Reference no: EM132705785

Please explain the answers thoroughly for my understanding!!

1. (True or false) Let us focus on the difference between the arithmetic and geometric average return of securities. Is it true that the difference is likely larger in stocks than in bonds?

2. (Multiple choice) Suppose stocks X and Y have fundamental values of $100 and $200 per share, respectively. Further suppose the two stocks have the same level of risk. The current market prices of both stocks are $150. Suppose investors properly understand fundamental value and risk. What should we expect to happen?

(Choose one from below)

(A) Investors should sell stock X and buy stock Y. Stock X should end up having a lower price than stock Y.

(B) Investors should buy stock X and sell stock Y. Stock X should end up with a higher price than stock Y.

(C) Investors will do nothing

3. (True or false). Is it possible to reduce portfolio risk by investing more in a security with volatile returns.

4. (True or false) Suppose the CAPM holds. Suppose security X's beta does not change over time. Then, its expected return also does not change over time. For each of the following two questions, decide whether the described phenomenon is a violation of the efficient market hypothesis, and why.

5. It is socially beneficial for the Federal reserve to issue warnings based on the current stock market's price/earnings (P/E) ratio. If the P/E ratio is too high, then the Fed can warn investors that the market may be experiencing a bubble, so that investors can "cool off" and stop over-investing.

6. A new policy was passed at the start of January, stating that the government will increase funding for the renewable energy industry. In response to this news, stock prices of renewable energy companies went up throughout the month of January.

7. Recall that trading by arbitrageurs (smart investors) tend to make prices better reflect fundamental value. We know that institutional investors (funds) tend to trade stocks with large market capitalization because those stocks are more liquid (easier to trade). Does this imply that the prices of large capitalization stocks tend to be more efficient?

8. In factor investing, we are concerned about both a) data mining and b) crowding. Please explain those two concerns.