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Topic: Business
Number of pages / Number of words: 7 / 1721
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Any movement away from the rational expected return on a portfolio is a product of chance and cannot be specified:

The expected value of abnormal returns is zero, but chance generates apparent anomalies that split randomly between over-reaction and under-reaction.

Behavioral finance

In the field of behavioral finance investors are believed to over- or under-react to information presented to them, which leads them to make irrational decisions, contradicting the theory of efficient markets...


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If this is the case, then markets are no longer efficient and it is possible to systematically earn abnormal returns since anomalies exist on the market.

Investors over- and under-react due to being overconfident in their own information.

Psychologists find that people overweight salient information (stands out and captures attention), and give too much consideration to how extreme information is and not enough to its validity...


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