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Finance & Accounting
Pages 3 (753 words)
Topic: Behavioural Finance Name Professor Institution Course Date Many studies in the area of behavioural finance suggest that individual investors make systematic errors due to behavioural biases. Do you believe that more sophisticated investors (e.g. equity fund managers) can capitalize on such individual investors’ errors and consistently outperform the market on a risk-adjusted basis?
It is very clear that some of the participants in the market do not make rational decisions which translate to mistakes. However, astute market players get the chance to capitalize on such mistakes. For instance, a rational investor can take the decision to buy when there is market crash resulting from speculative behavior (Mussweiller & Schneller, 2003, p. 124). Given a risk-adjusted basis, rational investors can beat market performance in a consistent manner. According to the perfect market hypothesis, prices reflect the full information about the market. This has the implication that an investor cannot beat the market unless he or she has inside information. A number of indices have been created with the aim of mimicking market performance. Research studies indicate that index funds account for almost 10 percent of the U.S. stock market capitalization and 60 percent of the money flowing into mutual funds. Despite the increasing euphoria towards passive management, there is active management which has enabled investors beat market bearing returns. Behavioral finance insists that investors are irrational in their decisions and that it is easy to partly predict future performance of stocks using their past performance. ...
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