B – George works for a data management company where he performs statistical analysis of big data
Describe and critically discuss prospect theory and the prospective gain/loss based utility.
- Define post earnings announcement drift in stock prices. Describe how various cognitive biases and disposition behaviour on the part of investors might be causing this phenomenon. Discuss the empirical checks we have discussed that aim to determine which of the various hypotheses regarding what may be behind post earnings announcement drift might have greater support from the data. Finally, discuss how momentum profits may arise if post earnings announcement drift happens regularly in stock markets.
- Evidence suggests that individuals’ savings are insufficient for their retirement and the resulting pension shortfall is accentuated by poor investment choices. What psychological theories have been used to explain these phenomena? How can these theories be used to ‘nudge’ individuals into making better choices?
- “The presence of arbitrageurs ensures asset prices do not deviate substantially from fundamental values”. Critically evaluate this claim with reference to both theoretical and empirical evidence.
- The following is an excerpt from Piotroski (2000)
“Prior research (Rosenberg, Reid, and Lanstein , Fama and French , and Lakonishok, Shleifer, and Vishny ) shows that a portfolio of high BM firms outperforms a portfolio of low BM firms. Such strong return performance has been attributed to both market efficiency and market inefficiency.”
Critically discuss both the market efficiency and market inefficiency based explanations to why we have been observing high book-to-market (BM) firms outperforming low BM ones. Make sure you include the empirical findings in support of either the market efficiency based argument or the market inefficiency based arguments in your essay.
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