Equity Investments - Equity Investments Section 1
76. In an inefficient market, investors will most likely benefit from a(n):
- Option : B
- Explanation : In an inefficient market, investors might be able to earn superior risk adjusted returns since opportunities for it exist in the market e.g. due to mispricing. However, in an efficient market a passive investment strategy would be preferred to an active strategy for its lower costs and because opportunities for earning superior risk adjusted returns in an efficient market are negligible.
- Option : C
- Explanation : The first two statements are correct as momentum anomalies relate to short-term price patterns, typically resulting from investor overreaction in response to the release of unexpected public information.
79. Which of the following is least likely to explain the January effect anomaly?
- Option : B
- Explanation : Tax-selling and window dressing are two reasons generally given for the January effect.
80. A market anomaly which is inconsistent with weak-form market efficiency is:
- Option : B
- Explanation : A contradiction to weak-form efficiency occurs when securities that have experienced high returns in the short term tend to continue to generate higher returns in subsequent periods. If investors can trade on the basis of momentum and earn abnormal profits, then this anomaly contradicts the weak form of the efficient market hypothesis because it represents a pattern in prices that can be exploited by simply using historical price information.
