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Final Exam Questions, Student Proposed
Final Exam Questions, Student Proposed
How the CAPM beta of this portfolio 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 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 year of 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 strategies will 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.
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 straight line, tangent to that frontier. What is the frontier if we cannot borrow 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 go along efficient parabola. It will no longer be a straight line, and therefore a test should change. One possible solutions is to test separately 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 restrict ourselves 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 bit trickier, because the regression is no longer linear (but we know that it is a parabola, so we can still test it using a nonlinear regression) Probably there's a better way to test it but it's just off the top of my head.
Question 2. (this one would be easy for those who attended the lectures, but it has a really nice intuition) Desribe what is Sharpe ratio and Treynor ratio. Suppose you own only a 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 welldiversified 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.
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 find any 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 riskreturn 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 an event study analysis of some event of one firm. Abnormal return for date 0 is positive and significant. But other abnormal returns are insignificant. Please, interpret your results. 2. Further to question 1 suppose that cumulative abnormal returns are insignificant. Can we conclude that that news had not impact on the value of the firm? 3. Suppose you are a manager of one company and you have bad news for investors. At what day of the week do you prefer to release this information to minimize impact on prices of your company? 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 returns
3) 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. What are rational explanations for the Small Firm Effects anomaly?
2. What period returns are the best for estimating beta of a particular stock in Market Model and why? 3. Why do not the mutual funds with high returns in past several years attract new investors?
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 riskfree 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?
Extra
Credit:
3
Final
exam
questions
1) How
are
the
RW1,
RW2
and
RW3
hypotheses
related?
Which
is
the
weakest
form
of
the
random
walk
hypotheses?
(question
for
3-
grade)
2) Describe
three
main
approaches
used
to
construct
multi-factor
models
of
stock
returns.
Which
seems
most
suitable
for
the
Russian
market,
taking
into
account
its
specifics?
(question
for
4-
grade)
3) Why
are
tests
usually
based
on
CARs
rather
than
ARs
in
event
study
analysis?
(question
for
4-
grade)
4) How
to
solve
the
problem
of
thin
trading
in
the
event
period
(infrequently
traded
stocks)
in
event
study
analysis?
(question
for
5-
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 are right-skewed?
1) You are surely understand how important the news about some events are when examining the value of the firm. But what do you think whether these
new have the same degree of importance if it is occurred that it is just rumours? If there is a difference explain why. 2) Suppose you are an investor who is going to buy a share in any mutual fund. Which parameters are more important for you while choosing the preferable fund: Sharp ratio, Treynor ratio or Jensens Alpha? 3) How skewness of distribution influence the results when analyzing risks? Question 1: a) What is the disposition effect? b) Why is prospect theory one possible explanation for the disposition effect? c) Can you think of another possible explanation? d) How the disposition effect might influence stock returns? Answer: a) Disposition effect: Investors have the tendency to sell shares whose price is increasing, while keeping assets that have dropped in value,so they tend to ''sell winners too early and ride losers too long b) Past prices serve as a reference point. Different risk attitude for gains and losses: risk seeking in the loss domain (convex value function), risk averse in the gain domain (concave value function). Therefore, sell winners too early and ride losers too long. c) Investors may also believe that winners and losers will mean revert. However, it is a misunderstanding 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 sell thereby increasing the supply of stocks. temporary downward pressure on current stock prices drift in stock returns If stock prices fall below the reference point: Investors will be averse to sell thereby restricting supply temporary upward pressure on current stock prices drift in stock returns Question 2: Illustrate necessary steps for implementing event studies. Answer: 1. Identify the event of interest (Share repurchases, dividend payments, M&As, new products, firing/hiring of executives) 2. Define the event windows Event window: several days around the event date. Long enough to capture the significant effect of the event and short enough to exclude confounding effects. 3. Selection of the sample: firms impacted by the event Eliminate firms that experience other relevant events during the event window 4. Compute the appropriate return measures: abnormal returns (AR), Cumulative abnormal returns (CAR) 5. Analyze results.
