1. If a forecaster spends hours every day studying data to forecast interest rates but his...

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1. If a forecaster spends hours every day studying data to forecast interest rates but his expectations are not as accurate as predicting that tomorrow s interest rate will be identical to today s interest rate, are his expectations rational?
2. If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market. Is this statement true, false, or uncertain? Explain your answer.
3. Suppose that increases in the money supply lead toa rise in stock prices. Does this mean that when you see that the money supply has had a sharp rise in the past week, you should go out and buy stocks? Why or why not?
4. If I read in the Globe and Mail: Report on Business that the smart money on Bay Street expects stock prices to fall, should I follow that lead and sell all my stocks?
5. If my broker has been right in her five previous buy and sell recommendations, should I continue listening to her advice?
6. Can a person with rational expectations expect the price of a share of Google to rise by 10% in the next month?

David · Accepted Answer

If a forecaster spends hours every day studying data to forecast interest rates, but his expectations are not as accurate as predicting that tomorrow’s interest rates will be identical to today’s interest rates, are his expectations optimal?
If a forecaster spends hours every day studying data to forecast interest rates, but his expectations are not as accurate as predicting that tomorrow’s interest rates will be identical to today’s interest rates, are his expectations optimal?
No, because he could improve the accuracy of his forecasts by predicting that tomorrow’s interest rates will be identical to today’s. His forecasts are therefore not optimal, and he does not have rational expectations.
“If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market.”  Is this statement true, false or uncertain?  Explain your answer.
True, as an approximation. If large changes in a stock price could be predicted,

1. If a forecaster spends hours every day studying data to forecast interest rates but his expectations are not as accurate as predicting that tomorrow s interest rate will be identical to today s...

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