1. Explain the concept of rationality in respect to financial markets.

2. Explain how, according to Shleifer (2000), supporters of EMH reconcile irrationality with efficient markets in the case of:

1. Uncorrelated trading strategies
2. Correlated trading strategies

3. According to neoclassical theories, prices are always set according to asset risk (The CAPM). What are the behavioural implications of this assertion?

4. Briefly explain how the two key building blocks of behavioural finance are incompatible with the notion of efficient capital markets.

6. Clearly explain the following terms:

1. Cognitive psychology
2. Heuristics
3. Cognitive Dissonance

7. According to Hong and Stein (1999) large firms are less prone to mispricing when there is divergence of opinion. Briefly explain this statement.