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- (a) The Efficient Market Hypothesis (EMH) is a theory that explores the relationship between the availability of information and asset prices. It argues that all available information is already reflected in the price of share and therefore, it is impossible to beat the market over the long-term. Briefly explain the sub-hypotheses in EMH.which one is correct please confirm? Q2" Which of the following strategies will be profitable if the price of the underlying asset is expected to decrease? (There may be more than one correct response.) Buying a put Buying a call. Selling a put Selling a call.Which of the following statements about arbitrage is correct? Select one: O a. A risk averse investor will never arbitrage because of the risk involved. O b. An arbitrage opportunity arises when it is possible to exploit a pricing anomaly to make riskless guaranteed profits. O c. Arbitrage opportunities continue to exist in equilibrium. d. An investor loves to arbitrage because he/she is willing to pay a premium to buy risky assets.
- Relying solely on using a traditional spot cash market is a relatively high risk means to pricing a commodity. A. True B. FalseQuestion 1 Part A. What are the two key assumptions of the efficient market hypothesis?I. Rational investors collect information and compete for profitsII. Any temporary mispricing would be arbitraged away III. Irrationality: Investors make mistakes when forming expectations or making investment decisionsIV. The mispricing might not be quickly eliminated because of limits to arbitrage a) I and II b) II and IV c) III and IV d) I and III Part B. What are the two key assumptions of behavioral asset pricing theory?I. Rational investors collect information and compete for profitsII. Any temporary mispricing would be arbitraged away III. Irrationality: Investors make mistakes when forming expectations or making investment decisionsIV. The mispricing might not be quickly eliminated because of limits to arbitrage a) II and IV b) I and III c) III and IV d) I and IIA very high degree of capital market efficiency a. mispricing never occurs. b. means share prices always correctly reflect all available information. c. the capital markets anticipate and price correctly all possible future payoffs and states of the world. d. means share prices react quickly, completely, and without bias once new value-relevant information is available to the market.
- Market risk ________. a. is equal to the rate of return generated by a risk-free asset b. cannot be eliminated, as it is non-diversifiable c. is synonymous with diversifiable risk d. is synonymous with financial riskProfitable projects are difficult to find. a. Efficient capital markets b. The curse of competitive markets c. Risk-return trade-off d. All risks are not equalMarket Efficiency Implications Explain why a characteristic of an efficient market is that investments in that market have zero NPVs.
- 1. According to the efficient market hypothesis (EMH), in a perfect market, the security prices reflect the true and fair value of all the underlying securities' assets at any time. On the contrary, an inefficient market is a market whose security price at any time does not entirely reflect the value of its assets. In this form of market, traders can beat the market because they can employ strategies like arbitrage and speculation. Explain with example, the price reactions towards the bad news that indicate market is inefficient.Which of the following is NOT true? O In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral O None of these (i.e. all are TRUE) O In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate O Risk-neutral valuation provides prices that are only correct in a world where investors are risk- neutral ◄ Previous Next ▸Which of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate