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BFC3241 - Investments - S1 2025

BFC3241 - Investments - S1 2025

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BHP has announced an EPS of 12.5 on 01 Apr 2021. The return on the BHP stock one day before the announcement was 0.50%, the return on the announcement day was 1.50%, and the return one day after the announcement was 0.01%. The market return on the same days was 0.01%, 0.30%, and 0.20%, respectively. What is the cumulative abnormal return of the BHP for the whole 3-day period around the EPS announcement?

2.01%

1.5%

0.50%

0.67%

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It has been shown that stocks with high short interest (the number of stocks sold short) have lower risk-adjusted returns compared to stocks with low short interest. Since short interest in stocks is publicly disclosed by exhanges, this return pattern constitutes a “short interest anomaly” because anyone can make money by short-selling stocks with high short interest and buying stocks with low short interest. What Limit to Arbitrage explanation can justify the persistence of this anomaly?

If you account for the short-selling fees required to short sell stocks, you would not be able to generate profits on this anomaly

✅

If you account for transaction costs, you would still be able to generate profits on this anomaly

❌

Since this return gap between stocks with high and low short interest will never close, you cannot generate any profits on this anomaly

❌

If you account for risks correctly when calculating risk-adjusted returns between the stocks with high and low short interest, there would be no difference in return, i.e., no profits for arbitrageurs

❌

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If you want to buy a UIT, you need to

go to a stock exchange

be an institutional investor

be an authorized market participant

go to an investment company offering UITs

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Grossman-Stiglitz paradox states that:

In a market where information is costless, and there are no limits to arbitrage, no one acquires information, but asset prices are still informationally efficient

None of the above

In a market where information collection and analysis are costly, there is no point for the security analysis industry to exist

The belief in market efficiency makes the market efficient

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You are a fund manager of a passive mutual fund. Your performance benchmark is the index of the largest 30 German stocks, DAX 30. HeidelbergCement has performed better than the DAX index recently, while Covestro has performed worse than the index. As a result, HeidelbergCement has been recently included in the DAX 30 index (its weight in the index is 1%), while Covestro has been excluded from the index (its weight in the index before exclusion was 0.5%)

Which of the following actions should you undertake as a fund manager of the fund?

You should not make any changes to your porftolio since it is passive

❌

You should sell all holdings in Covestro and buy HeidelbergCement such that it has 0.5% in your portfolio

❌

Since you need to outperform your benchmark and HeldelbergCement has performed better than the index, you should buy HeidelbergCement such that it has more than 1% in your fund’s portfolio

❌

You should sell all holdings in Covestro and buy HeidelbergCement such that it has 1% in your portfolio

✅

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risky asset has an expected return of 31% and a standard deviation of 60%. A

risk-free asset has a return of 2.30%. What is the standard deviation of the

portfolio consisting of 40% of the risky asset and 60% of the risk-free asset?

30.00%

❌

36.00%

❌

24.00%