1. Column (A) in on the following page shows the monthly return on the British FTSE 100 index from May 2007 through February 2009. Columns (B) and (C) show returns on the stocks of two firms—Executive...

1. Column (A) in on the following page shows the monthly return on the British FTSE 100 index from May 2007 through February 2009. Columns (B) and (C) show returns on the stocks of two firms—Executive Cheese and Paddington Beer. Both firms announced their earnings in February 2009. Calculate the average abnormal return of the two stocks during the month of the earnings announcement.

2. Explain how incentive and agency problems can contribute to mispricing of securities or to bubbles. Give examples.

3. Many commentators have blamed the subprime crisis on “irrational exuberance.” What is your view? Explain briefly.

4. Some extreme bubbles are obvious with hindsight, after they burst. But how would you define a bubble? There are many examples of good news and rising stock prices, followed by bad news and falling stock prices. Can you set out rules and procedures to distinguish bubbles from the normal ups and downs of stock prices?