Questions 3& 4Introduction

Short Answer (35 points total)

To answer questions 3 and 4, refer to the week 12 articles entitledAre Markets Efficient?"by Malkiel and Shleifer, in addition to what we covered in class.

3a. Why do Malkiel, and those who think like him, believe in efficient market theory?

3b. What are three attacks on EMH that Malkiel attributes to the behavioralists?

3c. What does Malkiel believe about the market patterns the behavioralists claim to have discovered?

4a. How does Shleifer define arbitrage? How does he use the concept to argueagainst market efficiency?

4b.Why would the market value of Royal Dutch equal 1.5 times the market value of Shell if efficient market theory is correct?

4c.Why is the Royal Dutch/Shell case something of an embarrassment for EMH?

4d.How does the fact that arbitrage is risky argue against EMH?