Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguards market portfolio return in that same year.

Question 32

Buffetts contract potentially encourages his successors to

I. Take small firm risk

II. Take value firm risk

III. Buy momentum winners

IV. Take high beta risk

		I, II, III
		I, II
		I
		I, II, III, IV

Question 33

What would be a better contract if Fama-French 3-factor model is the correct model?

		Bonus can only be positive when alpha estimated from the Fama-French 3-factor model is positive
		Bonus can only be positive when the Size factor beta is positive
		Bonus can only be positive when the Value factor beta is positive
		Bonus can only be positive when market beta is 1 but size and value betas are 0