisprospecttheoryone

possibleexplanation for the disposition effect? c)Can you thinkofanother

possible explanation? d) How the disposition effect might influence stock

returns?

Answer:

a)Dispositioneffect:Investorshavethetendencytosellshareswhosepriceisincreasing,whilekeepingassetsthathavedroppedinvalue,sotheytendto''sell

winnerstooearlyandrideloserstoolongb)Pastpricesserveasareferencepoint.Differentriskattitudeforgainsandlosses:riskseekinginthelossdomain(convexvaluefunction),riskaverseinthegain

domain(concavevaluefunction).Therefore,sellwinnerstooearlyandrideloserstoolong.c) Investors may also believe that winners and losers will mean revert. However, it is amisunderstanding of random processes and stock market efficiency.

d) The Disposition effect may affect the supply of stocks:

If stock prices rise above the reference point: Investors will be more willing to sellthereby increasing the supply of stocks. temporary downward pressure on current

stock prices drift in stock returnsIf stock prices fall below the reference point: Investors will be averse to sell thereby

restricting supplytemporary upward pressure on current stock pricesdrift in stockreturns

Question2:Illustratenecessarystepsforimplementingeventstudies.

Answer:1.Identifytheeventofinterest(Sharerepurchases,dividendpayments,M&As,new

products,firing/hiringofexecutives)

2.Definetheeventwindows

Eventwindow:severaldaysaroundtheeventdate.Longenoughtocapturethesignificanteffectoftheeventandshortenoughtoexcludeconfoundingeffects.3.Selectionofthesample:firmsimpactedbytheevent

Eliminatefirmsthatexperienceotherrelevanteventsduringtheeventwindow

4.Computetheappropriatereturnmeasures:abnormalreturns(AR),Cumulativeabnormalreturns(CAR)

5.Analyzeresults.


6/15

Question 3:

True/False.Explain:Theexistenceofenoughtechnicalanalystsinfinancial

marketsassuresthattheweakformmarketefficiencyholds,whilethe

existenceofenoughfundamentalanalystsdoesthesameforthesemi-strong

form.Definethementionedformsofmarketefficiency.

Answer:True

Weakformefficiency:pricesreflectallinformationcontainedinpastprices.Semi-strongformefficiency:weakform+allpubliclyavailableinformation.

Technical analystsshould findanyexistingpatterns inpricesandexploitthem. If

there are enough of the analysts, they will compete to exploit the opportunity.Eventually, all beneficial trading strategies disappear. Competition among

fundamental analysts makes sure that prices also reflect all publicly availableinformation,andtherebyitensuresthesemi-strongformefficiencytohold.

3FinalExamQuestions

1. Assume that you want to perform an event study for a company's stock

returns. The chosen firm isaquitetypicalcompanyin some industry(e.g. one of

threelargestmobileoperatorsinRussia).Supposethatafterarelativelylongperiod

withoutanysignificantevents(forthechosenfirm)thegovernmentpassesalaw

which regulates prices for mobile network services. One week later the serious

shiftstakeplacesintheboardofadministrationofthechosencompany.Proposean

empiricalstrategytotesttheimpactof onlythelasteventonthecompany'sstock

returnsusing the necessary data on returns, indices, prices etc. available on the

market.

2.Supposeyouhaveadataonreturnsofthreedifferentfunds.Youknowthat

amongthesefundsareindexmutualfund,activemutualfundandhedgefund.First

ofall,discussthepurposesandmaininvestmentstrategiesofsuchtypesoffunds.

Thenthinkoutaboutwhichofthegivenreturnsbelongstothecertainkindoffunds,

discuss briefly your answer and provide intuition. Finally, propose appropriate


7/15

hypothesesaswellasformalempiricalstrategiestodetectthefund'stypegiventhe

returnperformanceandusingthenecessarydataavailableonthemarket.

3. On the lectures we have discussed the behavioral viewpoint on the

momentumfactor(whenwinnerscontinuetowinandloserscontinuetolose).Now

trytoprovideasmanybehavioralexplanationsasyoucanofthesizefactor(when

small stocks outperformed large stocks), thebook-to-market factor (when stocks

withhighBtMoutperformstockswithlowBtM)andthereversalfactor(whenthe

stockwhichhavebeengrowingforseveralyearstendstofallforthenextseveral

years).Despitewehavementionedsomeoftheseempiricalevidencesinbehavioral

prospectduringtheclasses,someofproposedexplanationscanbesupplemented.

