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Chapter 7: Q.18 (page 210)

Assume that the efficient market hypothesis holds. Marcos has been recently hired by a brokerage firm and claims that he now has access to the best market information. However, he is the 鈥渘ew guy,鈥� and no one at the firm tells him much about the business. Would you expect Marcos鈥檚 clients to be better or worse off than the rest of the firm鈥檚 clients?

Short Answer

Expert verified

According to the efficient market hypothesis, the individual who knows more about the job would be able to attract better clients than the one who does not. As a result, Marcos is expected to have worse clientele than the other brokers.

Step by step solution

01

Efficiency market hypothesis : 

It relates to the belief that an investor cannot beat the market and that it is impossible for an investor to outperform the market in terms of share price since the stock price is already created on the basis of the investor's future predictions.

02

Explanation : 

Marcos is a new broker in the company who has recently joined and does not have the same level of knowledge and expertise as the other brokers. Marcos's clients will be worse off than other clients due to his lack of understanding about the firm's actions, just as a participant who is unfamiliar with market efficiency will not profit.

According to the efficient market hypothesis, the individual who knows more about the job would be able to attract better clients than the one who does not. As a result, Marcos is expected to have worse clientele than the other brokers.

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Most popular questions from this chapter

Suppose that in every last week of November stock prices go up by an average of 3%. Would this constitute evidence in favor of or against the efficient market hypothesis?

If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?

In the late 1990s, as information technology advanced rapidly and the Internet was widely developed, U.S. stock markets soared, peaking in early 2001. Later that year, these markets began to unwind and then crashed, with many commentators identifying the previous few years as a 鈥渟tock market bubble.鈥� How might it be possible for this episode to be a bubble but still adhere to the efficient market hypothesis?

What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to the problem of estimating bond cash flows. Which security would you predict to be more volatile?

The Internet is a great source of information on stock prices and stock price movements. Yahoo Finance is a great source for stock market data. Go to http://finance .yahoo.com and click on 鈥淢arkets,鈥� then 鈥淲orld Indices,鈥� and then the DJI symbol to view current data on the Dow Jones Industrial Average. Click on the chart to manipulate the different variables. Change the time range and observe the stock trend over various intervals. Have stock prices been going up or down over the past day, week, three months, and year?
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