Question 1. Short Answers (20 points) 1.1 (6 points) Are the following statements consistent or in violation of the efficient market hypothesis? (for each statement, indicate whether it is consistent or inconsistent, and briefly explain) a) Nearly half of all professionally managed mutual funds can outperform the S&P 500 in a typical year. b) Stock prices of small capitalization firms tend to be predictably more volatile than stock prices of large capitalization finns, everything else being equal. c) Stocks that perform well in the morning perform poorly in the afternoon. 12 (6 points) State whether the following statements are true (T) or false (F), and briefly explain. Stocks with a beta of zero offer an expected rate of return of zero. b) You can construct a portfolio with a beta of 0.75 by investing 75% of the investment budget in T-bills (risk-free asset) and the remainder in the market portfolio. c) Risky assets must eam an expected return that is higher than the risk-free rate because otherwise no investors will hold the risky asset. 1.3 (8 points) Stock XYZ has an expected retm of 12% and beta of l. Stock ABC has expected retum of 13% and beta of 1.5. The market's expected return is 11% and risk-free rate is 5%. According to the CAPM, which stock is a better buy