solution

Assuming that the market is efficient, is each of the following statements true, false, or uncertain? Briefly explain your answers.

1. If the market is efficient, no rational investor will sell individual stocks short.
2. If the market is efficient, no rational investor will buy an individual stock on margin.
3. 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.
4. 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).