Question

5.When discussing the empirical tests of the EMH, there are three topical areas that suggest that the debate probably will never be settled: the magnitude issue, the selection bias issue, and the lucky event issue. Specifically with the lucky event issue, the laws of probability are oftentimes ignored or forgotten.

True

False

6.Bonds rate BBB or Baa or above are considered investment grade bonds whereas those lower rated bonds are classified as speculative grade, high yield, or junk bonds. Defaults on high-grade bonds - the reason for the rating - are not common as evidenced by our in-class discussion.

True

False

7.While oftentimes referred to as risk-free, default-free bonds such as US Treasury issues are nonetheless subject to interest rate and inflation rate risk.

True

False

8.Owing to the recent actions by the Federal Reserve in 2020, the current US government yield curve is inverted. Yield curves can be used to extract market expectations

True

False

Answer 1

5) True

The above statement is true as the debate over EMH will never be settled due to the three issues.

These issues are as follows:

• The magnitude issue: Portfolio managers play an important role in generating the investment earnings. However, these profits are hard to validate due to standard deviations associated with well diversified portfolio.
• The selection bias issues: this suggests that the techniques managers used to generate profits is not revealed, thus it cannot be statistically validated.
• The lucky event issue: There is a probability of superior profits, but it will be repeated in another period is a question which highlights that the law of probability are often ignored or forgotten.

Thus, all these issues suggests that debate over EMH will never settled.

6) True

The above statement is true because investment grades stocks possess low credit risk and there are less chances of company's failure to repay it's loan. The speculative grade stocks yield high but possess high credit risk.

7)True

Thought the US Treasury bonds are considered risk free investments, but they may face the interest rate risk or inflation rate risk. When interest rate rises, the market value of bonds tends to decline. Also, rise in inflation leads to very low yield.

8) True

Inverted yield curve means long term debt instruments have low yield compared to short term instruments.  Federal Reserve influences the interest rates which indicated the yield. In 2020, inverted yield signaled the economic recession in US in 2020.