The schweser solution says that EMH assumes that markets are rational but it *DOES NOT* assume that INVESTORS are rational. Is this correct ? I am looking at the schweser notes and it seems to say that “investors exhibit three major characteristics, one one of which is rational expectations” Pg 208, schweser notes, Book 1. It again repeats the same information on page 272 in the warm up section. It says that traditional finance assumes that investors *ARE rational*. I hate Schweser making contradictory statements. Could someone please clarify…
Remember this one. My opinion is that they are just bullshitting. Outation from CFAI curriculum: “Rational expectations assume that investors are coherent, accurate, and unbiased forecasters.” Hence rational
Turkya whats the page # and volume? wantd to read up on this?
Another random reasoning for Schewer on ques 19.3 (Volume II, 2 PM )… “If there is a forward premium on a currency, it *does not* posit that foward rates have predictive power for future spot rates.” Is this test written to confuse the heck out of people at the last stage? I heard people saying that the test was one of the better ones by schweser but I think some of the answers are just plain wrong !
that is true. why wouldy ou assume just because there a premium forwards have predictive future power?
comp_sci_kid Wrote: ------------------------------------------------------- > Turkya whats the page # and volume? wantd to read > up on this? Vol 2, Reading 15, p158 they give a short summary of traditional finance theory and then a summary of behavioral finance
Maybe I am wrong then but I did a search online for this and found the following information at this site http://www.msfin.acc.chula.ac.th/node/480 “The non-parametric approach shows that the forward rate is an unbiased predictor of the future spot exchange rate in both exchange rate systems. Therefore, we can hedge exchange rate exposure by using the forward exchange rate.” I don’t know what is correct.
I don’t want to confuse anyone but found more information here … so CSK, you are correct. http://www.cepr.org/PUBS/Bulletin/dps/dp773.htm “Numerous studies show, however, that the forward rate is not the best predictor of the future spot rate; indeed it tends to mispredict the direction of subsequent spot rate changes. Some authors attribute this rejection of the `simple efficiency hypothesis’ to a risk premium and others to inefficient information processing by market participants, but studies using survey data on expected exchange rate changes indicate that the risk premium cannot fully explain this phenomenon. Many economists therefore dismiss the forward rate as containing little information concerning subsequent spot rate movements.”
Well, if several economists are debating about this then I am certainly no expert 
CSK, you are great !
i think over all this exam was badly written