Question

Q1:

Representativeness, according to financial economists, leads to:

• strong form efficient financial markets.

• stable stock returns over both short and long periods of time.

• stock price under reactions to new information.

• abnormal long-term profits.

• overreactions in stock returns.

Q2:

The efficient market hypothesis says that, on average, professional investors will:

• tend to earn below average rates of returns.

• outperform investors with inside information.

• earn a normal rate of return.

• earn the same rate of return over time regardless of the risk assumed.

• tend to outperform most market participants.

Answer 1

Q. 1) Reprentativeness according to financial economists leads to over reactions in stock returns.

Reason : Strong form efficient financial markets is a component of efficient market hypothesis.

Reprentativeness leads to overreactions & not stable stock return over any period of time.

Stock price under reaction to new information means a conservatism.

It is not related to long term profits as it affects the stock return.

Q. 2) The efficient market hypothesis says that on average professional investors will tend to outperform the most market participants.

Reason : Efficient market hypothesis assumes that market has all public information related to stock, so investor can not out perform with the inside information.

Further returns are based on the level of risk assumed. One can earn above or below average return.