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Final Exam Questions, Student Proposed (1)

Final Exam Questions, Student Proposed (1)

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Published by Vladimir Gusev

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Published by: Vladimir Gusev on Dec 21, 2011
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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.
What puzzles of CAPM do you know? List them and their possible explanations.
List the measures of risk adjusted returns. Provide rationale for each, indicateadvantages and disadvantages of using them
1) What is the difference between unit trust, closed-end fund, andexchange 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 factthat 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` confidencein hedge fund are strong?
: 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, amanager should sell a part of the portfolio on the market and pay taxes, if he or she sells it ata 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 tomeasure market efficiency. In what types of markets (emerging or developed) these strategieswill work?
:1. Short-term reversal strategy. The strategy is in the following. Buy last week losers and selllast week winners after waiting for a week to control for microstructure effects. This strategywill work on both types of markets.2. Momentum strategy. The stocks that performed well during previous six months will likelyperform well in the next months. And vice versa: the stocks that performed bad will do thesame in the following months. Thus, the strategy is to sort stocks and choose top - 10% andbottom 10%. After 6 months buy winners and sell losers and keep for the next 6 months. Itseems 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 ispresent in both emerging and developed markets.
Question: 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 longperiod it becomes huge because of compounding. Moreover, the choice of a condi- tionalmean specification is very important because our estimates of abnormal returns depend onthe model. If we specify the model incorrectly then we will get unreliable results.
• Cross-sectional correlations. If one ignores the cross-sectional correlations then he or shewill 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 risklessasset, 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 varianceof market portfolio)b)to the right of market portfolio. This one is a little bittrickier, because the regression is no longer linear (but we knowthat 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 oneexample where each of these statistics is well suited.
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 brieflydescribe 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?
Final exam questions
Propose some measure that could be used to measure liquidity of a companystock
What is abnormal return and propose at least two models for normal returns
Why can alpha significantly different from zero mean inefficiency of themarket portfolio in CAPM? Does alpha significantly different from zero alwaysmean inefficiency?

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