Question
Please read the following situation and answer the questions. Please be specific, give reasons and create links to theoretical concepts while answering the questions. A.
Please read the following situation and answer the questions. Please be specific, give reasons and create links to theoretical concepts while answering the questions.
A. Mr Ali wants has finally decided to invest in ABC company because he observe through publical information that it performed well in past. He is not considering the funds invested in T-bills, which he has separated for his daughters marriage. Moreover, he is not considering selling one of his U.S. bond funds to raise cash to buy the Pogo Island bonds. One possibility is my High Yield Bond Fund, which has declined 5% in value year to date. I am not excited about this funds prospects; in fact, I think it is likely to decline more, but there is a small probability that it could recover very quickly. So I have decided instead to sell my Core Bond Fund that has appreciated 5% this year. I expect this investment to continue to deliver attractive returns, but there is a small chance this years gains might disappear quickly.
Additionally, Mr. Ali observes that market is not that much efficient and he has identified certain mispriced securities but he does not take long position in those undervalued stocks to beat the market.
- Looking at the Mr. Alis approach of investment in ABC company, what form of Efficient Market Hypothesis you think market holds?
- What behavioural biases i.e., risk seeking, mental accounting etc., you observe in the investment process?
- Which analytical perspective Mr. Ali has ignored in the analysis of ABC company?
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