Review 2 - BANK 1005(11941) Derivatives and Securities...

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BANK 1005(11941) Derivatives and Securities Markets Page 1 of 4 Review Activites - Topic 2 (The Equity Markets) Questions and Problems You should answer the following Questions and Problems : 2, 4, 6, 8, 11 and 12 in your textbook. Consider this feedback as a guide toward writing a sound explanation, not as the “best answers”. You do need to employ your learning and thinking to craft a ‘good answer’. Good writing skills will also result in high quality discussions and arguments. I have provided some comments to hopefully assist you in thinking deeper. Learning about the financial markets involves using a “package” of resources and thinking, rather than just learning these “answers”. You need to show real understanding of the issues acquired from your learning and thinking in your explanations/arguments. Often, according to the authors of your book (in the preface), the problems and questions have been chosen to “provoke debate rather than a search for the ‘correct answer’.” Take these questions and the suggested feedback in this spirit! 2. Market efficiency in the stock market implies that resources will be allocated in an economically efficient manner throughout the Australian economy. Discuss. The term “efficiency” has a number of meanings. The two that are relevant to this question are: Informational efficiency under which share prices reflect all available information; and Allocational efficiency under which funds are directed into the most productive (i.e. the highest yielding) avenues of investment. These concepts are related as we need informational efficiency for the achievement of allocational efficiency. Why? However, the existence of informational efficiency need not imply allocational efficiency. For example, the existence of a rational speculative bubble does not contradict informational efficiency (investors are reacting to relevant information), but it does contradict allocational efficiency (prices deviate from fundamental values). 4. Discuss the differences between an exchange-traded fund (ETF) and a listed share trust (i.e. a listed unit trust specialising in share investment). An ETF is an indexed fund that holds a portfolio with the same composition as an important market index. As such, these securities (ETFs) provide an alternative for investors who want to invest in indexed funds. Such investors either believe that the market is efficient so that an actively managed fund cannot beat the
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Review 2 - BANK 1005(11941) Derivatives and Securities...

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