Short Answer Questions

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

(a) There are two companies. The first one is a highly uncertain startup gaming company. The only chance for the company to succeed is that the market tanks so that people have nothing to do and start playing games. The second one is a boring oil company with stable customers. The only uncertainy is that if the economy is not good, they may lose a couple clients. Based on CAPM, the second one is safer than the first one.

(b) In the CAPM world, the result that the efficient portfolio is the market portfolio is an assumption and a coincidence.

(c) Momentum Effect

i. The momentum effect is stronger using returns in the past 1-6 months instead of 7-12 months, consistent with the underreaction hypothesis.

ii. The momentum effect is stronger among large stocks, which is inconsistent with the underreaction hypothesis.