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Question 5B

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Essentials Of Investments
Found in: Page 258
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

At a cocktail party, your co-worker tells you that he has beaten the market for each of the last three years. Suppose you believe him. Does this shake your belief in efficient markets?

The correct answer is NO.

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Step by Step Solution

Definition

The Random Walk Theory suggests that the past stock prices or previous market trends cannot be relied upon to predict its future movement.

Explanation

As per this theory there would naturally be some people who would beat the market while others would not. Also the higher, the risk for investments, there would have higher returns too.

Therefore there is no harm in believing him without violating the EMH.

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