Trytospecifyyouranswerwiththenamesofbehavioraltheories(e.g."accordingto

Kahneman&Tverskytheory,dispositioneffect,etc").Youalsocanproposeyour

ownrelevantexplanation(rationalorbehavioral)ofsuchempiricalevidence.

1) Youexpectthatstockmarketwillgrowfor15%thisyear.Therearetwofundson

market:AandB.Atakes3%commissionfrominvestmentsand2%managementfee

eachyear.Btakes4%commissionforwithdrawalinvestmentsand1%managementfee

eachyear.Whichfundwouldyouchooseifyouwanttoinvest$100forone-year

period?

Answer:1-yearinvestmentinAwillgive$9.32;inBwillgive$9.30.

2) Discuss,shouldyouchooseforeventstudythissituation:4-thquarterfinancialreportof

DevelopmentCompanyinRussia.

Answer:theeventshouldbesomethingunexpected.ButinRussia,theDevelopment

businessissleepingduringthewinter.Thereisnothingunexpectedin4thquarter

financialreport,becausemajornewswasreleasedin3thquarterreportandin4th

quartertherewerelittlechanges.

3) Whythepricechangeofastockcouldbezeroattheendofaday?

Answer:stockexchangedoesnotworkatthisday(holiday,tradestopping),therewere

nodealsonthisstock,andthepricechangedsomehowbutfinallyreturnedtotheopen

point


8/15

QuestionsforEmpiricsofFinancialMarkets

I came up with more questions because I do not know whether all of them aresuitablefortheexam.

Question1:Howcanyoujustifyusageoftechnicalanalysis?Infact,alotofpeopleuseitandmakemoney,butatthesametimeitmayworkevenonrandomlygenerated

data(e.g.randomwalk).

Answer 1:First of all, not all the tools of technical analysis are as ridiculous asshouldersandmanyofthem(e.g.differentindicators),trytograbcorrelationsin

dataand,hence,whenstockpricesdohavesomeintrinsicdependence(especially

whentimeintervalsareshort),technicalanalysismaywork.Moreover,oneanotherjustificationmaybeused.Alotofpeopleknowtherulesoftechnicalanalysisand

whenallofthemseethatthemarketshouldgoinacertaindirectiontheyusethe

samestrategyand,hence,arelikelytopullthemarketinthedirectiontheyexpectitshouldmove.

Question2:Doyouthinkthedemandforriskierassetsisgreaterinabullishmarket

orinabearishone?Supportyouranswerbyargumentation.

Answer 2: In accordance with one of the last lectures, people are risk loving in

losses(thereareconstraintsforshortsellingandtheprobabilityoflossisanyway

greaterinabearishmarket).Hence,whenthemarketfalls(it isbearish)investorsarelikelytotakemorerisks.Thenthedemandforassetswithhighexposuretorisk

grows.Thus,theanswerisinbearish.

Question 3: Comment on the statement: Markets are more likely to demonstrate

efficient behaviorwhenwelookat themduringlongtime periodsrather thanshort

ones.

Answer3:Wehaveseenatlecturesabouteventstudythatsometimesittakesquite

longperiodsoftime for amarket toabsorbnews. Therefore,ifwe consider very

short periods of time,we arenot likely to find any signs of efficiency. But if weconsiderlongperiodsoftimewhenthemarketmanagestoabsorballthenewswe

canseethatefficiencymaybepresent(i.e.pricesreflectalltherelevantinformation

etc.).Thus,thestatementseemstobevalid.

Question 4: Give an example when event study (here by event study we mean theprocedurewe used inour home assignment and discussed inclass) failsbutnews is

likelytoberelevantforthestockprice.

Answer4:Itmaybethecaseforalowliquidstock.Inperiodswhenitistraded,its

pricehastoabsorballthenews,butdifferentnewscanhavedifferenteffectsand


9/15

togethertheymay result insomething that isnot likely todemonstrate non-zero

abnormalreturns.

