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Sample Final Exam

Sample Final Exam

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Published by Vladimir Gusev

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Published by: Vladimir Gusev on Dec 21, 2011
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Module 3, 2011
Empirics of Financial Markets
Final Exam
This is a three-hour closed-book exam. You are permitted a 2-sided A4 note sheet, calculator,and pens/pencils. No computers (or iPads), or cell phones.
PLEASE LABEL THE TOP RIGHT COURNER OF EACH PAGE
WITH THEQUESTION NUMBER(s) YOU ARE ANSWERING on that page.
Short answer questions (Answer 5 of 7) (4 points each)
 If you do all 7, the lowest scoring 5 will count toward your exam grade.
1. Is it possible to eliminate all risk using diversification? Explain your answer.2. What is the difference between unit trust, closed-end fund, and exchange traded funds?
3.Whatisthemainstatementoftheprospecttheory?
 4. Suppose you are a manager of one company and you have bad news for investors. At whatday of the week do you prefer to release this information to minimize impact on prices of your company? Why?5. What are the main difficulties with long horizons event studies?6. What is the January effect? Is this an anomaly or is there a rational explanation?7. Why did Fama and French introduce three-factor model in place of CAPM? What is thecriticism for using SMB and HML as risk factors?
Medium Answer Questions (Answer 4 of 5) (7.5 points each)
 If you do all 5, the lowest scoring 4 will count toward your exam grade.
8. Under what conditions will behavioral biases impact stock returns? Under what conditionswill behavioral biases NOT impact stock returns?9. Suppose you are testing the hypothesis that the Steve Ballmer's announcement on comingofficial PC support of the new Kinect controller had a significant impact on Microsoft's stock  performance. However, the t-test does not show you any evidence that returns of the stock were different. Give at least 5 different reasons for why it might be the case.10. How are the RW1, RW2 and RW3 hypotheses related? Which is the weakest form of therandom walk hypotheses?11. What are weak, semi-strong and strong forms of market efficiency? Describe at least 3ways to test weak form of market efficiency.
 
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Medium Answer Questions (
continued 
)
12. Explain Roll’s Critique [from Roll (1977)]. Then answer, if we run OLS regressions of stock returns on the market portfolio, but find no significant alpha, does this mean that theCAPM is valid? Does alpha significantly different from zero always mean inefficiency?
Long Answer Questions (Answer 2 of 3) (25 points each)
 If you do all 3, the lowest scoring 2 will count toward your exam grade.
Instructions PLEASE READ:
Long answer questions are broken up into several parts. I did this to make grading 80 examseasier, more consistent and more fair.
Please label your answers with the question numberand letter
(e.g. ‘12b’) carefully which question and which question part you are answering.
Please keep answers to each part separate
, if not you might receive a lower grade, becauseI will not be looking for the answer to part ‘b’ in part ‘a’.13a) When we say, “Factor X is priced.” What does that mean? What does it mean to say afactor is priced? (5 points)13b) Suppose you find evidence that a proposed factor is highly correlated with the timeseries of stock returns. Is this evidence that the factor is priced? (5 points)13c) Describe
in detail 
empirical tests to demonstrate whether or not a factor is priced. “indetail” means that you should describe each step of the test (for example, Step 1: Get returnsfor all stocks, Step 2: estimate ____, etc.). (10 points)13d) For each step in 13c, please explain the economic or statistical motivation for each step.For example, if you say the first step is to get returns for all stocks, the economic motivationmight be because you expect a factor to be able to price all assets in an economy. Stocks areone class of assets in the economy, and the returns are easy to get. (5 points)

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