1 a.) When the literature states that there is information in the stock market v
ID: 2664067 • Letter: 1
Question
1 a.) When the literature states that there is information in the stock market volatility which is relevant for explaining documented return anomalies, what anomaly is it referring to? How is the anomaly explained?b.) Assume that a fund manager has two investment style portfolios: one invests in small-value stocks and the other one invests in small-growth stocks. He is using the Russell 1000 growth as a benchmark for his portfolios and claims that he has been able to consistently outperform the benchmark. Which one of his portfolios would you invest in ? Explain your answer
Explanation / Answer
1) a) The given information is relating to insertion anomaly. Insertion aamoly indicates that we cannot insert a fact about one entity until we have an additional fact about other entity. b) Growth and value investing represents two different ways of investing, whose borders are much blurred. Growth stocks are better than value stocks because growth stocks are those stocks that grow over a period of time and show potential for future growth. On the other hand,value stocks are those which the market has overlooked and as a result the price is low and about to increase when the necessary market corrections occur. Value stocks are less volatile than growth stocks. Value stocks are out of favour as it requires long time frames for investment. Hwever to deterine a stock's value, its P/E ratio and future eaning prospects should be determined. Since value stocks are not so favourable, we recommend to invest in growth stocks portfolio which has higher potential for future growth.
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