Question 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 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. Do you take your colleague's advice?Explain your rationale by applying concepts of market efficiency learned so far in the course. Include whether the mutual fund's performance violates or disproves efficient markets and why or why not?

Question 2

Prior to the 2010 Dodd-Frank Act, 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 2010 Dodd-Frank Act.

Explain the moral hazard associated with such proprietary trading activity.