Question 3: True/False. Explain: The existence of enough technical analysts in financial markets assures that the weak form market efficiency holds, while the existence of enough fundamental analysts does the same for the semi-strong form. Define the mentioned forms of market efficiency. Answer: True Weak form efficiency: prices reflect all information contained in past prices. Semi-strong form efficiency: weak form + all publicly available information. Technical analysts should find any existing patterns in prices and exploit them. 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 available information, and thereby it ensures the semi-strong form efficiency to hold.
hypotheses
as
well
as
formal
empirical
strategies
to
detect
the
fund's
type
given
the
return
performance
and
using
the
necessary
data
available
on
the
market.
3.
On
the
lectures
we
have
discussed
the
behavioral
viewpoint
on
the
momentum
factor
(when
winners
continue
to
win
and
losers
continue
to
lose).
Now
try
to
provide
as
many
behavioral
explanations
as
you
can
of
the
size
factor
(when
small
stocks
outperformed
large
stocks),
the
book-to-market
factor
(when
stocks
with
high
BtM
outperform
stocks
with
low
BtM)
and
the
reversal
factor
(when
the
stock
which
have
been
growing
for
several
years
tends
to
fall
for
the
next
several
years).
Despite
we
have
mentioned
some
of
these
empirical
evidences
in
behavioral
prospect
during
the
classes,
some
of
proposed
explanations
can
be
supplemented.
Try
to
specify
your
answer
with
the
names
of
behavioral
theories
(e.g.
"according
to
Kahneman
&
Tversky
theory,
disposition
effect,
etc").
You
also
can
propose
your
own
relevant
explanation
(rational
or
behavioral)
of
such
empirical
evidence.
1) You
expect
that
stock
market
will
grow
for
15%
this
year.
There
are
two
funds
on
market:
A
and
B.
A
takes
3%
commission
from
investments
and
2%
management
fee
each
year.
B
takes
4%
commission
for
withdrawal
investments
and
1%
management
fee
each
year.
Which
fund
would
you
choose
if
you
want
to
invest
$100
for
one-year
period?
Answer:
1-year
investment
in
A
will
give
$9.32;
in
B
will
give
$9.30.
2) Discuss,
should
you
choose
for
event
study
this
situation:
4-th
quarter
financial
report
of
Development
Company
in
Russia.
Answer:
the
event
should
be
something
unexpected.
But
in
Russia,
the
Development
business
is
sleeping
during
the
winter.
There
is
nothing
unexpected
in
4th
quarter
financial
report,
because
major
news
was
released
in
3th
quarter
report
and
in
4th
quarter
there
were
little
changes.
3) Why
the
price
change
of
a
stock
could
be
zero
at
the
end
of
a
day?
Answer:
stock
exchange
does
not
work
at
this
day
(holiday,
trade
stopping),
there
were
no
deals
on
this
stock,
and
the
price
changed
somehow
but
finally
returned
to
the
open
point
together
they
may
result
in
something
that
is
not
likely
to
demonstrate
non-zero
abnormal
returns.
Question
5:
Explain
why
people
invest
in
mutual
funds
since
even
if
they
outperform
the
market
almost
all
the
results
of
their
nice
performance
stay
in
the
pockets
of
fund
managers?
Moreover,
mutual
funds
on
average
do
not
have
very
good
performance
Answer
5:
There
may
be
several
reasons.
First
of
all,
many
small
investors
simply
do
not
have
enough
money
to
buy
expensive
financial
instruments.
Also,
some
people
may
not
want
to
bother
themselves
with
how
to
invest;
they
want
somebody
else
to
think
for
them.
Another
reason
is
quite
obvious;
mutual
funds
can
have
very
persuasive
advertising
campaign.
Questions:
1) Why
do
people
perceive
equal
gains
and
losses
differently?
2) Is
it
possible
to
eliminate
all
risk
using
diversification?
Explain
your
answer.
3) How
quickly
does
stock
price
change
when
new
information
comes
to
market?
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) If CAPM has so many problems with it, and requires a lot of assumption to make, than why economists still use it? What is important in CAPM besides failures seeing in empirical researches? 2) Do firms have incentives to wrench their public information? Why these incentives could appear? 3) Why some agents in economy could irrational? What is failures of assumption stay after irrationality?
