EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 12, Problem 2PS
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To determine: Security prices might be set efficiently.
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Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit the behavioral biases, security prices might still be set efficiently?
Mark thinks that there is an interesting paradox of the efficient market hypothesis. If the market believes that prices reflect all information, investors will stop seeking mispriced securities. This may lead to more mispriced stocks and more inefficiency. However, if the market believes that inefficiency still exists, the competition of trying to be the first to find mispriced securities will make markets more efficient. Do you agree with Mark? Why or why not? Please briefly comment.
What would happen to market efficiency if all investors attempted to follow a passive strategy?
Chapter 12 Solutions
EBK INVESTMENTS
Ch. 12 - Prob. 1PSCh. 12 - Prob. 2PSCh. 12 - Prob. 3PSCh. 12 - Prob. 4PSCh. 12 - Prob. 5PSCh. 12 - Prob. 6PSCh. 12 - Prob. 7PSCh. 12 - Prob. 8PSCh. 12 - Prob. 9PSCh. 12 - Prob. 10PS
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- What is weak-form EMH? What would you expect to see/not see if markets where weak form efficient? In other words, can you think of market events that would serve as evidence that market is or isn’t weak-form efficient?arrow_forwardWhich of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.arrow_forwardIf the weakest form of market efficiency holds, then security prices reflect all information found in past prices and volume. Thus, traditional "technical analysis" will not work. Group of answer choices True Falsearrow_forward
- Which of the following statements about the Efficient Market Hypothesis (EMH) is incorrect? Group of answer choices a)If the market is strong-form efficient, investors can not earn abnormal returns using inside information. b) If the investment in small firms earns a positive abnormal return, the stock market is not semi-strong form efficient. c) If a market is efficient, investors tend to follow a passive investment strategy. d) If the future stock price change depends on its history, the market is not weak-form efficient. e) If a market is weak-form efficient, fundamental analysis can not earn a positive abnormal return.arrow_forwardEven if behavioral biases do not affect equilibrium asset prices, why might it still be important for investors to be aware of them?arrow_forwardDoes the efficient market hypothesis suggest that an investor can outperform the market? What effect does the arrival of information have on the market efficiency? How rapidly do security prices change in response to new information in an efficient market?arrow_forward
- If all investors believe that the market is efficient, could that eventually lead to less efficiency in the market? Explain with an example.arrow_forwardThe following table lists Shleifer's 3 lines of defense for the efficient market hypothesis in the first column and empirical violations of these defenses in the second column. Which empirical violation supports the Shleifer's second line of defense, that even if quasi-rational traders are present, so long as their errors are uncorrelated they will cancel out and market prices still will reflect accurately underlying fundamental values?arrow_forwardWhat sorts of factors might limit the ability of rational investors to take advantage of any “pricing errors” that result from the actions of “behavioral investors”?arrow_forward
- Advocates of the efficient market hypothesis would agree that it is virtually impossible for any investor to consistenrly outperform the market (T/F)arrow_forwardWhat is semi-strong-form EMH? What would you expect to see/not see if markets where semi-strong form efficient? In other words, can you think of market events that would serve as evidence that market is or isn’t semi-strong-form efficient?arrow_forwardWhich is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the abovearrow_forward
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