We are in the tail end of Quarter 3 earnings reporting season in the U.S. markets. Roughly 60 percent of companies that have reported their Q3 earnings so far have reported negative earnings relative to pre-announcement expectations (negative surprises). Roughly 25 percent of companies that have reported their 3Q results have disclosed positive earnings surprises.

A. The markets have posted generally negative reaction to the above reports so far, with broad market index (S&P500) falling roughly 4 percent on pre- announcement period. Assuming that more than 80 percent of all companies have already provided their Q3 information, what do you expect the markets to do in the next 30 days and why? Note: formally, define the process that drives the market dynamics that is consistent with your answer. B. Is this markets behavior consistent with the Efficient Markets Hypothesis? Explain your answer. C. What behavioral anomaly/bias (if any) helps explain the markets behavior you outlined above? Explain your answer. Q4: In the following, which options are correct and which are wrong? The confidence index indicates a strong stock market when the A. Ratio between the average yield on S&P 500 stocks to the average yield on high- grade corporate bonds rises. B. Consumer confidence index rises above its long-term trend. C. Ratio of the average yield on high-grade corporate bonds to the average yield on low-grade corporate bonds rises. D. Demand for bonds declines relative to the demand for equity securities. Explain your answers.