Question

Explain why each of the following statements is either True or False. A. If every investor followed a long-term “buy and hold” strategy, the stock market would not be efficient. B. Stock A is trading at the top of its 52-week range, Stock B is trading at the bottom if its 52 week range. If the market is efficient, most rational investors would prefer Stock A to Stock B at their current prices. C. Stock A is trading at the top of its 52-week range, Stock B is trading at the bottom of its 52 week range. If the market is efficient, one possible explanation for this information is that the operating performance of Company A during the past year exceeded investor expectations, while the operating performance of Company B disappointed investors.

Answer 1

A. If every investor followed a long-term “buy and hold” strategy, the stock market would not be efficient.- False. A long term buy & hold startergy will make market efficient

B. Stock A is trading at the top of its 52-week range, Stock B is trading at the bottom if its 52 week range. If the market is efficient, most rational investors would prefer Stock A to Stock B at their current prices. False. Rationale investor would prefer B instead of A as stock B is trading at lower end and is considered to be undervalued.

C. Stock A is trading at the top of its 52-week range, Stock B is trading at the bottom of its 52 week range. If the market is efficient, one possible explanation for this information is that the operating performance of Company A during the past year exceeded investor expectations, while the operating performance of Company B disappointed investors. True. Market is based on expectations. In this case Stock A has exceeded investor expectations and hence trading at higher range & vice versa for Stock B