a. Write down an empirical anomaly in the stock market. How would you design a trading strategy to exploit this anomaly? Specifically, what stocks will you long and short?
b. Briefly explain what is Efficient Market Hypothesis (EMH)? Specifically, what are the typical information sets? What are the implications of different levels of market efficiency?
c. When stock prices deviate from fundamentals, arbitrageurs may be reluctant to forcefully eliminate the mispricing and take profit. Noise trader risk is one type of limits to arbitrage. Briefly explain what is noise trader risk and why can it intimidate arbitrageurs?
