Answered step by step
Verified Expert Solution
Question
1 Approved Answer
please answer B 1. Below lists a number of possible facts about investor or price behavior. Please ar- ticulate how you would make money by
please answer B
1. Below lists a number of possible facts about investor or price behavior. Please ar- ticulate how you would make money by exploiting these mistakes and the reasoning behind your strategy. The first one is given as an example. (a) Fact: most retail investors naively buy stocks of companies that make products they are familiar with (e.g. McDonald's) and ignore companies they never heard of. Answer: this will tend to make less popular stocks undervalued and pop- ular stocks overvalued. Therefore, I would exploit this by going long the unpopular stocks and short the popular ones. (b) Fact: many investors prefer "lottery stocks: companies that have low prices but have a small probability of price suddenly jumping up by a lot. (Their payoff is similar to lottery). Please explain how you would exploit this fact. (c) Fact: corporate bonds have credit ratings that indicate their default risk. The most highly rated is AAA (almost no default risk), followed by AA, A, BBB, 1 Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started