Contemporary Issues in Finance
Digital Household Finance
Practice Exam — Open Questions (Modules 1–4)
12 new practice questions (3 per module), written in the exact open-question, explain-and-derive style of the official example
exam — each with a full illustrative model answer. Try to answer each question yourself, in writing, before reading the model
answer underneath.
Preparation for the exam of August 17.
, Module 1 — Positioning
Question 1
Explain the "Inelastic Market Hypothesis" (IMH). What does it claim about the relationship between investor
flows and prices, and why is it relevant to the "rise of retail" and the growth of passive investing discussed in
this module?
Illustrative Answer
The IMH challenges a core assumption of the Efficient Market Hypothesis by claiming that demand for financial
assets is relatively INSENSITIVE (inelastic) to price changes, especially over short horizons. Even when prices
swing wildly, investors — particularly institutions — do not adjust their holdings much in response. The
practical consequence is that even small net flows of money moving in or out of the market can cause
disproportionately LARGE price movements, because the "buffer" of price-sensitive demand that would
normally absorb those flows is much thinner than classical theory assumes.
This is not because investors don't care about price at all, but because structural factors get in the way of quick
reaction: a preference for passive, buy-and-hold investing, and fixed mandates that require holding a set
percentage in equities regardless of valuation.
Relevance to the rise of retail: as more retail money flows into markets — much of it through passive vehicles
like ETFs, and much of it via technology that removes the natural "friction" of needing to actively decide to
trade — an increasing share of total market demand becomes exactly the inelastic, flow-driven kind of demand
the IMH describes. This helps explain why markets have arguably become MORE volatile relative to the flow of
new fundamental information than classical efficient-market theory alone would predict, and it directly
connects to the module's broader theme that greater retail accessibility, while positive for financial inclusion,
can also introduce new systemic risks.
Question 2
A large retirement-savings provider rolls out a robo-advice service to the employees of client companies.
Based on the Bianchi & Brière (2024) study discussed in class: (a) which types of investors are MORE likely to
take up the robo-service once they see its recommendation, and (b) what happens to those investors'
attention and equity exposure after they subscribe?
Illustrative Answer
(a) Take-up: the probability of taking up the robo, conditional on having seen its recommendation, is HIGHER
for investors who are older, male, have SMALLER portfolios, and check their account MORE frequently. It is
also higher the FURTHER the robo's recommended allocation sits from the investor's current allocation, and
the RISKIER the recommended allocation is relative to the current one — in other words, the robo
disproportionately attracts exactly the investors whose current allocation is furthest from an efficient one, and
who therefore stand to benefit most.
(b) After subscribing: investors become MORE attentive, not less — they spend more time on the platform
(more logins, more page visits, more minutes), particularly around the month their pay/remuneration arrives,
and this heightened attention persists well beyond the initial sign-up. This shows the robo is used to
COMPLEMENT investor engagement rather than substitute for it. Equity exposure rises by about 8.7
percentage points on average, with a sharp jump at the moment of subscription followed by a continuing
positive trend afterward. Robo-takers who receive a rebalancing alert are also about 19% more likely to
actually rebalance, versus an 11.4% baseline probability for "robo curious" non-takers — showing that trust in
the robo's recommendations persists even after real shocks to the portfolio, not just at the initial take-up
decision.
Question 3
Digital financial services face four distinct behavioural design challenges as a user moves from first noticing a
product to actually acting on it. Name the four stages, and for the FIRST stage, give one specific challenge and
its matching design principle.
Illustrative Answer
Digital Household Finance
Practice Exam — Open Questions (Modules 1–4)
12 new practice questions (3 per module), written in the exact open-question, explain-and-derive style of the official example
exam — each with a full illustrative model answer. Try to answer each question yourself, in writing, before reading the model
answer underneath.
Preparation for the exam of August 17.
, Module 1 — Positioning
Question 1
Explain the "Inelastic Market Hypothesis" (IMH). What does it claim about the relationship between investor
flows and prices, and why is it relevant to the "rise of retail" and the growth of passive investing discussed in
this module?
Illustrative Answer
The IMH challenges a core assumption of the Efficient Market Hypothesis by claiming that demand for financial
assets is relatively INSENSITIVE (inelastic) to price changes, especially over short horizons. Even when prices
swing wildly, investors — particularly institutions — do not adjust their holdings much in response. The
practical consequence is that even small net flows of money moving in or out of the market can cause
disproportionately LARGE price movements, because the "buffer" of price-sensitive demand that would
normally absorb those flows is much thinner than classical theory assumes.
This is not because investors don't care about price at all, but because structural factors get in the way of quick
reaction: a preference for passive, buy-and-hold investing, and fixed mandates that require holding a set
percentage in equities regardless of valuation.
Relevance to the rise of retail: as more retail money flows into markets — much of it through passive vehicles
like ETFs, and much of it via technology that removes the natural "friction" of needing to actively decide to
trade — an increasing share of total market demand becomes exactly the inelastic, flow-driven kind of demand
the IMH describes. This helps explain why markets have arguably become MORE volatile relative to the flow of
new fundamental information than classical efficient-market theory alone would predict, and it directly
connects to the module's broader theme that greater retail accessibility, while positive for financial inclusion,
can also introduce new systemic risks.
Question 2
A large retirement-savings provider rolls out a robo-advice service to the employees of client companies.
Based on the Bianchi & Brière (2024) study discussed in class: (a) which types of investors are MORE likely to
take up the robo-service once they see its recommendation, and (b) what happens to those investors'
attention and equity exposure after they subscribe?
Illustrative Answer
(a) Take-up: the probability of taking up the robo, conditional on having seen its recommendation, is HIGHER
for investors who are older, male, have SMALLER portfolios, and check their account MORE frequently. It is
also higher the FURTHER the robo's recommended allocation sits from the investor's current allocation, and
the RISKIER the recommended allocation is relative to the current one — in other words, the robo
disproportionately attracts exactly the investors whose current allocation is furthest from an efficient one, and
who therefore stand to benefit most.
(b) After subscribing: investors become MORE attentive, not less — they spend more time on the platform
(more logins, more page visits, more minutes), particularly around the month their pay/remuneration arrives,
and this heightened attention persists well beyond the initial sign-up. This shows the robo is used to
COMPLEMENT investor engagement rather than substitute for it. Equity exposure rises by about 8.7
percentage points on average, with a sharp jump at the moment of subscription followed by a continuing
positive trend afterward. Robo-takers who receive a rebalancing alert are also about 19% more likely to
actually rebalance, versus an 11.4% baseline probability for "robo curious" non-takers — showing that trust in
the robo's recommendations persists even after real shocks to the portfolio, not just at the initial take-up
decision.
Question 3
Digital financial services face four distinct behavioural design challenges as a user moves from first noticing a
product to actually acting on it. Name the four stages, and for the FIRST stage, give one specific challenge and
its matching design principle.
Illustrative Answer
