EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 12, Problem 5PS
Summary Introduction
To determine: The rationale for indexing for the investors
Introduction: Indexing is used to measure the statistical analysis of economic data. It summarizes the market activity. It is mostly beneficial for passive investing to specify a particular market segments.
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Some advocates of behavioral finance agree with efficient market advocates that indexing is the optimal investment strategy for most investors. But their reasons for this conclusion differ greatly. Compare and contrast the rationale for indexing according to both of these schools of thought.
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.
Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?
Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate
Investors hold only efficient portfolios of traded securities.
Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities.
Investors have homogeneous risk averse preferences toward taking on risk.
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
Ch. 12 - Prob. 11PSCh. 12 - Prob. 12PSCh. 12 - Prob. 13PSCh. 12 - Prob. 14PSCh. 12 - Prob. 15PSCh. 12 - Prob. 16PSCh. 12 - Prob. 17PSCh. 12 - Prob. 18PSCh. 12 - Prob. 19PSCh. 12 - Prob. 20PSCh. 12 - Prob. 21PSCh. 12 - Prob. 22PSCh. 12 - Prob. 23PSCh. 12 - Prob. 24PSCh. 12 - Prob. 25PSCh. 12 - Prob. 1CPCh. 12 - Prob. 2CPCh. 12 - Prob. 3CPCh. 12 - Prob. 4CPCh. 12 - Prob. 5CP
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- Market timers focus onusing overall market trends as a basis for predicting when to buy or sell investments. However, they can use valuation techniques on specific financial instruments to support their decision. True or false?arrow_forwardWhich 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.arrow_forwardMark 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.arrow_forward
- If you knew that you can invest in a passive index fund, at a low cost, and capture all the returns of the market index, would that affect your opinion of the effectiveness of a strategy using technical analysis or fundamental analysis?arrow_forwardDo you agree with the following statement? And explain why. “The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by welldiversified investors who are concerned with specific risk. “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_forward
- Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments:a. Both the CAPM and APT require a mean-variance efficient market portfolio.b. Neither the CAPM nor the APT assumes normally distributed security returns.c. The CAPM assumes that one specific factor explains security returns but APT does not.State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.arrow_forwardAll of the following statements about an efficient market are correct EXCEPT: a. All financial transactions have an NPV of equal to zero b. A skilled individual may have sustainable above market returns c. The investor is compensated properly for risk borne d. The investor does not receive abnormal returns consistentlyarrow_forwardBiases and attitudes of investors and their anomalous behaviors inconsistent with traditional finance theories are studied according to: Group of answer choices C. Modigliani & Miller A. Random Walk Theory D. Modern Portfolio Theory B. Behavioral Financearrow_forward
- Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds?a. Survivorship bias and backfill bias both result in upwardly biased hedge fund index returns.b. Survivorship bias and backfill bias both result in downwardly biased hedge fund index returns.c. Survivorship bias results in upwardly biased hedge fund index returns, but backfill bias results in downwardly biased hedge fund index returns.arrow_forwardWhy 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?arrow_forwardAccording to the efficient market, which of the following are not true? Select one: securities are in equilibrium prices fully reflect all public information available the investors should not waste their time on under- or over-valued securities None of the answers are correct the market has demonstrated that stocks are not reasonably priced.arrow_forward
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