Chapter 5 2. The fact that government bonds make a elevateder(prenominal) rate of return than common telephone circuits in one year is non indicate that investors are dead willing to settle for lower returns on stocks than bonds. It means that investors expectations were non met, or alternatively that investors were surprised. To take on additional risk, risk-averse investors necessitate additional expected return. But expected returns are not the same as realized returns. Be military campaign stocks and bonds are risky, their returns will vary from year to year, and bonds will earn higher(prenominal) returns than stocks in few years. But the expected returns of common stocks should always be higher than the expected returns of government bonds. 4. Earning high returns in an efficient grocery store is like come onning at roulette. In any haphazard process, there will be throw outners and losers, and some winners might win big. Earning consistently high returns over time is also affirmable in an efficient market, just like a gambler on a lucky streak might win repeatedly at roulette. The relevant questions are whether the very high returns or the length of the winning streak is inconsistent with machination luck or not. 6.a.
The market would be inefficient because it is not responding rapidly to new information. b. Buy the targets stock immediately on the announcement. Sell in four days after it has risen and pocket a nice profit. c. If more investors pursued this strategy, the increased demand on announcement would cause the determine to jump sharply immediately after the announcement. The price response would become efficient. d. This problem illustrates the statement. People discover an inefficiency, and in the process of capitalizing on the inefficiency, they drive it away. e. This is not necessarily evidence of market inefficiency. If investors expect the bid to be followed by higher bids from other potential buyers, the market will rationally and...If you desire to get a full essay, order it on our website: Orderessay
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