True or false: 1. Behavioral finance suggests that invesotors' irrationality affects stock prices and therefore makes...

True or false:

1. Behavioral finance suggests that invesotors' irrationality affects stock prices and therefore makes it easy for sophisticated traders to generate alpha.

2. Assume that you believe in the Fama-Frech 3 factor model. The fact that stocks with high book to market ratios generate alpha relative to the CAPM is violation of market efficiency based on public information

3. Market efficiency can only be jointly tested with a given model of equilibrium expected returns

4. the fact that volatility spikes on earinings announcement days is a violation of market efficiency relative to public information

Expert Solution

1. True, it is true that behavioral finance suggest that invesotors' irrationality affects stock prices.

If so, you’re not alone. After all, the cyclical investment process, which includes information procurement, stock picking, holding, and selling investments, followed by making a new selection, is full of psychological pitfalls. However, only by becoming aware of and actively avoiding behavioral biases can investors reach impartial decisions. The emerging field of behavioral finance aims to shed light on true financial behavior.

This piece outlines the aims of behavioral finance, the various cognitive and emotional biases investors often fall prey to, the tangible consequences these biases may lead to, and how cultural influences can affect investment decision-making.

2. False, it is not true that stocks with high book to market ratios generate alpha relative to the CAPM is violating market efficiency based on public information. The generation of alpha does not depend upon the method of valuation of stocks It depends upon the trading in the market.

3. False, there are various factors to determine market efficiency and the generation of returns in the market. Equilibrium returns does not shows market effficiency. there are various methods to determine equilibrium points.

4. False,the fact that volatility spikes on earnings announcement days are a violation of market efficiency .

jeff jeffy answered 2 years ago

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