5-10 5. If markets are efficient, which of the following investors should achiev

Question

5-10

5. If markets are efficient, which of the following investors should achieve superior returns over time? (a) Investors who choose stocks by throwing darts at a list of stocks in the financial pages of (b) Analysts who spend considerable time evaluating the best stocks to buy (c) Mutual fund managers who manage other people's money for a living (d) None of the options are correct. 6. Weak-form efficiency implies that past stock returns (a) form patterns that tend to repeat. (b) are major inputs to investorsfor forming trading strategies. (c) do not help to predict future returns. (d) are difficult to explain. 7. The conviction of Raj Rajratnam for insider trading supplies evidence against which form of the efficient markets hypothesis? (a) Weak-form efficiency (b) Semistrong form efficiency (c) Strong-form efficiency (d) It is evidence against all forms. 8. Briefly explain why, in a competitive securities market, successive price changes are random. Behavioral Finance 9. The study of behavioral finance has best helped explain which of the following investor behav ors? (a) Investors are often unable to short-sell unfavorable stocks. (b) Investors often create undiversified portfolios. (c) Investors tend to sell their losing stocks and retain stocks that have capital gains. (d) Investors are generally too slow to update their beliefs in the face of new evidence 10. Briefly discuss some of the important findings of behavioral finance studies.

Explanation / Answer

5. If markets are efficient, none of the above options are correct about investor who should achieve superior returns over time.

6. Weak form efficiency implies that past stock returns do not help to predict the future returns.

7. The conviction of Raj Rajratnam for insider trading supplies evidences against which form of the efficient market hypothesis. It is the form of strong form efficiency.

8. In a competitive securities market, successive price changes are random because in a competitive market, prices reflect all available information. The only reason prices change is because of new information. By definition new information arrives randomly. Therefore security prices change randomly. In a competitive market, prices reflect all available information. The only reason prices change is because of new information. By definition new information arrives randomly. Therefore security prices change randomly.

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