In a market in which investors and traders have rational expectations, what should the price of an asset equal?
Give a concise definition of the efficient markets hypothesis. What assumptions does it require about liquidity and information?
If you believe that the stock market is an efficient market, why would an investment strategy of "buy and hold" be a good idea?
Why are fads inconsistent with the predictions of the efficient market hypothesis?
Read
this NYT article discussed in class. (Also see
this,
this, and
this.) Is it possible for one firm to control gasoline prices in this manner? If the thesis is correct, then should the people presenting it be investing in oil and gas futures right now? If it is correct, would there be an effect on current gasoline prices (according to the efficient market hypothesis)?
What is program trading? Does it play a significant role in increasing market volatility? What are some of the other problems with EMH discussed in class today? Why would Warren buffet likely not embrace this hypothesis?
What are transaction costs and how can they be reduced by exploiting economies of scale?
Why do higher interest rates increase adverse selection in the loan market?
Distinguish symmetric information with asymmetric information, and state why the distinction is important for the financial system.
What is the difference between moral hazard and adverse selection? How does each contribute to making information asymmetric?
How is information collection in financial markets is subject to the free rider problem? How do banks overcome the free rider problem?
Explain, verbally and graphically, what the "lemons problem" is. How does the lemons problem lead many firms to borrow from banks rather than from individual investors?
