Session 12: Market Efficiency and Investor Behavior

Question 0

Behavior of individual investors-underdiversification and portfolio bias

Answer 0

• individual investors fail to diversify their portfolios adequately
• familiarity bias (favor companies they are familiar with)
• relative wealth concerns (care more about their portfolio relative to their peers)

Question 1

Three Forms of Market Efficiency

Answer 1

Weak form efficient: past information/historical data
Semi-strong form efficient: all publicly available information
Strong form efficient: all information (even private)
-> illegal, insider information

Question 2

The Behavior of individual investors

Answer 2

• underdiversification and portfolio bias
• excessive trading and overconfidence
• investor attention, mood and experience
• herd behavior
• informational cascade effects