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Arguments and evidence from behavioural finance

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Reference no: EM13194778 , Length: 2000 words

The UK insurance industry currently has the following life-expectancy forecasts for people in their early 20s: Men, 82 years; Women, 84 years; at least one partner of a couple, 86 years. Thus, most people on the Behavioural Finance unit have lifetime investment horizons of over 60 years. This is what we mean by the very long term.

For the very long term investor there is something special about the stock market. There are strong arguments and evidence that say that the stock market is the best asset class for the very long term investor. This means that for your very long term future you should be investing in the stock market. So even if your future career has nothing to do with the stock market, you still have to know how the stock market works.

Assignment requirement: Write a 2,000 word essay. In the course of your essay you must answer the following questions (not necessarily in the same order in which they are given):

(1) Explain why the stock market is regarded as the best asset class for the very long term investor.

(2) What is the difference between passive investing and active investing?

(3) If you believe in modern finance and the EMH you will be a passive investor. If you believe that behavioural finance can be applied to very long term stock market investing you will be an active investor. Explain why?

(4) Are you going to be an active or a passive investor? Why?

(5) What does beating the market mean?

(6) Being an active investor is the same thing as trying to beat the market. Explain.

(7) The only justification for being an active rather than a passive investor is that you have good grounds for believing that you can systematically apply the ideas of behavioural finance to consistently beat the market over a time horizon of 60+ years. Explain why the preceding sentence is true.

Suppose your answer to (4) is that you are going to be an active investor. Then answer the following questions.

(1) Explain clearly what very long term active strategies you are going to apply.

(2) Explain why they will work and make sure to explain why they will still be working in 20, 30, 40, 50 or 60 years from now.

(3) Explain what is wrong with the modern finance and EMH arguments and evidence that there is no thing as a very long term strategy for beating the market.

Suppose your answer to (4) is that you are going to be a passive investor. Then answer the following questions.

- What is so convincing about the arguments and evidence from modern finance and the EMH that there is no way of consistently beating the market over the very long term?

- What is wrong with the arguments and evidence from behavioural finance that there might be active strategies that consistently beat the market over the very long term?

Suppose you do not accept the arguments and evidence that the stock market is the best asset class for the very long term investor then spend the whole of your essay answering the following questions.

- What is wrong with the arguments and evidence that the stock market is the best asset class for the very long term investor?

- So how are you going to invest for your very long term future? Back up your answer with arguments and evidence.

Reference no: EM13194778

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