HW #2

Q1 .In an investment market , understanding the concept of undervalued and overvalued stock is very important . hence , a prudent investor must have good knowledge about beta, market rate of return and risk free rate of return a) Being an investor , critically analyse the conditions of undervalud and overvalued stock

4. What forms of market efficiency are violated if investors overreact to good news, resulting in stock price increases followed by stock price decreases: a. Semi-strong form efficiency b. Strong-form efficiency c. Both 1 and 2 d. Neither 1 nor 2

An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called Select one: a. smart money. Ob. short sales. Oc. behavioral finance. Od. random walk.

According to the efficient market theory, whenever investors find that the required return of stock is less than the expected return of the stock, the investor will buy the stock.  This will: a. drive the price up b. cause the market to crash c. drive the price down d. not affect the price

Explain why the risk premium of a stock does not depend on its diversifiable risk.       Question content area bottom Part 1 ​(Select the best choice​ below.)     A. Investors​ don't care about diversifiable risk and so​ don't hold any.   B. Investors care about diversifiable​ risk, but hedge their positions so they​ don't demand a risk premium.   C. Although investors must hold diversifiable​ risk, they​ don't care about​ it, so there is no risk premium.   D. Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.

At time t you own one stock that pays no dividends, and observe that F(t, T) < St/Z(t, T). What arbitrage is available to you, assuming that you can only trade the stock, ZCB and forward contract? Be precise about the transactions you should execute to exploit the arbitrage.

Strong form efficient market hypothesis states that stock prices reflects all the information in a market. The information may be public or private (i.e., insider information about the market) and such information will not benefit  an investor in the form of higher returns.

Q1.  Why is some risk diversifiable and other risk is not (non-diversifiable)?   Q2.   Yes or no, are industries that have a high standard deviations (wide fluctuation of the price of the stock) not useful as investments?  Beyond answering Yes or no, state the reason behind your choice.

Suppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soer") if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where F, + S,e! does not result in arbitrage opportunities rT

1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.

Q1 .In an investment market , understanding the concept of undervalued and overvalued stock is very important . hence , a prudent investor must have good knowledge about beta, market rate of return and risk free rate of return  a) Being an investor , critically analyse the conditions of undervalud and overvalued stock b) Give a graphical example to present the positioning of - systematic risk - risk free rate of return  - mareket rate of return - risk premium

1. Which form of market efficiency is the best among weak, semi strong and strong? 2. Is stock market efficient? Give logic in favour of your answer

Q1 .In an investment market , understanding the concept of undervalued and overvalued stock is very important . hence , a prudent investor must have good knowledge about beta, market rate of return and risk free rate of return b) Give a graphical example to present the positioning of- systematic risk- risk free rate of return - mareket rate of return- risk premium

f a stock's expected return as seen by the marginal investor exceeds his or her required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return. O False O True Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.

EXERCISE 1Indicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.1) The higher the systematic risk of a company’s stock, the higher the value of itsbeta. The higher the beta, the higher the return required by the investors.(Explain your reasoning.)

Which of the following strategy would you adopt if you expect the fall in prices of a stock? A. Buy a call B. Sell a call C. Sell a put D. Buy a future