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6. Choose TWO of the following: (a) What are the necessary conditions for an asset market to be efficient? Suggest a test for whether a
6. Choose TWO of the following: (a) What are the necessary conditions for an asset market to be efficient? Suggest a test for whether a particular market is efficient. (b) Discuss the tension between potential solutions for the equity premium and risk-free rate puzzles. (c) How would you test the hypothesis that expected equity returns are time varying? How would you interpret the results of the test? Give an example of such a test. (d) How can the Fama-McBeth method be used to estimate the CAPM? What are the key assumptions that are made in using this method of estimation? (e) Explain how Carry and Momentum strategies in the forward foreign exchange market appear to provide high excess returns. [25 marks each]
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