Market+Efficiency+and+Behavioral+Finance

Market+Efficiency+and+Behavioral+Finance - FINA 3104...

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FINA 3104 Practice Problems Fall 2011 The Efficient Market Hypothesis and Behavioral Finance 1. True or False (a) According to the efficient market hypothesis, if stock prices have gone up in the past they should go down in the future, because the average return should be zero. (b) If you believe that the market is fully semi-strong form efficient, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. (c) Stocks with a higher CAPM beta earn a higher return on average. This evidence suggests that the market is not efficient. (d) In equilibrium there should be some market inefficiency. (e) If most (not all) investors are overconfident, then the market cannot be efficient. (f) The disposition effect is an irrational behavior. 2. Anomalies You want to examine whether stocks with the word “China” in their company names (let’s call these “China stocks”) earn an abnormal return in August 2008, when the Olympics
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Market+Efficiency+and+Behavioral+Finance - FINA 3104...

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