Parajumble on Behavioral Models in Finance
XAT 2021 · Verbal Ability & Logical Reasoning · Medium · Verbal Ability
Read the following statements and answer the question that follows.
- Behavioral models in finance most often critique the efficient market hypothesis, which states that if investors behave rationally then prices should reflect all available information about the financial asset in consideration.
- A number of behavioral models, including feedback models where investors bid up the price, have been used to explain this phenomenon.
- But asset price bubbles and crashes belie this conclusion.
- Finance is one of the fields where behavioral models have been used extensively, enough for behavioral finance.
- This idea of "irrational exuberance" is now widely accepted and used in financial analysis, especially while analyzing asset price bubbles.
Arrange the above five statements in a logical sequence.
- A.
4, 3, 1, 5, 2
- B.
1, 4, 2, 3, 5
- C.
4, 1, 3, 2, 5
- D.
1, 3, 2, 5, 4
- E.
4, 5, 1, 3, 2
Answer
C
Explanation
Statement 4 introduces behavioral models in finance. Statement 1 details what they critique (EMH). Statement 3 counters EMH with asset price bubbles. Statement 2 explains how behavioral models address this phenomenon. Statement 5 concludes with 'irrational exuberance'. Sequence: 4-1-3-2-5.
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