Consider the following two statements: (i) The representativeness principle results in an under reaction in share markets.
(ii) The conservatism principle can explain why share prices underreact to new information as long
As there are enough conservative investors.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)Representativeness refers to the tendency for individual stocks to follow the market.

Question

Quizplus · Accepted Answer

Statement (i) is incorrect because the representativeness principle predicts that investors may overreact to new information, leading to excessive price movements. Statement (ii) is correct in that the conservatism principle suggests that investors may be slow to update their beliefs and therefore underreact to new information. However, the condition that there are enough conservative investors is not necessary for this principle to hold.

Consider the Following Two Statements: (I) the Representativeness Principle Results