Question
a. Explain the importance of market efficiency for the assumed objective of maximizing shareholder wealth.
b. In the past, you have successfully used the following simple trading rule to buy and sell shares: if the stock has risen for the last three days - sell; if the stock has fallen for the last three days - buy. Explain whether or not this is an example of informational efficiency.
c. If a security has a beta greater than 1 but offers an expected return that is less than the expected return on the market portfolio, does the security plot above or below the security market line (SML)?