M06_MISH1438_06_IM_C06 - Chapter 6 Are Financial Markets...

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Chapter 6 Are Financial Markets Efficient? The Efficient Market Hypothesis Rationale Behind the Hypothesis Stronger Version of Efficient Markets Theory Evidence on the Efficient Market Hypothesis Evidence in Favor of Market Efficiency Mini-Case Box: An Exception That Proves the Rule: Ivan Boesky Case : Should Foreign Exchange Rates Follow a Random Walk? Evidence Against Market Efficiency Overview of the Evidence on Efficient Markets Theory The Practicing Manager: Practical Guide to Investing in the Stock Market How Valuable are Published Reports by Investment Advisors? Mini-Case Box: Should You Hire and Ape as Your Investment Adviser? Should You Be Skeptical of Hot Tips? Do Stock Prices Always Rise When There is Good News? Efficient Markets Prescription for the Investor Case : What Does the Stock Market Crash of 1987 and the Tech Crash of 2000 Tell Us About the Efficient Market Hypothesis? Behavioral Finance Overview and Teaching Tips To fully understand how asset prices are determined, students need to be exposed to efficient markets hypothesis which describes how information is reflected in the asset prices. The discussion of the evidence on the efficient markets illustrates how much controversy there is in this theory. Students also particularly enjoy the Practicing Manager application which uses efficient markets theory to provide a practical guide to investing in the stock market. This application captures the attention of even the most disinterested student because all of us are interested in how to get rich (or, at least, in how to keep from getting poor). This application also gives students practice using the reasoning that they learned earlier in the chapter. In addition, the theory is confronted with evidence that shows the student important implications for the real world.
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30 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition Answers to End-of-Chapters Questions 1. False. Expectations can be highly inaccurate and still be rational because optimal forecasts are not necessarily accurate: A forecast is optimal if it is the best possible even if the forecast errors are large. 2.
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M06_MISH1438_06_IM_C06 - Chapter 6 Are Financial Markets...

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