State whether the following are true or false. Explain your statement. A finding that small firms...

State whether the following are true or false. Explain your statement.

A finding that small firms earn higher returns than large firms would provides evidence against the weak form of the efficient market theory. (5 marks)
Proponents of the EMH typically advocate a passive investment strategy. ( 5 marks)

Solutions

Expert Solution

1. The given statement is FALSE because small firm bias is a violation of a strong form of Efficient market, not the weak form of Efficient market.

Small company bias advocates that a small company will be earning higher return than large company but a strong form of Efficient market contradicts that. Hence it is in contradiction of the strong form of Efficient market because it advocates that all the privately and publicly available information have already been discounted into the stock price.

2. The given statement is TRUE because Efficient market hypothesis advocate that all the publicly and privately available information have already been discounted into the stock price so there is no possibility of additional rate of return and hence it is advocating passive investment by investing into the index.

Given statement is TRUE.

jeff jeffy answered 2 years ago

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