Assuming that the market is efficient, is each of the following statements true, false, or uncertain? Briefly explain your answers.
- If the market is efficient, no rational investor will sell individual stocks short.
- If the market is efficient, no rational investor will buy an individual stock on margin.
- Because writing a call option offers a potentially limited gain (i.e., the premium), combined with an unlimited potential loss, a proponent of the efficient market hypothesis is unlikely to write a call option on the S&P 500.
- Well-diversified portfolio A offers a return of 10% and a standard deviation of 8%. Well-diversified portfolio B offers a return of 5% and a standard deviation of 4%. No rational investor will choose portfolio B. (Note: Assume that it is rational for an investor to hold an appropriate well diversified portfolio as a stand-alone investment).
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