Question 1. Return extrapolation (30 points). In Lecture Note 7, we discussed different sources of return extrapolation. Below, we review these important concepts. - 1 a (20 points). As we discussed in class, "return-based mechanisms" of return extrapolation are mainly derived from psychology of beliefs. We discussed two psychological biases of beliefs: base-rate neglect and belief in a law of small numbers. For each of these two biases, please explain how they give rise to return extrapolation. Please provide as much detail as possible. - 1b (10 points). As we discussed in class, "mechanisms with inference about fundamentals" are more based on the notion of bounded rationality. In particular, we discussed a bounded rationality approach for understanding return extrapolation based on the model of Hong and Stein (1999). Please explain why momentum traders in Hong and Stein (1999) exhibit return extrapolation. Please provide as much detail as possible