1. Below lists a number of possible facts about investor or price behavior. Please articulate how you would make money by exploiting these mistakes and the reasoning behind your strategy. The first one is given as an example.

1. (a) Fact: most retail investors naively buy stocks of companies that make products they are familiar with (e.g. McDonald's) and ignore companies they never heard of.

Answer: this will tend to make less popular stocks undervalued and popular stocks overvalued. Therefore, I would exploit this by going long the unpopular stocks and short the popular ones.

(b) Fact: many investors prefer "lottery stocks": companies that have low prices but have a small probability of price suddenly jumping up by a lot. (Their payoff is similar to the lottery). Please explain how you would exploit this fact.

(c) Fact: corporate bonds have credit ratings that indicate their default risk. The most highly rated is AAA (almost no default risk), followed by AA, A, BBB,