1. What does the efficient-market hypothesis have to say about these two statements? a. “I notice that short-term interest rates are about 1% below long-term rates. We should borrow short-term.” b. “I...

1. What does the efficient-market hypothesis have to say about these two statements?

a. “I notice that short-term interest rates are about 1% below long-term rates. We should borrow short-term.”

b. “I notice that interest rates in Japan are lower than rates in the United States. We would do better to borrow Japanese yen rather than U.S. dollars.”

2. Fama and French show that average stock returns on firms with small market capitalizations have been significantly higher than average returns for “large-cap” firms. What are the possible explanations for this result? Does the result disprove market efficiency? Explain briefly.