Question

1. What are the two components in the investment decision process? How does market efficiency affect this process? (5 points)

Answer 1

Every investor has his own investment objectives that are determined by short or long term financial needs.The major investment objectives are 1) Increasing Rate of return 2) Reducing the risk.The other objects are safety liquidity and hedging against inflation. Investment in India can broadly be classified into two categories. 1)Risk assets and 2)Risk free asset.

Efficient market hypotheses tells that the market is able to correctly price securities in a timely manner.

Problems of EMH: Firstly,the efficient market hypothesis assumes all investors perceive all available information in precisely in same manner.Secondly, there will be single investor ever able to attain greater profitability than another with the same amount of invested funds.thirdly, there will be no investor should ever be able to meet the market.