Question

The Stock Market and Efficient Markets

True/False

1. Expectations that are formed solely on the basis of past information are know as rational expectations.

2. The theory of rational expectations argues that optimal forecasts need not be perfectly accurate.

3. An important implication of rational expectation theory is that when there is a change in the way a variable behaves, the way expectations of this variable are formed will change as well.

4. If the optimal forecast of a return on a financial asset exceeds its equilibrium return, the situation is called an unexploited profit opportunity.

5. In an efficient market, all unexploited profit opportunities will be eliminated.

6. Everyone in a financial market must be well informed about a security if the market is to be considered efficient.

7. The efficient markets theory suggests that published reports of financial analysts can guarantee that individuals who use this information will outperform the market.

8. The overwhelming majority of statistical studies indicate that financial analysts do indeed pick financial portfolios that outperform the market average.

9. According to the efficient markets hypothesis, picking stocks by throwing darts at the financial page is an inferior strategy compared to employing the advice of financial analysts.

Answer 1

1.

False

It is a case of adaptive expectations.

2.

True

It can deviate from the perfect and accurate forecast.

3.

True

With change in variables and its values, the outcome will also change.

4.

True

It means that profit earning opportunity is present, but not yet capitalized upon it.

5.

True

Efficient market means, market has absorbed all types of information. It eliminates the unexploited opportunities.

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