Question

If your broker has been right in her five previous buy and sell​ recommendations, you should continue to listen to her advice. Is this statement true or​ false?

(a) ​False, although your broker has done well in the​ past, efficient market theory suggests that she has probably been lucky
(b) ​True, for your broker to be right five times in a​ row, she must have superior market information
(c) ​False, although your broker has done well in the​ past, rational market theory suggests that she has probably been lucky
(d)True, brokers often have inside information that is generally not available to the public. You should listen to her and profit from her inside knowledge

Answer 1

The statement is false; according to efficient and rational market theories, past success from a broker doesn't guarantee future success and can be attributed to luck. It's also important to note that using inside information is illegal for trading.

Step-by-step explanation:

The statement 'If your broker has been right in her five previous buy and sell​ recommendations, you should continue to listen to her advice' is a complex one and warrants scrutiny. According to efficient market theory, which is a key concept within the field of finance, it is false to assume that past success guarantees future success. Efficient market theory suggests that the market incorporates all available information into the prices of securities, implying that any previous success is more likely attributed to luck rather than to a consistent advantage or skill.

Furthermore, the statement that brokers often have inside information is incorrect and unethical. Using inside information for trading is illegal, and professional brokers must adhere to regulations that prevent the use of such information. Therefore, while past performance can inform your opinion of the broker's abilities, rational market theory similarly suggests that success in financial markets is inherently unpredictable, and each recommendation should be evaluated on its own merits.