Q7.In the ideal, factors should:

A) continue to explain returns even after being identified as factors

B) be uncorrelated with other factors

C) track some non-diversifiable source of risk

D) (B) and (C)

E) all of the above

Q8.The weak form of the efficient-market hypothesis contradicts

A) technical analysis but supports fundamental analysis as valid.

B) fundamental analysis but supports technical analysis as valid.

C) both fundamental analysis and technical analysis.

D) technical analysis but is silent on the possibility of successful fundamental analysis.

Q9. Recall our asymmetric information model of bid-ask spreads from class. Suppose that a

dealer trades against an order which might come from an informed trader or a liquidity

trader. The securitys true value is either $60 or $50. The true value is $60 with 70%

probability and $50 with 30% probability.

The order is from an informed trader with 20% probability and from a liquidity trader with

80% probability. An informed trader observes the true value of $60 or $50 perfectly and

places a buy order if the value is high or a sell order if the value is low. Liquidity traders

buys or sells with equal probabilities.

Calculate the bid-ask spread.

Q10. Now suppose the dealer knows that at the end of the month the probability the order is

from a liquidity trader is even greater than 80%, as workers invest part of their paychecks

for retirement and as retirees sell investments to pay monthly expenses. What will

happen to the bid-ask spread relative to your answer to Question 9?

A) The bid-ask spread will decrease

B) The bid-ask spread will increase

C) The bid-ask spread will be unchanged

D) Cannot be determined from information provided