Your friend's portfolio consistently plots above the Security Market Line. As a result, your friend claims to know how to earn abnormal returns. Thus, your friend tries to convince you that the market is not efficient. How should you respond? A) You should totally agree; this is direct evidence against market efficiency B) Tell your friend that this should be expected due to the Momentum effect C) Tell your friend that it is hard to measure risk (Joint Hypothesis Problem); maybe he market is efficient, or maybe risk is being measured improperly D) none of the above

Your friend's portfolio consistently plots above the Security Market Line. As a result, your friend claims to know how to earn abnormal returns. Thus, your friend tries to convince you that the market is not efficient. How should you respond? A) You should totally agree; this is direct evidence against market efficiency B) Tell your friend that this should be expected due to the Momentum effect C) Tell your friend that it is hard to measure risk (Joint Hypothesis Problem); maybe he market is efficient, or maybe risk is being measured improperly D) none of the above

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 4MC: You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the...

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You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: e. Add a set of indifference curves to the graph created for part b. What do these curves represent? What is the optimal portfolio for this investor? Add a second set of indifference curves that leads to the selection of a different optimal portfolio. Why do the two investors choose different portfolios?
You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: Add a set of indifference curves to the graph created for part b. What do these curves represent? What is the optimal portfolio for this investor? Add a second set of indifference curves that leads to the selection of a different optimal portfolio. Why do the two investors choose different portfolios?
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