Question 26

Which statements are correct below given the LTCM event

I: Market can be inefficient in the short term, but efficient in the long term

II: Sometimes, arbitrageurs may not be able to benefit from trading on inefficient prices

III: Since price is efficient in the long term, arbitrageurs who trade against short term inefficiency should always be able to benefit from such trading in the long term

		I
		II
		I and II
		I and III

Question 27

Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguards market portfolio return in that same year. Please answer all the 7 questions below.

How would his successors increase the chance of getting positive bonus?

I. Borrow money to buy the Vanguard market portfolio so that their market beta can be levered up to a number higher than 1.

II. Increase the idiosyncratic risk in their investment but do not increase their market beta beyond 1

III. Buy small stocks or value stocks

IV. Obtain better information than the market on some stocks and invest in the stocks that can deliver positive alpha

		I and III
		I, III, and IV
		I and II
		II and III