Posted: January 10th, 2016

Behavioural Finance’ proponents dispute assumptions of investor rationality and argue that anomalies to the Efficient Market Hypothesis allow for ‘mispricing’ of assets and the opportunity for abnormal returns.

Financial Investment Analysis.
Assignment One: Efficient Asset Pricing
Background for discussion:
When selecting a portfolio of potential investment opportunities, it is argued that if the market is ‘efficient’ the rational investor should buy equity index mutual funds in an effort to mimic the market at minimal transaction cost, as all relevant ‘news’ information will have already been factored into stock asset prices. However, ‘Behavioural Finance’ proponents dispute assumptions of investor rationality and argue that anomalies to the Efficient Market Hypothesis allow for ‘mispricing’ of assets and the opportunity for abnormal returns.
You are asked to:
1. Explain and critically evaluate the above statements, drawing upon relevant academic literature.
2. Discuss whether investors do this in reality. You may refer to recent case study evidence to support your answer.
Your submission:
• The report should between 1,500 to 2,000 words in length. There will be grading penalties applied for reports that are over or under this word limit.

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