Question5:Explainwhypeopleinvestinmutualfundssinceeveniftheyoutperformthemarketalmostalltheresultsoftheirniceperformancestayinthepocketsoffund

managers?Moreover,mutualfundsonaveragedonothaveverygoodperformanceAnswer5:Theremaybeseveralreasons.Firstofall,manysmallinvestorssimplydo

nothaveenoughmoneytobuyexpensivefinancialinstruments.Also,somepeople

maynotwanttobotherthemselveswithhowtoinvest;theywantsomebodyelsetothink for them. Another reason is quite obvious; mutual funds can have very

persuasiveadvertisingcampaign.

Questions:1) Whydopeopleperceiveequalgainsandlossesdifferently?

2) Isitpossibletoeliminateallriskusingdiversification?Explainyouranswer.3) Howquicklydoesstockpricechangewhennewinformationcomestomarket?

Dear Patrick,

Here are my questions:1. Describe several examples of peoples behavioral biases and how they can be

replicated in financial data.

2. What academic paper on empirics in finance (that may be considered in the

course or may not) do you consider to deserve no publication? What empirical

issue did the authors attacked? What methods did they apply? Why did they fail to

get a worthwhile result? (This question arose during the last lecture).

Name an academic paper on finance that you consider to be one of the most

influential? Describe in brief the new theoretical concepts or / and empirical

findings that the paper presented.

3. What types of mutual funds do you know? What are the distinctive features of

different types of funds? What are the benefits to individual investors of investing

in a mutual fund? Describe all approaches you know to measure funds

performance.

1) IfCAPMhassomanyproblemswithit,andrequiresalotofassumptionto

make,thanwhyeconomistsstilluseit?WhatisimportantinCAPMbesides

failuresseeinginempiricalresearches?

2) Dofirmshaveincentivestowrenchtheirpublicinformation?Whytheseincentivescouldappear?

3) Whysomeagentsineconomycouldirrational?Whatisfailuresofassumptionstayafterirrationality?


10/15

1. Describebrieflyhowonecouldtestwhethersomeevenaffectedthestockprice

ornot.

2. What are the main ideas of behavioral finance you know? Provide some

examples.

3. WhatistheideaofSPIDeRfunds?Howtheydifferfromclassicalmutualfunds?

Questions:

1. Whydomostsuccessfulinvestmentfundstendtoshowlowerreturnover

time?2. WhydidFamaandFrenchintroducethree-factormodelinplaceofCAPM?

WhatisthecriticismforusingSMBandHMLasriskfactors?

3. What is the evidence in favor of behavioral explanation of return predictability? Isit enough to explain why price-scaled variables such as book-to-market predictreturns?

1. Whatkindofmarketefficiencycanbetestedbytheeventstudiesapproach?

Whatarethekeycomponentsofasuccessfuleventstudy?2. WhytheoldMorningStarrankingwasabandoned?Isthenewoneflawless?

3. WhydomostmutualfundsreporttheSharperatioandJensensalpha?WhataretheadvantagesofthesetwomeasuresovertheTreynorratio?

4. Whyagoodcompanydoesnotnecessarilymeanagoodstocktobuy?

1).Eventstudy.

Whilecomputingteststatisticforcumulativeabnormalreturnonecanestimatestandarderrorusingthewholeestimationperiod.Nowconsiderthepossibilityof

heteroskedasticiyinreturns.Discussthetrade-offbetweendifferentlengthsofthe

window.Moreprecisely,describethebiaseswhichcanarisea) Insmallestimationperiods.b) Inlargeestimationperiods.

2).CAPM

AswenowCAPMmodelisbasedonseveralassumptionsincludingsocalledmean-variancecriterion.Brieflydescribethegistofthisassumption.Whatishappening

withthecoefficientofthemodeliftheutilityofinvestorsisbiasedtothevariancecomponent?Tothemeancomponent?

3).ConsidertheproblemofestimationCARaroundthepublicationofannualreportofthecompany.Assumethatthenewstobeannounceddontincludeanyimportant

information.Wealsoassumethattheestimationwindowissymmetric.Describea

scenariowhenwehave:a)PositiveCAR


11/15

b)NegativeCAR

Hint:considerdifferentexpectationsofinvestorsaboutthenewstobeannounced.

