1. A work colleague was bragging that the actively managed mutual fund he selected among your employer's 401(k) electives outperformed the S&P 500 over the past 3 years. The colleague (who did not take FINC 561) claims that it's 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.

a) Do you take your colleague's advice? Why or why not?

b) Does the mutual fund's strong performance prove conclusively that markets are inefficient? 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 Bank's 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.

Use the definition of moral hazard (may have to perform a Google search) and explain the moral hazard associated with such proprietary trading activity.

Hint: think about who owns the banks? It's not the tax payers or the Government.

3. 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?