1. Your friend suggests that a good way to study whether stock prices are informationally efficient is to analyze whether mutual fund managers can earn abnormal returns. Should her study examine the performance of fund managers gross of expenses (i.e., load fees, management fees) or net of expenses? Of course, the retum gross of expenses is higher than the return net of expenses. 2. Here is the output of two event studies (i.e., CARs from some date before the event through some date after the event). (1) Assuming that the correct E[R] model was used, which result (right graph or left graph or both) is most consistent with semistrong EMH? (11) Assuming that an incorrect risk model was used, can we reach any conclusions about the validity of the semi-strong EMH from either graph? | 3. You analyzed the returns of a sample of stocks. You found that, on average, the fims with high E/P (earning price) ratios have higher subsequent returns. (1) Discuss an explanation for this pattern that is consistent with the EMH. (11) Discuss an explanation that is not consistent with the EMH. (iil) If mispricing is the primary reason for this pattem of E/P ratios, what long-short trading strategy will you propose? Justify your proposed strategy