Questionsby

1. SupposeaninvestorwhobelievesinCAPMandisreadytotaketheriskthatlittle

morethanriskofmarketportfolio.Foreachofdescribedsituations,please

specifythetypesofassets(i.e.stocksbondormix)whichtheinvestorwillholdin

herportfolio:

a. Perfectmarkets.

b. Thereisnoopportunitiesforinvestortoborrowmoney.

c. Perfectmarketsbutthedepositratediffersfromtherateatwhichinvestor

canborrowmoney.

Answers

a. Shewillholdaportfoliothatisatthemarketlineandthisportfolioconsistof

bondsandstockslittletotherightsidefromthemarketpotfolio

b. Shewillholdaportfolioatefficientfrontiertotherightsidefromthemarket

portfolio,thatportfolioconsistsonlyofstocks,becausemarketlineendsat

marketportfolio.

c. Shewillholdaportfolioatefficientfrontiertotherightsidefromthemarket

portfolio,thatportfolioconsistsonlyofstocks,becauseslopeofmarketline

islessthantheslopeofefficientfrontiernearthemarketportfolio.2. Assumeyouarereadytotakeriskthatisthesameasamarketrisk,andyou

investinoneoftheSPIDeRfund.Yourfriendtoldtoyouthatthemanagerof

fundyouveinvestedtookmorethanmarketrisk.Howyoucanverifythatyour

friendright/wrong

Answer:

toestimatefundperformanceonhistoricaldata,forexamplerunregressionof

excessreturnsondifferentfactorsreturns.

3. Please,brieflydescribetheimpactofeventwindowwideningonyour

conclusionsabouteventsignificanceduringeventstudy.Answer:

Seeslides33-36inCalculatingTestStatisticsforEventStudiesinDetail

presentation.1. WhatitistheRW3hypothesis?Proposeatleastthreewaysfortestingit.Howdoyou

thinkaremarketsefficient?Providesomeevidence.


12/15

2. Namethemainmodelsformeasuringnormalperformanceduringeventstudies.

Proposeamethodforchoosingthebestofthem.

3. Whatisthemaindifferencebetweenmutualandhedgefunds?Provideatleasttwo

examplesforeachofthem.

1) PleasedescribeTheSmallFirmEffects.

2) Couldyounamethetestthatisrobusttoeventinducedvolatilitychanges.

3) Afterwhatperiodoftimeaccordingtothetheoryreturnsofthemomentumstrategyis

zero.

1. Assume you have several stocks in the portfolio. How the CAPM beta of thisportfolio depends on betas of each asset. If it is possible provide exact formula.

2. What puzzles of CAPM do you know? List them and their possible explanations.3. List the measures of risk adjusted returns. Provide rationale for each, indicate


1. What are the Treynor and the Sharpe ratios for risk reward? What is the

differencebetweenthetwo?Whichoneisintousewhenconsideringadditionofasinglestock

tothewell-diversifiedportfolio?Why?

2. Howmanyportfoliosareneeded(andsufficient)toconstructallportfoliosfrom

theefficientmean-variancefrontier?Whatarethey?

3. Describe a general methodology of conducting event studies. Additionally,

explaintheissuesoftheeventstudytimelineselection.

DescribehowtofinddataonmarketreturnsforbothUSandRussianstockmarkets.

Provideoneoftheexpressionsfort-statisticusedfortestingwhetheraneventchanged

sharespricesignificantly.Explainwheretheexpressioncomesfrom.

HowisitpossiblethatSPiDeRscanmaintainsuchlowfeesas0,1%peryear?Regular

operationsinstockmarketaremuchmoreexpensive.

1. Whatisamomentumstrategy?Describehowtoimplementitindetails.Howmayyou

rebalancewinnersandlosersportfolios?Whatareprosandconsofdifferentwaysof

rebalancing?Whythemomentumstrategymaybeprofitable?Doesprofitabilityofthis

strategycontradictmarketefficiencyhypothesis?

2. Whatareweak,semi-strongandstrongformsofmarketefficiency?Describeseveral

waystotestweakformofmarketefficiency.


