Question

Answer please the Question below - in WRITTEN FORM ONLY PLEASE

1) Mr JM Hamdan put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of Khaleej Times. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money.

Explain this phenomenon and evaluate the consequences in terms the Efficient Markets Hypothesis

Answer 1

Efficient market hypothesis states that market prices of securities reflect all the available information about the security and It would be very difficult for any potential investor to consistently generate alpha. Alpha is the excess return generated over the required rate on a security. Mr. JM Hamden put all his money and double in a matter of months, this stock and the investor behavior is more aligned towards high risk and high return security where the probability of gaining or losing money seems to be equivalent in nature to the outcome of gambling in Casino. These types of outcomes are outliers and do not represent the general behavior of the market or they would be treated as exception in hypothesis theory. Now since the return generated by the asset is high so more people would be attracted towards that stock and when the demand for that stock would increase the price will increase and in turn the return that the investors would be able to generate would fall and would be aligned with the risk adjusted return.