Chapter 7: Q.21 (page 210)
What are the implications of behavioral finance?
According to behavioral finance, when stock prices rise, investors are less likely to engage in short sells, resulting in missed profit chances.
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Suppose that you are a trader at the stock market. T-Mobile’s stocks currently trade at and the expected return is . You have information that leads you to believe that by the end of year the company’s returns will be around . Are your expectations optimal? How will your behavior influence the stock price?
If you read in the Wall Street Journal that the “smart money” on Wall Street expects stock prices to fall, should you follow that lead and sell all your stocks?
Some economists think that central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used to prick a market bubble? Explain using the Gordon growth model.
“An efficient market is one in which no one ever profits from having better information than the rest of the market participants.” Is this statement true, false, or uncertain? Explain your answer.
Why does entry occur?
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