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(a) For event studies to measure the cumulative abnormal returns reliably, what is the minimum form (level) of market efficiency that is required? Explain. (b)
(a) For event studies to measure the cumulative abnormal returns reliably, what is the minimum form (level) of market efficiency that is required? Explain. (b) Suppose the return of any asset in the economy can be modelled by a two-factor model. The factor loadings of two assets, A and B, are given in the following table. Asset Faster 1 Factor loading Factor 2 0.5 1.5 -0.2 0.8 A B The risk-free rate is 1%. The risk premium of Factor 1 and Factor 2 are given by 11 = 4% and 12 = 6% respectively. All numbers are annualised. (i) Compute the fair expected return of asset A and asset B under APT. (ii) A fund manager would like form a portfolio by investing w in Asset A and (1-w) in B, but she is very uncomfortable with any risk exposure to the first factor. Suggest an allocation strategy for her. (a) For event studies to measure the cumulative abnormal returns reliably, what is the minimum form (level) of market efficiency that is required? Explain. (b) Suppose the return of any asset in the economy can be modelled by a two-factor model. The factor loadings of two assets, A and B, are given in the following table. Asset Faster 1 Factor loading Factor 2 0.5 1.5 -0.2 0.8 A B The risk-free rate is 1%. The risk premium of Factor 1 and Factor 2 are given by 11 = 4% and 12 = 6% respectively. All numbers are annualised. (i) Compute the fair expected return of asset A and asset B under APT. (ii) A fund manager would like form a portfolio by investing w in Asset A and (1-w) in B, but she is very uncomfortable with any risk exposure to the first factor. Suggest an allocation strategy for her
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