a. Securities that have suffered capital losses, demand will increase (the higher is the loss, the greater will be the demand) and for securities that have experienced gains demand will decrease (the higher is the gain, the lower will be the demand). This explains (2 pts.) 1. The disposition effect 2. Bubbles effect 3. Market efficiency 4. Excessive volatility 5. Equity risk premium b. Value stocks are defined as stocks which have a low P/E ratio or low price to cash flow ratio or low price to book value ratio. Growth stocks are defined as stocks which have a high P/E ratio or high price to cash flow ratio or high price to book ratio. (2 pts.) A. True B. False c. The equity premium is the excess of the expected return on a portfolio of fixed-income securities over the expected return on the aggregate stock market. (2 pts.) A. True B. False