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Question 1 (22 Marks) a) Consider the following statement: "International Systems Ltd released its annual earnings figure five days ago. On the day of the announcement, the company's return was 2%, while its expected return on that day was 0%. You observed that the company had an abnormal return of 0.9% the day after the announcement, and 0.5% two days later, before stabilizing to 0% each day thereafter." Critically discuss this statement, in the context of the notions of market efficiency and behavioural finance 6 Marks) b) The Capital Asset Pricing Model (CAPM) originally coined by Sharpe and Linter, is an important asset pricing model used in both industry and academia. Describe the intuition behind the model, and why it is useful in finance. (8 Marks) c) In class, we identified a number of constraints on investment in the context of investment management. Identify and describe two such constraints that apply to individuals. (4 Marks) d) You observe that the yield curve is upward sloping. Using TWO theories of the term structure of interest rates, explain why the yield curve may exhibit this shape. (4 Marks) Question 1 (22 Marks) a) Consider the following statement: "International Systems Ltd released its annual earnings figure five days ago. On the day of the announcement, the company's return was 2%, while its expected return on that day was 0%. You observed that the company had an abnormal return of 0.9% the day after the announcement, and 0.5% two days later, before stabilizing to 0% each day thereafter." Critically discuss this statement, in the context of the notions of market efficiency and behavioural finance 6 Marks) b) The Capital Asset Pricing Model (CAPM) originally coined by Sharpe and Linter, is an important asset pricing model used in both industry and academia. Describe the intuition behind the model, and why it is useful in finance. (8 Marks) c) In class, we identified a number of constraints on investment in the context of investment management. Identify and describe two such constraints that apply to individuals. (4 Marks) d) You observe that the yield curve is upward sloping. Using TWO theories of the term structure of interest rates, explain why the yield curve may exhibit this shape. (4 Marks)