Question
a) Suppose that an investment manager has produced positive alpha every year for the last 5 years. Explain how efficient market hypothesis and behavioral finance
a) Suppose that an investment manager has produced positive alpha every year for the last 5 years. Explain how efficient market hypothesis and behavioral finance would differ in their explanations of this fact.
b) The chart below shows returns for various timeframes for the strategy Dogs of the Dow and two stock market indices. The strategy involves buying the ten stocks in the Dow Jones Industrial Average which have the highest dividend yield (dividend/price) at the beginning of each year. Returns reported are annualized.
Investment Previous 1 year Previous 3 years Previous 5 years Previous 10 years Since 2000
Dogs of the Dow 0.00% 14.80% 11.60% 15.6% 9.0%
Dow Jones Industrial Average -3.5% 13.7% 10.3% 13.6% 7.5% S&P 500 -4.4% 9.8% 8.9% 13.7% 6.4%
Explain how efficient market hypothesis and behavioral finance would differ in their explanations of these results. Which form of market efficiency is being tested?
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