Question

In: Finance

State whether the following statements are true or false, and explain your answer if you judge...

State whether the following statements are true or false, and explain your answer if you judge the statement to be false (a statement must always be true to be considered true).

            i) In an efficient market all investments should have the same long-run average return

            ii) In an efficient market all investors should have the same long-run average return

            iii) Stocks exhibiting positive or negative abnormal returns indicates market inefficiency

iv) Evidence of irrational behavior on the part of some investors proves that efficient market hypothesis is false

Solutions

Expert Solution

This statement is true. In an efficient market, all the stocks have the same long run average return and no stocks would have an above - average rate of return.

This statement is also true.  In an efficient market, all the stocks have the same long run average return and no stocks would have an above - average rate of return.

This statement is true. In an efficient no trader can earn an above average rate of return. So, in case any stock is exhibiting a positive abnormal return or negative return then the market is inefficient. According , to the efficient market hypothesis, as all the stock information is quickly reflected in the stock prices, no investor can earn abnormal returns in any stock.

Yes this statement is true. According to the efficient market hypothesis, the investors exhibit rational behavior. All the investors use all the information that is available in the market. When any investor exhibit irrational behavior then the efficient market hypotheses is wrong.


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