UNIVERSITI TUNKU ABDUL RAHMAN FACULTY OF BUSINESS AND FINANCE UBFF3283 PORTFOLIO MANAGEMENT

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TUTORIAL 7

1. Can the market really have a measurable effect on the price behavior of

individual securities? Explain.

2. What is the random walk hypothesis, and how does it apply to stocks? What is an efficient market? How can a market be efficient if its prices behave in a random fashion?

3. Explain why it is difficult, if not impossible, to consistently outperform an

efficient market.

a Does this mean that high rates of return are not available in the stock market?

b. How can an investor earn a high rate of return in an efficient market?

4. What are market anomalies and how do they come about? Do they support or refute the EMH? Briefly describe each of the following: a. The January effect. b. The PIE effect. c. The size effect.

5. Briefly define each of the following terms, and describe how it can affect investors’ decisions:

a. Loss aversion b. Representativeness c. Narrow framing d. Overconfidence e. Biased self-attribution

UBFF3283 PORTFOLIO MANAGEMENT

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6. You find the closing prices for a stock you own. You want to use a 10-day moving average to monitor the stock. Calculate the la-day moving average for days 11 through 20. Based on the data in the table below, are there any signals you should act on? Explain.

Day Closing Price Day Closing Price 1 $25.25 11 $30.00 2 26.00 12 30.00 3 27.00 13 31.00 4 28.00 14 31.50 5 27.00 15 31.00 6 28.00 16 32.00 7 27.50 17 29.00 8 29.00 18 29.00 9 27.00 19 28.00 10 28.00 20 27.00