Chapter 9, Problem 8QA

Explain the random walk model for exchange rate forecasting. Can it be consistent with technical analysis?

In the single-index model represented by the equation ri = E(ri) + βiF + ei, the term ei represents A. the impact of anticipated firm-specific events on security i's return. B. the impact of changes in the market on security i's return. C. the impact of unanticipated macroeconomic events on security i's return. D. the impact of anticipated macroeconomic events on security i's return. E. the impact of unanticipated firm-specific events on security i's return.

Which of the following is correct with regards to Theories of Term Structure?   When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.