1. A work colleague was bragging that the actively managed mutual fund he selected among your employers 401(k) electives outperformed the S&P 500 over the past 3 years. The colleague (who did not take FINC 561) claims that its a great fund, that the manager is a genius and is urging you to invest in that fund as well.However, you believe that markets are efficient. Do you take your colleagues advice? Explain your rationale by applying concepts of market efficiency learned so far in the course. Include whether the mutual funds performance violates or disproves efficient markets and why or why not?

2. Prior to the 2010 Dodd-Frank Act "Volker Rule", banks employed proprietary traders (aka Prop Traders) whose job was to invest the Banks capital in various short-term trading strategies. Prop Traders often took large risks (using leverage) and were rewarded with yearly bonuses worth millions of dollars. Prop Trading was eventually disallowed by the Volker Rule, which was part of Dodd-Frank Act.

Explain the moral hazard associated with such proprietary trading activity.

3. You see an advertisement in a book that shows how to make lot of money in the stock market with little or no risk.

Apply the concepts of "no free lunch" to explain...

i) Whether or not you would buy the book and why or why not?

ii) What the value of the information contained within the book and why?

4. Stocks are a risky asset that have significantly outperformed Treasury Bills (a risk-less asset), over the long-term.

Why then, would one invest in Treasury Bills instead of stocks?