Question

2. Most professional investment managers do not accept the Efficient Market Hypothesis for what reason(s)? a. Most of them consistently outperform market average returns b. The restrictive nature of the EMH assumptions do not reflect actual financial market conditions. c. If the strong form of EMH were true, index funds would dominate and there would be no rationale for active investment management. d. EMH has been disproven. e. b&c 3. Which of the following is true about common stock compared to debt from the corporation's perspective? Less expensive than debt. Offers greater financial flexibility to the company than does debt. Creates a cash flow burden to the company if revenue declines. d. Requires regular dividends as a legal obligation 4. The equation ParrrF+ B* MRP results from? a. CAPM. b. APT ΕΜΗ. d. The latest findings from behavioral finance. Which investor behavior does not reflect a decision making bias proposed by behavioral finance investigators? a. Recency bias. b. Loss aversion c. Regret bias (fear of missing out. d. Strict adherence to risk/return discipline

Answer 1

(Intel PAGE NO.: DATE: 11 2. EMH or Efficient market hypothesis states that stocks are always fairly priced on exchanges and it is not possible for investors to purchase or sell stocks at lower or higher prices than fair value Consider option (a). It is not correct because only about 20-25% of investment mangers ont perform market average returns Consider option (d). EMH has been proven and is still valid because of its underlying hypothesis that consistently outperforming markets awerage retrom is impossible. (d) is incorrect option (6) and (c) are correct, I hence, we choose option (d) as the right one option (6) validity EMH assumptions state that all the einformation arvoulable for a given stock is universally known to all the investors. Howeves, to this is not a practicality: Every investor does his/her own reas research on the stock and hence has different information. This is one such EMH assumption that does not reflect actual financial market conditions. Hence, (b) to correct option (c) validity of EMH is true to larger extent, or say, its strong form is true then there - would be no need for active investment because all stocks reflect fair prices and all information that the givestors have is uniformily available. Hence, only passive investmentcs) will be rewarded ice, index funds, would dominate leaving no rationale for active investment Chanagement. Hence, (c) 6 also correct.

PAGE NO.: DATE : 11 3. Common stock us deft from corporation's perspective option (a) Common stock is less expensive than deft, incorrect, Since, pecking order theory states senior stakeholders will be paid before Junior stakeholders ine, debt holders will be paid before equity (common stock) horders, that is why denty when liquidation of sole of assets as probable, a in such case, debtors will require a lower reform because . of precedence in first night to send payments. option (o) A A Connect Sopa Common stock can be raised in a more convenient and easier manner thom dett. of also provides quick accessitility. Hence, it 6 flexible, at Pron There is no cash flow turden as common stockholders et do not require compulsory dividends. It is at the - discretion of the company to pay dividends or at b. not. Also, liquid nature of common stock relieves the or company of any cash flow burden. option (d) Regular dinstand 6 not a legal obligation, whereas, o n bonds/deft holders enjoy printages of regular incomes a from company as legal obligation, if any,

h. PAGE NO.: DATE: 1 Vares = Rf + B* MRP option (a) CAPM. Of is correct, A CAPM is a model I used to determme relationship between expected returns and market risk (or systematic as non-diversifiable risk). ra= expected return on asset on ref = rick free rate (usually US T-bells ] - $ = risk of investment & plotted against ite portfolid an al market & MRP = expected market return premium an option (6) APT of 6 incorrect because APT stands for Arbitrage Pricing Theory and has formula & ECRDi - ECR); + (E(I) - E(R), )* B option (os Emn. of to incorrect. EMH 6 lefficient Jonso k market Hypothests which does not relate to on the given formula alast are option a latest findings from behavioral finance. Incorrect

PAGE NO.: DATE: 1 / I. option (a) Recency bias. Incorrect. My o o d of is a phenomenon when a person tends to remember or something that has occurred recently rather than what has I happened a while ago, and on option 6 Loss aversion. Incorrect, - of 6 a tendency where people prefer avoiding losses in order to make gans or profits yang option (as Regret bias. Incorrect. Th at The tendency of a person to avoid taking decision ar I decisive actions because of the fear of regnet if the decision al action is a failure in future. COM opion (d) strict adherence to sick/return discipline. Correct This tendeney helps or rather wisists investos to o riskrefum discipline that is following the path of maximum setum - optimum risk. Ny