Question

6. Investors are more concerned with changes in wealth than in returns, per se. This situation suggests that investors:
a. are risk averse.
b. can be loss averse.
c. place more value on gains than on losses of equal magnitude.

7. Two analysts are overheard discussing technical trading rules. One says, "I have noticed over the last year or so that the market rises to about 11,000 and then falls back. It seems to do that every two to three months. At the bottom, it goes to about 10,000 and then rebounds. It's sort of like watching a roller coaster." The market consistently staying in a band between 10,000 and 11,000 is most
likely to be used as evidence against which form of market efficiency?
a. Weak-form efficient.
b. Semi-strong form efficient.
c. Strong-form efficient.

Answer 1

Solution:

Investor who are risk averse will consider risky assets only if they provide compensations for risk via a risk premium.Risk averse investor will prefer assets with low risk.

Loss aversion refers to people's tendency to prefer avoiding losses to acquire gains of equal magnitude.In other words,the value people place on avoiding a certain loss is higher than the value of acquiring a gain of equal size.

Thus when investors are more concerned with changes in wealth than in returns, per se,this situation suggests that investors are loss averse.