John Terry currently has 200,000 invested in Delta Investment exchange traded fund, a broad-based index fund with an expected return of 12% and volatility of 10%. He is forty years old and is saving for his retirement.

Johns broker gives him a call and suggests that he make an equity investment into Echo Investment, another broad-based index ETF. This investment has an expected return of 8%, and volatility of 5%, and a negative correlation with Delta Investment of -0.50.

The risk-free rate is 2%.

a) Based upon the information above, would you advise John to invest in Echo Investment? Please justify your answer.

b) Building upon your answer to part a, what is the optimum combination of investment in Delta Investment and Echo Investment based upon the above information?

c) Earlier this year, John downloaded the Robinhood app after hearing it provides commission-free investing. After doing considerable research, he put a relatively modest amount of his savings into the stock market. In his first four weeks of actively investing, he has made himself a total shareholder return of 112% by picking a small number of meme stocks that increased significantly. Does John generating such high returns directly contradict the efficient market hypothesis or can such returns be explained by traditional financial theory in the short run?

d) Why based upon financial theory should it be impossible for John to generate abnormal returns in the long-run?

e) Building upon your answer in part d, if we wanted to determine whether John has been generating abnormal returns, why would this need to be done on a risk adjusted basis? How might you advise that be calculated?