EBK FINANCIAL ACCOUNTING THEORY AND ANA
12th Edition
ISBN: 9781119299646
Author: CATHEY
Publisher: JOHN WILEY+SONS,INC.-CONSIGNMENT
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Chapter 4, Problem 4.3C
a)
To determine
To discuss:Four types of anomalies associated with
b)
To determine
To discuss : Concept of behavioral finance.
c)
To determine
To discuss : Cognitive biasness in finance.
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Discuss the four basic types of anomalies that the Efficient Market Hypothesis cannot explain. Discuss the concept of behavioral finance and what are some of the most common cognitive biases in finance?
The theory is based on the notion that investors act rationally and consider all available information in the decision-making process, and hence investment markets are efficient, reflecting all available information in security prices. This describes
Select one:
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b. irrational investors.
c. behavioral finance.
d. cognitive errors.
e. None of the these
Give three examples of financial market anomalies discussed in the finance literature and critically evaluate whether these anomalies indicate that the financial markets are inefficient.
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EBK FINANCIAL ACCOUNTING THEORY AND ANA
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- Some advocates of behavioral finance agree with efficient market advocates that indexing is the optimal investment strategy for most investors. But their reasons for this conclusion differ greatly. Compare and contrast the rationale for indexing according to both of these schools of thought.arrow_forwardThe small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.arrow_forwardHow can investors and market participants navigate the presence of anomalies and the potential for abnormal returns while managing associated risks effectively? Are there specific strategies or approaches that you find particularly effective in this content ?arrow_forward
- Which of the following statements is false? A. Funding risk is the risk that a firm will not be able to meet its (short-term) financial obligations when due. B. Banks have high levels of liquidity assets and stable funding since the financial crisis. C. Basel II employ the value at risk (VaR) to measure credit risk and operational risk. D. The covariance cannot be measured in units.arrow_forwardWhich of the following is true of Behavioral Finance? Question 24 options: 1) It is a study of how sociological and economic factors drive investor buy-and-sell decisions 2) It argues that investors are always rational in their investment decision and that price anomalies are due to weak form market efficiency 3) It argues that investors often make decisions based on emotions and biases 4) It is a study of how market overreaction and underreaction are explained by the efficient market hypothesisarrow_forwardWhich of the following statements concerning the Efficient Market Hypothesis is correct? Select one: a. Stock market prices are based on speculation not on underlying information b. New information that confirms investor expectations should change stock prices c. Stock prices should slowly respond when unexpected information becomes available d. Careful research can help investors earn abnormal profits e. Your return on investment should reflect the riskiness of your portfolioarrow_forward
- Which failures in risk management systems have had catastrophic consequences in financial markets? Illustrate with examplesarrow_forwardTrue or false : The market is inefficient because some investors in the market suffer from behavioral biases.arrow_forwardProponents of behavioral finance use three concepts to argue that markets are not efficient. What are these arguments?arrow_forward
- Statement 1: Fundamental analysis believe that the historical performance of the stocks and markets areindications of future performanceStatement 2: Fundamental analysis works best in determining market sentiment and factor in the creation ofinvestment or trading decisionsStatement 3: Fundamental analysis will succeed if the analyst finds overlooked data in identifying undervaluedsecuritiesStatement 4: Fundamental analysis works best if all investors are logical and could separate emotions frominvestment decision.Statement 5: Fundamental analysis use charts and patterns that can suggest future activity and to measure asecurity’s intrinsic value.a. Only statements 1 and 3 are correct b. Only statements 2 and 4 are correct c. Only statements 1 and 2 are correct d. Only statements 3 and 4 are correctarrow_forwardWhich one of the following statements is true? Market crashes tend to be accompanied by low market volume. The Asian market crash was followed by a quick recovery. The market crashes of 1929 and 1987 are very similar in both the percentage decline in market value and in the ensuing market recovery. Market crashes tend to follow market bubbles. Market bubbles and crashes prove that financial markets are inefficient.arrow_forwardInflation, recession, and high interest rates are economic events which are characterized as: A. Company-specific risk that can be diversified away. B. Systematic risk that can be diversified away. C. Diversifiable risk. D. Market risk. E. Unsystematic risk that can be diversified away.arrow_forward
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