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Question 8 What is an example of an anomaly that once reported in research studies has...

Question 8

What is an example of an anomaly that once reported in research studies has attenuated? Is this positive or negative from the standpoint of market efficiency?

Question 7

What does the early evidence on the ability of behavioral investing to enhance performance tell us?

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Expert Solution

What is an example of an anomaly that once reported in research studies has attenuated? Is this positive or negative from the standpoint of market efficiency?

Most of the financial anomalies have attenuated. An example is the small firm effect financial market anomaly. The intensity of the anomaly impact has significantly reduced and this is negative from the standpoint of the market efficiency. As we know, anomalies go against the assumptions of the efficient market hypothesis and so if the intensity reduces, it means the anomaly is headed towards the provisions of the EMH as outlined by Fama (1970).

What does the early evidence on the ability of behavioral investing to enhance performance tell us?

It will tell us that an understanding of the behavioral finance plays crucial role for enhancing portfolio performance .The behavioral finance tell us that sometimes humans do not behave rationally as he is expected but they sometime allow psychological powers to come to play when making certain decisions. Investors are not universally risk averse but they accept certain levels of risk depending on the tied returns.

The Behavioral finance concepts could be applied in the portfolio management, the asset allocation, for managing equity and in selecting funds & many other investing ways for enhancing performance.


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