1. Describe
briefly
how
one
could
test
whether
some
even
affected
the
stock
price
or
not.
2. What
are
the
main
ideas
of
behavioral
finance
you
know?
Provide
some
examples.
3. What
is
the
idea
of
SPIDeR
funds?
How
they
differ
from
classical
mutual
funds?
Questions: 1. Why do most successful investment funds tend to show lower return over time? 2. Why did Fama and French introduce three-factor model in place of CAPM? What is the criticism for using SMB and HML as risk factors? 3. What is the evidence in favor of behavioral explanation of return predictability? Is it enough to explain why price-scaled variables such as book-to-market predict returns? 1. What kind of market efficiency can be tested by the event studies approach? What are the key components of a successful event study? 2. Why the old Morning Star ranking was abandoned? Is the new one flawless? 3. Why do most mutual funds report the Sharpe ratio and Jensens alpha? What are the advantages of these two measures over the Treynor ratio? 4. Why a good company does not necessarily mean a good stock to buy? 1). Event study. While computing test statistic for cumulative abnormal return one can estimate standard error using the whole estimation period. Now consider the possibility of heteroskedasticiy in returns. Discuss the trade-off between different lengths of the window. More precisely, describe the biases which can arise a) In small estimation periods. b) In large estimation periods. 2).CAPM As we now CAPM model is based on several assumptions including so called mean- variance criterion. Briefly describe the gist of this assumption. What is happening with the coefficient of the model if the utility of investors is biased to the variance component? To the mean component? 3). Consider the problem of estimation CAR around the publication of annual report of the company. Assume that the news to be announced dont include any important information. We also assume that the estimation window is symmetric. Describe a scenario when we have: a) Positive CAR
b)
Negative
CAR
Hint:
consider
different
expectations
of
investors
about
the
news
to
be
announced.
Questions
by
1. Suppose
an
investor
who
believes
in
CAPM
and
is
ready
to
take
the
risk
that
little
more
than
risk
of
market
portfolio.
For
each
of
described
situations,
please
specify
the
types
of
assets
(i.e.
stocks
bond
or
mix)
which
the
investor
will
hold
in
her
portfolio:
a. Perfect
markets.
b. There
is
no
opportunities
for
investor
to
borrow
money.
c. Perfect
markets
but
the
deposit
rate
differs
from
the
rate
at
which
investor
can
borrow
money.
Answers
a. She
will
hold
a
portfolio
that
is
at
the
market
line
and
this
portfolio
consist
of
bonds
and
stocks
little
to
the
right
side
from
the
market
potfolio
b. She
will
hold
a
portfolio
at
efficient
frontier
to
the
right
side
from
the
market
portfolio,
that
portfolio
consists
only
of
stocks,
because
market
line
ends
at
market
portfolio.
c. She
will
hold
a
portfolio
at
efficient
frontier
to
the
right
side
from
the
market
portfolio,
that
portfolio
consists
only
of
stocks,
because
slope
of
market
line
is
less
than
the
slope
of
efficient
frontier
near
the
market
portfolio.
2. Assume
you
are
ready
to
take
risk
that
is
the
same
as
a
market
risk,
and
you
invest
in
one
of
the
SPIDeR
fund.
Your
friend
told
to
you
that
the
manager
of
fund
youve
invested
took
more
than
market
risk.
How
you
can
verify
that
your
friend
right/wrong
Answer:
to
estimate
fund
performance
on
historical
data,
for
example
run
regression
of
excess
returns
on
different
factors
returns.
3. Please,
briefly
describe
the
impact
of
event
window
widening
on
your
conclusions
about
event
significance
during
event
study.
Answer:
See
slides
33-36
in
Calculating
Test
Statistics
for
EventStudies
in
Detail
presentation.
1. What
it
is
the
RW3
hypothesis?
Propose
at
least
three
ways
for
testing
it.
How
do
you
think
are
markets
efficient?
Provide
some
evidence.
