Q\#2 [40 POINTS] BEHAVIORAL FINANCE 2.1. Answer the following question about the limitations and criticisms of EMH in the form of Behavioral Finance: - Explain how some of the behavioral biases discussed in the chapter might contribute to the success of technical trading rules. - Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit the behavioral biases discussed in the chapter, security prices might still be set efficiently? - What sorts of factors might limit the ability of rational investors to take advantage of any "pricing errors" that result from the actions of "behavioral investors"? - Even if behavioral biases do not affect equilibrium asset prices, why might it still be important for investors to be aware of them? - Some advocates of behavioral finance agree with efficient market advocates that indexing is the optimal investment strategy for most investors. But their reasons for this conclusion differ greatly. Compare and contrast the rationale for indexing according to both of these schools of thought. 2.2. According to Behavioral Finance advocates' arguments, the two sources of irrationalities are 1) inability to process information correctly and 2) behavioral biases. Discuss each of these categories and give some examples for both