a. Carefully explain how an event study might be used to judge whether stock price reactions to unexpected announcements of replacement of company CEOs indicate market efficiency. Be sure to explain what patterns you might expect to see in both the efficiency and the ineffi- ciency case and evaluate the shortcomings of this approach. [Write no more than 15 sentences in your answer.] (25 marks) b. While there are specific cases in which American and European op- tions with the same features (i.e. the same underlying, maturity and strike) have the same premia, explain why, in general, one might ex- pect American option premia to be greater than those for similar Eu- ropean options. [Write no more than 15 sentences in your answer.] (25 marks) c. What is bond convexity, how is it measured and how does it con- tribute to a bond trader understanding the manner in which her port- folio might react to yield changes? Do duration and convexity to- gether give a perfect picture of a bond's likely reaction to changes in yields? [Write no more than 15 sentences in your answer.] (25 marks) d. Work in empirical asset pricing has studied portfolios where stocks are grouped together on the basis of a 'value' measure (e.g. book-to- market value or earnings per share divided by price per share). What is the evidence on how mean returns vary across such portfolios and why does this provide a challenge to the Capital Asset Pricing model? How would you interpret the existence of differences in mean returns across value portfolios? [Write no more than 15 sentences in your answer.] (25 marks) a. Carefully explain how an event study might be used to judge whether stock price reactions to unexpected announcements of replacement of company CEOs indicate market efficiency. Be sure to explain what patterns you might expect to see in both the efficiency and the ineffi- ciency case and evaluate the shortcomings of this approach. [Write no more than 15 sentences in your answer.] (25 marks) b. While there are specific cases in which American and European op- tions with the same features (i.e. the same underlying, maturity and strike) have the same premia, explain why, in general, one might ex- pect American option premia to be greater than those for similar Eu- ropean options. [Write no more than 15 sentences in your answer.] (25 marks) c. What is bond convexity, how is it measured and how does it con- tribute to a bond trader understanding the manner in which her port- folio might react to yield changes? Do duration and convexity to- gether give a perfect picture of a bond's likely reaction to changes in yields? [Write no more than 15 sentences in your answer.] (25 marks) d. Work in empirical asset pricing has studied portfolios where stocks are grouped together on the basis of a 'value' measure (e.g. book-to- market value or earnings per share divided by price per share). What is the evidence on how mean returns vary across such portfolios and why does this provide a challenge to the Capital Asset Pricing model? How would you interpret the existence of differences in mean returns across value portfolios? [Write no more than 15 sentences in your answer.] (25 marks)
