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Question 8-23I

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Essentials Of Investments
Found in: Page 260
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

Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?

The correct answer is “not necessarily a violation of the efficient market hypothesis”.

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Step by Step Solution

Definition

CAPM is the abbreviated form of a model known as Capital Asset Price Model. It is used by the portfolio managers to project the potential returns of an investment portfolio.

Explanation

In the above scenario, it is likely that the thinly traded stocks may not have performed a considerable amount of market research and hence implies a greater degree of uncertainty. Therefore these are actually risk premia than the violation of any efficient market hypothesis.

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