Question 20

What lessons investors learned through economic or financial crisis:

1. Through LTCM crisis, investors learned about limits of arbitrage.

2. Through Covid 19 crisis, investors learned that lognormal assumption for many derivative contracts such as options may not be correct; in other words, the price of an asset can be negative in the real world.

3. Through Covid 19 crisis, investors learned that ESG (Environmenal, Social, and Governance) concept of a firm should be valued higher.

4. Through LTCM crisis, the option investors learned to smirk (through the implied volatility curve).

		1,2
		2,3
		1, 2, 3, 4
		1, 2, 3

Question 21

If market is efficient, what portfolios should investors invest in

		Only stocks with low risk
		any sufficiently diversified portfolio based on investors preference
		Only stocks with high risk
		Only risk-free asset