Question

Each of the following is a well-known stock price anomaly except that …

A. investors sell winners too early and hold on to losers too long.

B. stocks that have exceptionally high Book-to-Market ratio earn higher returns.

C. stock-price momentum helps forecast future returns.

D. stocks with the largest market cap earn lower returns than stocks with smaller market cap.

The joint hypothesis problem refers to the fact that tests of market efficiency must test two theories simultaneously. A commonly-seen example of this problem involves these two theories:

A. the CAPM and Prospect theory

B. the efficient frontier and two fund separation

C. the risk-free asset and the market portfolio, or two fund separation

D. markets are efficient and a model of returns (such as the CAPM)

Answer 1

Q1) A) investors sell winners too early and hold on to losers too long

Explanation: It is a bias called loss aversion bias. This is due to the investors being emotional. Rest of them are anomalybwhich affects stock price.

Q2) D) markets are efficient and a model of returns (such as the CAPM)

Explanation: Joint hypothesis problem implies that market efficiency is not testable. Any attempt to test for market efficiency must involve asset pricing models so that there are expected returns to compare to real returns.