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Chapter 7: Q.12 (page 210)

If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?

Short Answer

Expert verified

Yes, one can seek guidance from a reputable expert, but buying and selling stocks should be based only on market performance.

Step by step solution

01

Rational expectations theory :

It is the belief that a person picks the optimal decision based on the information available and previous experiences. The rational expectation theory's major motivation is to analyze the predicted inflation rate.

02

Explanation : 

It is not necessary, if a broker's advise has been accurate in the last several years in terms of buying and selling recommendations, then his advice will continue to be correct in the future. The market is completely unpredictable, but it also offers inescapable profit chances. As a result, the market might often behave radically contrary to predictions. Yes, one can seek guidance from a reputable expert, but buying and selling stocks should be based only on market performance.

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Most popular questions from this chapter

What are the implications of behavioral finance?

In the late 1990s, as information technology advanced rapidly and the Internet was widely developed, U.S. stock markets soared, peaking in early 2001. Later that year, these markets began to unwind and then crashed, with many commentators identifying the previous few years as a “stock market bubble.” How might it be possible for this episode to be a bubble but still adhere to the efficient market hypothesis?

Firms in a perfectly competitive market are said to be “price takers”—that is, once the market determines an

equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market,

but you are not happy with its price, would you raise the price, even by a cent?

The Internet is a great source of information on stock prices and stock price movements. Yahoo Finance is a great source for stock market data. Go to http://finance .yahoo.com and click on “Markets,” then “World Indices,” and then the DJI symbol to view current data on the Dow Jones Industrial Average. Click on the chart to manipulate the different variables. Change the time range and observe the stock trend over various intervals. Have stock prices been going up or down over the past day, week, three months, and year?

Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supply has sharply increased in the past week, you should go out and buy stocks? Why or why not?
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