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Straddle, CAPM, EMH

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1) How would you determine if a public corporation's financial statements are reliable?

2) Briefly compare and contrast the primary market and the secondary markets. What type of investors participates in each market?

3) A portfolio with a correlation of +1 is not a well-diversified portfolio. What must you do as an investor to structure a portfolio with negative correlation?

4) Compare and contrast the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT)? Which model is appropriate for calculating a stock's required rate of return?

5) Are the financial markets efficient, and if so, under what form of the Efficient Market Hypothesis model?
6) What macroeconomic variable do you believe has the greatest impact on interest rates? Briefly explain.

7) What is a straddle? Would you use it when buying/writing options? Why?

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Solution Preview

1) How would you determine if a public corporation's financial statements are reliable?
? Checked whether or not the financial statements checked by an independent auditor.
? Checked if the financial statement has be filed with the SEC, and checked if it's accessible to the public. The ones those are accessible can be found from the US SEC online database.

2) Briefly compare and contrast the primary market and the secondary markets. What types of investors participate in each market?
? Primary market: a market where a firstly issued IPO are purchased directly from the underwriting investment banker by the investors. The investors of this market are syndicate of securities dealers
? Secondary market: A market where investors are purchasing financial instruments such as stocks, bonds, option, future, and other securities from other investors, rather than from issuing companies themselves. For example NYSE, or NASDAQ, type ...

Solution Summary

1) How would you determine if a public corporation's financial statements are reliable?

2) Briefly compare and contrast the primary market and the secondary markets. What type of investors participates in each market?

3) A portfolio with a correlation of +1 is not a well-diversified portfolio. What must you do as an investor to structure a portfolio with negative correlation?

4) Compare and contrast the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT)? Which model is appropriate for calculating a stock's required rate of return?

5) Are the financial markets efficient, and if so, under what form of the Efficient Market Hypothesis model?
6) What macroeconomic variable do you believe has the greatest impact on interest rates? Briefly explain.

7) What is a straddle? Would you use it when buying/writing options? Why?

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