2. Name the main models for measuring normal performance during event studies. Propose a method for choosing the best of them. 3. What is the main difference between mutual and hedge funds? Provide at least two examples for each of them.
1) Please
describe
The
Small
Firm
Effects.
2) Could
you
name
the
test
that
is
robust
to
event
induced
volatility
changes.
3) After
what
period
of
time
according
to
the
theory
returns
of
the
momentum
strategy
is
zero.
Assume you have several stocks in the portfolio. How the CAPM beta of this portfolio 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 advantages and disadvantages of using them
1.
1.
What are the Treynor and the Sharpe ratios for risk reward? What is the
difference between the two? Which one is into use when considering addition of a single stock to the well-diversified portfolio? Why? 2. 3. How many portfolios are needed (and sufficient) to construct all portfolios from Describe a general methodology of conducting event studies. Additionally, the efficient mean-variance frontier? What are they?
explain the issues of the event study timeline selection. Describe how to find data on market returns for both US and Russian stock markets. Provide one of the expressions for t-statistic used for testing whether an event changed shares price significantly. Explain where the expression comes from. How is it possible that SPiDeRs can maintain such low fees as 0,1% per year? Regular operations in stock market are much more expensive.
1. What
is
a
momentum
strategy?
Describe
how
to
implement
it
in
details.
How
may
you
rebalance
winners
and
losers
portfolios?
What
are
pros
and
cons
of
different
ways
of
rebalancing?
Why
the
momentum
strategy
may
be
profitable?
Does
profitability
of
this
strategy
contradict
market
efficiency
hypothesis?
2. What
are
weak,
semi-strong
and
strong
forms
of
market
efficiency?
Describe
several
ways
to
test
weak
form
of
market
efficiency.
3. How to evaluate mutual fund performance? What are pros and cons of different approaches? Could fund managers manipulate performance results? How? What could authorities do to prevent manipulation?
1. Formulate
the
null
hypothesis
implied
by
CAPM.
What
is
the
Fama-MacBeth
approach
to
testing
the
null
hypothesis?
2. Formulate
the
hypothesis
for
market
efficiency
and
provide
some
ways
for
testing
it.
How
do
you
think
are
they
efficient
in
real
life?
Provide
some
evidence.
3. What
is
the
difference
between
Treynor
ratio
and
Sharp
ratio?
When
should
we
use
each
of
them?
4. Assume you have several stocks in the portfolio. How the CAPM beta of this portfolio depends 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 advantages and disadvantages of using them
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 efficient portfolio 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 to test EMH? 2. What is main idea behind CAPM ? its modifications (C-CAPM, ICAPM) ? What are the statistical evidences say about the CAPM and how those 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/unobserved efficincies.
3) What are the reasons for short-run(2-3 days) inefficiency, if in general (lond-run) we observe market efficiency (information and other)? 1. Suppose you are testing the hypothesis that the Steve Ballmer's announcement on coming official 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. 2. Suppose you are running the CAPM regression of Microsoft stock risk premium on S&P risk premium. You got a significant positive value for beta and an insignificant value for alpha. However, the Rsquared of your regression is just about 25%. Does it imply that the market 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 valueweighted portfolio to be more likely to pass the variance ratio test? 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 market efficiency? 3)What is CAPM? Which regressions one could run to test it? What is the economic interpretation of estimated coefficients in those regressions?
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 why there are actually no these two funds in the real market as they would probably find 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 and that implies normal distribution of returns. What is the reason for skewness that can normally be seen in returns distribution? 3. Is there a way to identify or estimate who of the investors is more risk-averse and who is less risk-averse in CAPM framework? 1. What is the Mean-Variance Criterion? Give definitions of the Capital Market Line and the Efficient Frontier Curve. Where can they be applied? 2. What are the main types of mutual funds? What are the main approaches to evaluation of their performance? Compare them to each other.
3. What are the main irrationalities in investors behavior? To what extent do they affect prices? What are possible ways of treating them in behavioral economics? 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 are more wlling to sell winners and hold on to losers. Provide some common behavioral explonations of that fact. 3. Using what instruments/actions investors could achieve returns above the return of the market portfolio?