Question 1 a. Explain how the Fama-French model can be used to judge whether or not an active portfolio manager has 'skill'. Discuss what else one can learn from this process of evaluation and what the shortcomings of the approach might be. [Write no more than 8 sentences.] (25 marks) b. How is stock market liquidity defined and what factors determine whether a market for a particular stock is likely to be liquid? Building on your description of the factors that influence liquidity, do you expect it to be fairly stable across time? [Write no more than 8 sentences.] (25 marks) c. Give a brief overview of the evidence for and against the Capital As- set Pricing model. Refer explicitly to published work on this topic. Given this evidence, what is your view on the value of the CAPM to investors, risk managers and others? [Write no more than 8 sentences.] (25 marks) d. Give a concise and intuitive explanation which explains why modern finance theory emphasises covariances between returns when dis- cussing the measurement of risk faced by investors rather than variances of returns. Give examples to illustrate your arguments. [Write no more than 8 sentences.] (25 marks)