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Securities Market

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Requirement: develop a response, with supporting rationale for Item 7 below, answer also included. Need one to two paragraphs. No cover sheet need. 7. You are trading in a market in which you know there are a few highly skilled traders who are better informed than you are. There are no transaction costs. Each day you randomly choose five stocks to buy and five stocks to sell (by, perhaps, throwing darts at a dartboard). a) Over the long run will your strategy outperform, underperform, or have the same return as a buy and hold strategy of investing in the market portfolio? b) Would your answer to part (a) change if all traders in the market were equally well informed and were equally skilled? Answer Key: a. You will underperform for two reasons: 1) transaction costs and 2) you will lose every time you trade with an informed investor. Of course in this problem only (2) will cause underperformance b. This time the only source of losses are transaction costs. In this case, your trades should break even so you should earn the same return

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