Question

Analyze each of the following investment strategies assuming you believe the “market efficiency” hypothesis (This should be around a page- single-spaced). Which one would likely be the most successful and why?

a. William reads the Wall Street Journal every morning and invests in stocks based on the insights he gains from reading the articles. He actively buys and sells shares based on this information.

b. Sarah has picked 50 stocks on the NYSE based on only buying companies that have the letter “u” in their name. She has never changed the portfolio choices she made initially.

c. Gary works for a law firm that deals with corporate mergers and acquisitions and frequently trades stocks based on the confidential information (i.e. a company is buying another company for a premium or an announced merger is now going to be canceled) he gathers at work.

d. Gibco hedge fund has developed a tool using supercomputing technology that can predict state primary election outcomes and the effect on the NYSE in the first hour of trading the day after the primary. Their predictive model has never been wrong.

e. Kelly has invested in an S&P Index ETF and has not changed her portfolio since her initial purchases.

Answer 1

Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.

I thin William would be most successful in his investments because:-

i) He actively and regularly monitors the news and articles and the information about companies, through which he gains insights and uses that as a tool to make his decision of investing. In this way he will capture all the ups and downs of the market and also his portfolio will be diversified so that he can mititgate any risk.

ii) Sara is using no logic behind her investment and she went by picking stocks with "u" in them. While this instict can result in profits if the stocks do well, they can hit her bad if they are not doing well.

iii) Gary is misusing confidential information to his own benefits resulting in insider trading, which is illegal.

iv) Gibco's approach and tool are good, however it will capture changes only related to election.

v) Kelly also has a good investment approach, but she doesnt change her portfolio, thus she is mititgating her risk by being risk averse, but her returns in turn will be lesser.