EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 1, Problem 18PS
Summary Introduction
To Determine: Wall Street firms traditionally compensated their traders with a share of the trading profits that they generated. Explain the practice might have affected trader’s willingness to assume risk. Determine the agency problem this practice engendered.
Introduction: When traders are compensated with profit it means that their work is appreciated, and they are motivated to reach further targets.
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Wall Street firms have traditionally compensated their traders with a share of the trading profits that they generated. How might this practice have affected traders’ willingness to assume risk? What is the agency problem this practice engendered?
Central banks have injected moral hazard into global markets, which skews investor behavior toward risky assets because the downside of risk is being underwritten by the central banks. Thus, bubbles occur, and bubbles are bound to burst.
Crticially discuss.
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Insider information cannot help investors to outperform the market
This form of efficiency suggests that all public information is already reflected in current prices
Fundamental analysis can be used to identify mispriced securities
Technical analysis can be used to identify mispriced securities
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- The "Discipline of the Market" means that in a competitive market customers and investors deal with firms that behave well, and leave those that do not. They avoid too much risk and flock to firms that pay the best. Then the good actors succeed, and the bad actors go out of business naturally. If the Discipline of the Market apply to financial services, then why do we need regulation and why do we need government restrictions where the free market should apply?arrow_forwardQUESTION Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?arrow_forwardWhich of the following is NOT correct with respect to the Efficient Market Hypothesis? If markets are semi-strong form efficient, then fundamental analysts would not be able to earn abnormally good returns, after considering the risk they assume. O Semi-strong form efficiency says that if a company announces a labor strike, the stock price very quickly adjusts downward. Evidence suggests that markets are NOT strong form efficient, since insiders could make abnormally good returns trading on private information. However, that is illegal. () Semi-strong form efficiency says that when Stryker makes an earning announcement, the stock price quickly reflects the new information. )Weak form efficiency says that technical analysts who study charts of stock prices and volumes can regularly make abnormally good returns, after considering the risk the assume. Page 24 of 30arrow_forward
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