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1) Suppose that an investment manager has produced higher returns than the S&P 500 index every...

1) Suppose that an investment manager has produced higher returns than the S&P 500 index every year for the last 5 years. Explain how efficient market hypothesis and behavioral finance would differ in their explanations of this phenomenon.

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Answer #1

According to efficient market hypothesis explanation : The over performance of the investment manager is on account of weak form of efficient market hypothesis, where out performance is due to random nature of stocks or luck.

According to behavioral finance explanation : Markets are not rational all the time. There are cases where it is irrational and the investment manager would have picked up stocks that were undervalued and hence benefited through out performance of the market.

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