13/15

3. Howtoevaluatemutualfundperformance?Whatareprosandconsofdifferent

approaches?Couldfundmanagersmanipulateperformanceresults?How?Whatcould

authoritiesdotopreventmanipulation?

1. FormulatethenullhypothesisimpliedbyCAPM.WhatistheFama-MacBethapproach

totestingthenullhypothesis?

2. Formulatethehypothesisformarketefficiencyandprovidesomewaysfortestingit.

Howdoyouthinkaretheyefficientinreallife?Providesomeevidence.

3. WhatisthedifferencebetweenTreynorratioandSharpratio?Whenshouldweuse

eachofthem?

4.Assume you have several stocks in the portfolio. How the CAPM beta of this portfoliodepends on betas of each asset. If it is possible provide exact formula.

5.What puzzles of CAPM do you know? List them and their possible explanations.6.List the measures of risk adjusted returns. Provide rationale for each, indicate


1. Define liquidity of a stock and describe several methods of

measuring it. What are the sourses of illequidity?

2. What is an efficient protfolio? How to construct efficientportfolio and to test its efficiency?

3. What might be alternative reasons behind event studies others

than measuring the speed of information incorporation?

1. What main idea is implied by the EMH? What are possible ways totest EMH?

2. What is main idea behind CAPM ? its modifications (C-CAPM, ICAPM)

? What are the statistical evidences say about the CAPM and howthose evidences connected with its popularity?

3. Can minimum variance portfolio coincide with optimal portfolio?

1) What is CAPM for? List please all major applications

2) Could it be the case, when we observe one type of efficincy, but

not the others.Consider all possible combanations of observed/unobservedefficincies.


14/15

3) What are the reasons for short-run(2-3 days) inefficiency, if ingeneral (lond-run) we observe market efficiency (information and

other)?

1. Suppose you are testing the hypothesis that the Steve Ballmer'sannouncement on coming official PC support of the new Kinectcontroller had a significant impact on Microsoft's stockperformance. However, the t-test does not show you any evidence that

returns of the stock were different. Give at least 5 differentreasons for why it might be the case.

2. Suppose you are running the CAPM regression of Microsoft stockrisk premium on S&P risk premium. You got a significant positivevalue for beta and an insignificant value for alpha. However, the R-

squared of your regression is just about 25%. Does it imply that themarket is not efficient? That investors are limited in arbitrage?Can it be explaining by the presence of noise trader risk?

3. Do you expect returns of equal-weighted portfolio or value-weighted portfolio to be more likely to pass the variance ratiotest?

1)What is market efficiency? How one could test whether markets are

efficient and what results he or she is likely to get?2)What is referred to as a December effect? Does it violate marketefficiency?3)What is CAPM? Which regressions one could run to test it? What isthe economic interpretation of estimated coefficients in thoseregressions?

1. The two fund separation theorem implies that there are only two funds needed

to get any point on the efficient frontier in CAMP framework. The question is whythere are actually no these two funds in the real market as they would probablyfind great potential demand from investors that wish to create their own optimal

market portfolios with custom risk/reward profiles?

2. It is usually assumed that the stock prices follow some diffusion process andthat implies normal distribution of returns. What is the reason for skewness thatcan normally be seen in returns distribution?

3. Is there a way to identify or estimate who of the investors is more risk-averseand who is less risk-averse in CAPM framework?

1.WhatistheMean-VarianceCriterion?GivedefinitionsoftheCapitalMarketLine

andtheEfficientFrontierCurve.Wherecantheybeapplied?2.Whatarethemaintypesofmutualfunds?Whatarethemainapproachesto

evaluationoftheirperformance?Comparethemtoeachother.


15/15

3.Whatarethemainirrationalitiesininvestorsbehavior?Towhatextentdothey

affectprices?Whatarepossiblewaysoftreatingtheminbehavioraleconomics?

1. Provide some arguments for the next statement: "small firms in general have

higher returns".2. Analyzing the trades of individuals investors Odean finds that investors aremore wlling to sell winners and hold on to losers. Provide some commonbehavioral explonations of that fact.3. Using what instruments/actions investors could achieve returns above thereturn of the market portfolio?

Final Exam Questions, Student Proposed

Documents

Transcript of Final Exam Questions, Student Proposed