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Chapter 7: Q.21 (page 210)

What are the implications of behavioral finance?

Short Answer

Expert verified

According to behavioral finance, when stock prices rise, investors are less likely to engage in short sells, resulting in missed profit chances.

Step by step solution

01

Stock market :  

A market where businesses may register and sell long-term debt and securities to the general public.

02

Explanation : 

According to behavioral finance, when stock prices rise, investors are less likely to engage in short sells, resulting in missed profit chances. According to behavioral finance, investors favor the upside risk above the negative risk. Short selling might appear to be a crime since it involves benefitting off the misfortunes of others.

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Most popular questions from this chapter

Suppose that you are a trader at the stock market. T-Mobile’s stocks currently trade at $45and the expected return is 9%. You have information that leads you to believe that by the end of year the company’s returns will be around 40%. Are your expectations optimal? How will your behavior influence the stock price?

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?

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?

Suppose that you are asked to forecast future stock prices of ABC Corporation, so you proceed to collect all available information. The day you announce your forecast, competitors of ABC Corporation announce a brand new plan to merge and reshape the structure of the industry. Would your forecast still be considered optimal?

Visit the Bloomberg Markets website at www.bloomberg .com/markets/stocks. Their interactive graph allows you to see cumulative returns for individual stocks as well as market indices. Over the last five years, which of the three indices appears the most volatile––the S&P 500 (SPX:IND), the Dow Jones Industrial Average (INDU:IND), or the NASDAQ Composite (CCMP:IND)? Which index would have been the best investment if compounded over the last five years?
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