Chapter 13 - Investor Behavior and Capital Market Efficiency. Exam Questions With Verified Answers.
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Investor Behavior and Capital
Institution
Investor Behavior And Capital
Chapter 13 - Investor Behavior and Capital
Market Efficiency. Exam Questions With
Verified Answers.
The difference between a stock's expected return and its required return according to the security
market line is - answerthe stock's alpha
alpha = E[R(s)] - r(s)
While the CAPM conclusion that...
Chapter 13 - Investor Behavior and Capital
Market Efficiency. Exam Questions With
Verified Answers.
The difference between a stock's expected return and its required return according to the security
market line is - answer✔the stock's alpha
alpha = E[R(s)] - r(s)
While the CAPM conclusion that the market is always efficient may not literally be true, -
answer✔competition among savvy investors who try to "beat the market" and earn a positive
alpha should keep the market portfolio close to efficient much of the time
If all investors have homogenous expectations (all investors have the same information), -
answer✔all investors would be aware that a stock had a positive alpha and none would be
willing to sell
*The only way to restore equilibrium in this case is for the price to rise immediately so that the
alpha is zero
An important conclusion of the CAPM is that - answer✔investors should hold the market
portfolio (combined with risk-free investments)
and
this investment advice does not depend on the quality of an investor's information or trading skill
*By doing this, investors can avoid being taken advantage of by more sophisticated investors
The CAPM requires only that investors have - answer✔rational expectations
*Means that all investors correctly interpret and use their own information, as well as the
information that can be inferred from market prices or the trades of others
The market portfolio can be inefficient only if - answer✔a significant number of investors either
-Do not have rational expectations
or
-Care about aspects of their portfolios other than expected return and volatility
There is evidence that individual investors fail to ____ and favor ____ - answer✔-diversify their
portfolios adequately (under diversification bias)
-investments in companies they are familiar with (familiarity bias)
Investors appear to trade too much which stems, at least in part, from - answer✔investor
overconfidence (tendency of uninformed individuals to overestimate the precision of their
knowledge)
In order for the behavior of uninformed investors to have an impact on the market, there must be
- answer✔patterns to their behavior that lead them to depart from the CAPM in systematic ways,
thus imparting systematic uncertainty into prices
Examples of behavior that could be systematic across investors include - answer✔-Disposition
effect (tendency to hang on to losers and sell winners)
-Investor mood swings that result from common events like weather
-Putting too much weight on their own experience
-Herd (actively try to follow each other's behavior)
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