According to Rational Expectations Theory

question 82

Multiple Choice

According to rational expectations theory,

• A) every day is a new day and yesterday's occurrences have no bearing on today's decisions.
• B) when making decisions a person will consider only information based on past experience.
• C) even though a person considers information related to future events as potentially important for decision making,he realizes that such information is unreliable and worthless.
• D) past experience is a good guide for decision making,but so is information related to possible future outcomes.

---

Definitions:

Market Risk

The risk of losses in investments due to factors that affect the entire market or asset class, such as economic changes or political events.

Firm-specific Risk

The type of risk that affects a particular company or industry, also known as unsystematic risk.

Diversified Away

The risk that can be reduced or eliminated in a portfolio through investments in a variety of assets, thus not tied to the performance of a single investment.

Market Risk

The risk of losses in positions arising from movements in market prices.