Question

In: Finance

Research has shown in the past that high B/M stocks generally have higher average returns than...

Research has shown in the past that high B/M stocks generally have higher average returns than low B/M stocks over long periods of time. Explain how efficient market hypothesis and behavioral finance would differ in their explanations of this phenomenon.

Solutions

Expert Solution

According to efficient market hypothesis below is the explanation:-

  • High B/M stock called value stocks are usually from well established companies- thus offers lower level of risk and volatility comparatively - thus they also usually gives dividends - hence would lead to higher avg returns than low B/W stock (growth stocks)
  • Even if adverse news affects the Value stocks it wont be for longer time

According to the behavioral finance below is the explanation:-

  • Investor’s risk tolerance, investment objective and time horizon will matter a lot ,
  • Growth stock if considered to be undervalued generally comes from fundamental stock analysis whereas Value stocks depending upon the financial ratio or benchmark that it is being compared to
  • Thus even in this scenario High B/M stock called value stocks are usually from well established companies-their financials will be solid depicting higher avg returns as compared to growth stocks

Related Solutions

Stocks A and B have the expected returns and standard deviations shown in the table below:...
Stocks A and B have the expected returns and standard deviations shown in the table below: Asset E(R) Std. deviation A 15% 30% B 20% 50% The correlation between A and B is 0.6. The risk-free rate is 3% and you have a risk-aversion parameter of 2. What is the proportion of your investment in A and B, respectively, in your optimal risky portoflio? A. 25.0% in A ; 75.0% in B B. 76.6% in A; 23,4% in B C....
1. Which asset classes generally offer higher average rates of returns? Why? 2. You have $100...
1. Which asset classes generally offer higher average rates of returns? Why? 2. You have $100 in cash. The prevailing interest rate is 20% per annum. You have two investment choices: a) Project costs $100 and will return $150 next year, b) Ice Cream—and you love ice cream. The problem is you know that you will be dead next year. What should you do? 3. Does project value depend on when you need cash? In our perfect world, can you...
Stocks that are more risky earn higher average returns. However, managers often manipulate accounting numbers to...
Stocks that are more risky earn higher average returns. However, managers often manipulate accounting numbers to smooth the volatility of their company’s earnings and try to make the company appear less risky. How can you explain this behavior?
Stocks A and B have the following​ returns: Stock A     Stock B 1 0.11    ...
Stocks A and B have the following​ returns: Stock A     Stock B 1 0.11     0.06 2 0.06     0.04 3 0.15     0.04 4 0.03       0.01 5    0.07                     -0.03 a. What are the expected returns of the two​ stocks? b. What are the standard deviations of the returns of the two​ stocks? c. If their correlation is 0.48​, what is the expected return and standard deviation of a portfolio of 56​% stock A and 44​%...
Animal cells generally have a higher concentration of Na+ outside of the cell than inside the...
Animal cells generally have a higher concentration of Na+ outside of the cell than inside the cell and a membrane potential around -70 mV. When an Na+ moves into an animal cell, how does that movement impact the membrane potential? How does that movement impact the Na+ concentration gradient? Explain what an equilibrium potential for an ion is, what the resting membrane potential is, and how they are different.
In class, we saw that countries with high levels of schooling attainment generally have higher income...
In class, we saw that countries with high levels of schooling attainment generally have higher income and growth rates than countries with low levels of schooling attainment. Based only on the model of individual schooling decisions discussed in class, what are two characteristics which you would expect to be systematically different between countries with high vs. low schooling attainment?
In class, we saw that countries with high levels of schooling attainment generally have higher income...
In class, we saw that countries with high levels of schooling attainment generally have higher income and growth rates than countries with low levels of schooling attainment. Based only on the model of individual schooling decisions discussed in class, what are two characteristics which you would expect to be systematically different between countries with high vs. low schooling attainment?
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (8%) (21%) 0.2 6 0 0.4 10 24 0.2 24 30 0.1 36 49 Calculate the expected rate of return, rB, for Stock B (rA = 12.80%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.87%.) Do not round intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 (14%) (35%) 0.2 4 0 0.3 12 20 0.2 18 29 0.1 30 42 Calculate the expected rate of return, rB, for Stock B (rA = 8.20%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 25.07%.) Do not round intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 (11%) (27%) 0.2 3 0 0.3 11 21 0.2 22 27 0.1 40 41 A.Calculate the expected rate of return, rB, for Stock B (rA = 10.10%.) Do not round intermediate calculations. Round your answer to two decimal places. % B.Calculate the standard deviation of expected returns, σA, for Stock A (σB = 22.00%.) Do not round intermediate calculations. Round your...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT