1. At t=0, the management of a firm (Firm A) decides that it will make a tender offer to acquire another firm (Firm B) a week later (at t=1). At t=0, the stock prices of Firm A and Firm B both stay the same on average. However, at t=1, the stock price of Firm A falls and the stock price of Firm B rises. a- What does this behavior imply about the informational efficiency of the market for the stocks of Firm A and Firm B? b- Which form or forms of the efficient Market Hypothesis is/ are violated (if any)? Explain why.

2. The momentum strategy is as follows: (1) Take a large group of traded securities (e.g. those in the S&P 500 Index) and rank the securities by their return over last 6 months; let those securities in the top 10 percent of the group be called “winners” and let those securities in the bottom 10 percent of the group be called “losers”. (2) Short all the loser securities and use the proceeds from the short sales to buy all of the winner securities; hold this portfolio for 6 months, (3) At the end of the 6-month holding period, start over with step (1); that is rank securities by return and redefine the winner and loser securities. (4) Based on the new winners and losers, redo step 2. (5) Keep doing this over and over, every 6 months.

3. The “momentum strategy” has been shown to generate expected returns in excess of those implied by CAPM; that is, the return on the momentum strategy generates greater returns on average than those which should be paid given the riskiness of momentum returns. What does the profitability of the momentum strategy imply about the informational efficiency of the market? Which form or forms of Efficient Market Hypothesis is/ are violated (if any)? Explain why.