Which of the following is true of Behavioral Finance? Question 24 options: 1) It is a study of how sociological and economic factors drive investor buy-and-sell decisions 2) It argues that investors are always rational in their investment decision and that price anomalies are due to weak form market efficiency 3) It argues that investors often make decisions based on emotions and biases 4) It is a study of how market overreaction and underreaction are explained by the efficient market hypothesis

Which of the following is true of Behavioral Finance? Question 24 options: 1) It is a study of how sociological and economic factors drive investor buy-and-sell decisions 2) It argues that investors are always rational in their investment decision and that price anomalies are due to weak form market efficiency 3) It argues that investors often make decisions based on emotions and biases 4) It is a study of how market overreaction and underreaction are explained by the efficient market hypothesis

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 8MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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The theory is based on the notion that investors act rationally and consider all available information in the decision-making process, and hence investment markets are efficient, reflecting all available information in security prices. This describes Select one: a. conventional finance. b. irrational investors. c. behavioral finance. d. cognitive errors. e. None of the these
Select all that are true with respect to the theory of market efficiency. Group of answer choices If markets are efficient, investors cannot earn positive returns If markets are efficient, it means prices are always "right" in that the reflect perfect foresight into what will happen in the future Strong form market efficiency suggests that all information, public or private, is reflected in current prices in an unbiased way Market efficiency suggests that relevant information is quickly impounded into prices If transaction costs are high, then prices are less likely to reflect all available information
In the strong form of the market accoarding to the Efficient Market Hypothesis investor can earn excess returns by usin the available information. Select one: a. False b. True
Carefully explain the Arbitrage Pricing Theory (APT). What is the main assumption the APT is built on? (b) With regard to market efficiency, what is meant by the term "anomaly"? Give two examples of market anomalies and explain why each is considered as an anomaly.
1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.
Which of the following is NOT true? You might be better off using elimination approach for this question if your other courses (Financial Management, Investment/Portfolio Management) did not familiarize yourself with the concept of risk-neutrality. In risk-neutral valuation the risk-free rate is used to discount expected cash flows In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate O Derivatives can be valued based on the assumption that investors are risk neutral O Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral None of these (i.e. all are TRUE)
The underlying assumptions of technical analysis are that A.price move in predictable patterns B. Market value is determined by market news C. Investors are rational
“Investors can only get normal profit”. Give detailed explanation on this statement and apply the market efficiency theory in your answer
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Question 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 II
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Explain these three 1. PURCHASING POWER RISK - is perhaps, more difficult to recognize than the other types of risk. It is easy to observe the decline in the price of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you have earned on investment has declined (risen) as a result of inflation (deflation). 2. INTEREST RATE RISK - Because money has time value, fluctuations in interest rates will cause the value of an investment to fluctuate also. Although interest rate risk is most commonly associated with bond price movements, rising interest rates cause bond prices to decline and declining interest rates cause bond prices to rise. 3. BUSINESS RISK - refers to the uncertainty about the rate of a return caused by the nature of the business. The most frequently discussed causes of business risk are uncertainty about the firm's sales and operating expenses.