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    Midterm Exam Finance

    Questions:

    1. (Chapter 8) Evaluate the following argument: “Value stocks consistently earn higher average

    returns than growth stocks. Therefore the stock market is not efficient according to the weak

    form efficient market hypothesis.”

    2. (Chapter 8) You invested in an active mutual fund that owns a portfolio of technology firms. At

    the end of the year, you review the data in Morningstar and identify 142 active mutual funds

    that invest in technology stocks. Out of these 142 funds, the fund you invested in earned the 8th

    -

    lowest annual return. According to Carhart’s analysis, should you continue to invest in this fund,

    sell your investment in the fund, or does historical performance provide no information about

    future performance?

    3. (Chapter 7) Suppose the Fama and French SMB portfolio earned a return of -6% over the past 12

    months. Over the past 12 months, two active mutual fund managers earned the same returns as

    each other. One manager invests in a diversified portfolio of large-capitalization US equities and

    the other manager invests in a diversified portfolio of small-capitalization US equities. Which of

    the two managers demonstrated more skill over the last 12 months and why?

    4. (Chapter 13) You are an active mutual fund manager who is trying to beat the S&P 500 index.

    For all 500 stocks in the index, you estimate the stock’s fair price using the binomial model.

    Explain what steps you would take to manage your portfolio using those estimated fair prices.

    5. (Chapter 14) You are the CEO of a publicly traded firm and you have just received a preliminary

    draft of your firm’s financial statements for 2019Q3. Suppose you were motivated to

    manipulate the earnings per share (EPS) in order to exceed your company’s EPS in some

    previous quarter. Which previous quarter’s EPS would you be most likely to target and how

    would you expect to benefit from exceeding this threshold?

Answer Detail

  1. Questions:1. (Chapter 8) Evaluate the following argument: “Value stocks consistently earn higher ave
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