- Market phenomena that would appear to contradict the efficient market hypothesis would include all of the following except:
- The fact that stock prices rebound in the first month of the new year.
- The fact that all information about a company available in the public domain would seem to preclude the opportunity to outperform the market.
- That firms generate higher returns, ceteris paribus, if they happen to have a lower price/earnings multiple.
- That a dearth of analyst coverage would tend to represent a opportunity for stock pickers to exploit a mispricing.
- One may define the efficient frontier as:
- The asset allocation with the lowest return for the level of risk assumed.
- That point on the risk/return continuum where one assumes the lowest level of risk for the amount of return generated.
- Where on the risk spectrum the allocation of assets would generate the greatest return for the level of risk assumed.
- Both b. & c.
- Behavioral finance:
- Further refines the notion of market efficiency.
- Posits that investors are given to traits such as overconfidence, a myopic view of the markets and a tendency to overreact to market events.
- Assumes risk and return are positively correlated.
- Could explain why seemingly different markets' and assets classes' correlations tend to approach 1 in times of uncertainty and turbulence.
- Both b & d
- The strong form of the Efficient Market Hypothesis indicates that stock prices fully reflect:
- All publicly available information.
- Public, market, insider and future information.
- Market only.
- Markets and fundamental company data.
- According to the Efficient Market Hypothesis:
- Portfolio managers' role decreases the likelihood that investors can add alpha.
- The pursuit of diversification is worthwhile.
- Active management adds little value overall.
- All of the foregoing.
- With respect to the security market line (SML) and the capital market line (CML):
- The security market line uses standard deviation as the risk measure while the capital market line uses beta as the risk measure.
- The capital market line provides a big picture view of risk and return, whereas the SML is used to price portfolios and individual securities.
- SML involves the risk premium concept, but CML does not.
- None of the foregoing.
Review Questions 7 - 12
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