Short Answer Questions

Are the following statements True, False or Ambiguous? Provide a short (one or two sentence) justication for each of your answers. Your score will be based on your justication (i.e., a correct answer with no or incorrect justication may receive zero points).

(a) From class we know that fund performances are not persistent but investors chase past fund performances. This investor behavior has to be irrational.

(b) The power of binomial option pricing method is in its exibility. Binomial option pricing method can account for path-dependent payoffs.

(c) Risk-neutral pricing option pricing method is independent from the replicating portfolio method in option pricing.

(d) Bitcoin serves as a medium of exchange, just like currencies. Therefore, the currency exposures of Bitcoin returns are high.

(e) The CAPM model is not very successful in the data, because there are risk factors that are not captured by the market risk.

(f) There are several events of inverted yield curve historically. Ever time there is inverted yield curve, the economy booms subsequently.