The reading Markets as Institutions have an exercise on the 69 do the number 5:

5. Some economists think that the medieval "just price" doctrine is antiquated, if not outright ridiculous. They argue that prices should follow the dictates of the market. Nonetheless, research on the "Ultimatum Game" (covered in Chapter 2) appears to show that people can have extremely strong opinions about what is just and may behave in accordance with these beliefs. Do you believe the two perspectives on prices can coexist? What are some of the potential problems?

Choose the best multiple choice:

When considering both their assets and their liabilities many institutions try to immunize their portfolios against interest rate risk. Which of the following is a true statement:

a) When an institution matches the durations of its assets and liabilities, price risk is eliminated but reinvestment risk continues to be a potential problem.

b) When an institution matches the durations of its assets and liabilities, reinvestment risk is eliminated but price risk continues to be a potential problem.

c) Assuming interest rates do not change, if an institution begins by strictly matching the durations of their assets and liabilities they won’t need to rebalance later, even if the durations of their assets and liabilities change over time at different rates.

d) When significant market interest rates changes occur, convexity differences between an institution’s asset and liability positions can create a need to rebalance a previously immunized portfolio.

Which of the following statements is correct?

A. Semistrong-form market efficiency implies that as soon as any public or private information comes into being it is incorporated into stock prices.

B. Weak-form market efficiency implies that recent trends in stock prices are of no use in predicting future stock prices.

C. Market efficiency implies that all stocks should have the same expected return.

D. According to strong-form market efficiency, insiders would find it possible to consistently earn abnormal returns in the stock market even if they have superior knowledge about the company.

E. Studies of the Efficient Markets Hypothesis suggest that neither the weak-form nor the semi-strong forms of efficiency hold, especially for larger companies. However, the market appears to be strong-form efficient because institutional traders make abnormal profits.

Post an approximately 300-word response to the suggested discussion question. There are a number of ways to approach this assignment: consider the reading in relation to its historical or theoretical context; write about an aspect of the week’s reading that you don’t understand, or something that jars you; formulate an insightful question or two about the reading and then attempt to answer your own questions; or respond to another student’s post, building upon it, disagreeing with it, or re-thinking it. In any case, strive for thoughtfulness and nuance.

Suggestion Discussion Question: During the financial crisis of 2007-2009, the U.S. government bailed out some financial institutions while allowing others to fail based on the argument

that some institutions are “too big to fail.” Experts generally agree that government bail-outs of private financial institutions lead to “moral hazard” problems (i.e., a financial institution has an incentive to take on more risk not less when it knows it will be saved). Please comment on the appropriateness and effectiveness of government bail-outs of financial institutions. Explain your opinions and provide supporting evidence.