Which of the following strategies will be profitable if the market overreacts?

A) selling an undervalued security
B) buying an overvalued security
C) selling an overvalued security
D none of these choices

Question

Which of the following strategies will be profitable if the market overreacts?

A) selling an undervalued security
B) buying an overvalued security
C) selling an overvalued security
D none of these choices

Quizplus · Accepted Answer

An unbiased reaction is one where there is no underreaction or overreaction to the arrival of new information.If the market underreacts to the value of new information,then the market price will fall below fundamental value.Profits can be earned by buying the undervalued security.Conversely,if the market overreacts,then profits can be earned by selling or taking a short position in the overvalued security.An underreaction or overreaction is a biased reaction,and is inconsistent with an efficient price reaction.

Which of the Following Strategies Will Be Profitable If the Market