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This is not an essay assignment, this is a problem set for Investment course but includes behavioral Finance materials too.

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This is not an essay assignment, this is a problem set for Investment course but includes behavioral Finance materials too.
Answered 1 days After Nov 13, 2022

Solution

Prince answered on Nov 15 2022
51 Votes
Q1:
Part a: The efficient market hypothesis states that stock prices trade at a fair market value that accounts for all relevant information. It becomes difficult or impossible to sell stocks at outrageous prices or buy them for a bargain. According to this notion, an investor must be prepared to invest money into risky assets if he wants to improve profits.
Market efficiency is not compromised. The Microsoft Company continues to make money off of its stock, but it is not clear whether individuals who purchased it after it achieved success have seen excessive returns. EMH does not imply that profitability can be predicted with accuracy and based on historical data. Furthermore, the stock prices determine whether a return is positive. If Microsoft Company keeps making money, the efficient market theory would be
oken. Therefore, it is impossible to forecast whether a company's history of steady, high profits will continue into the future.
Part b: I Disagree with the statement. Expected rates of return change depending on the premium received for taking on risk. When compared to other theories and models, the CAPM makes the assumption that a security's risk premium is purely determined by its share of market risk. For instance, the FF3F Model test findings show that a security's risk premium depends on its market risk, relative size, and relative price. The proper risk premia may also depend on other risk factors, such as cu
ency exchange or commodity prices.
Part c: It doesn't change its attractiveness in any way. The EMH asserts that the stock price reflects the dividend's dependability. A reliable dividend would probably reduce the perceived risk, lower the necessary return, and raise the price.
Part d: No, this doesn't make me question the validity of efficient markets. The idea of a random walk logically predicts that some people will outperform the market while others would not. However, the information given does not take the investment's risk into account. Investments with greater risk should provide greater rewards. Without going against the EMH, it is conceivable to believe him as it is being presented.
Part E: As per EMH, a new piece of information that market players utilise to revise their expectations and afterwards rebalance their portfolios, is what drives price fluctuations. The EMH is consistent with volatile prices
ought on by variable underlying economic circumstances and volatility changes in expectations.
Part F: Stock values are expected to trend up over the long term based on fair anticipated rates of return. The realistic expected return over a particular day is fairly tiny (for example, 12% year is only about 0.03% per day), so the price seems to be almost equally likely to rise or fall on any given day. Over longer time periods, the modest daily returns that are projected build up, making upward movement more likely than downward ones. Given that economies tend to grow over time and stock prices tend to...
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