Read the case and answer Question 2 and 3 worth 5 marks each.

The answer to Question 2 and 3 must be answered in MS Word and uploaded through the assignment "Test 1 - Question 2 and 3 Upload".

Please make sure to label each answer with the question number as each question is awarded marks individually.

Please make sure to only upload the answers to Questions 2 and 3 to avoid a similarity scores (due to including the question with the answer) and a delayed result of the test.

Please also make sure that you do copy from any source or individual (refer to the Academic Integrity Policy).

Case Study:

Raj and Chen are discussing their future investment strategies. Both want to be active investors but with different strategies to generate abnormal returns. Chen says that he wants to be a Growth investor and uses the MSCI growth index to invest. Raj wants to be a Value investor and also uses the MSCI Value index. They both want to invest in all the firms(and in the same weights) as in the index they each want to follow but due to their limited capital they only are able to invest in 10-15 firms from the index of 250 firms.

The MSCI Value and Growth index use firms from capitalisation based (cap-based) index and separates half the stocks in the Value index and the other half in the Growth index based on several screens (3 for Value firms and 5 for Growth firms). The MSCI value and Growth index do not share the same firm at the same time, however, a firm may be in Value index at one time and Growth index at another time.

Question 2

(i) Chen asks you if he was able to invest in all the firms in the index and in exactly the same weights as in the index (ignore the capital requirements here), will his investment strategy be able to generate abnormal returns over cap-based index benchmark in most market conditions before transaction costs. Explain your answer. (2.5 marks)

(ii) How would you explain to Chen he should invest in a cap-weighted index ETF instead of investing actively? Make sure you use a relevant example from t