A good part of a company's future prospects are predictable. Given this fact, stock prices can't possibly follow a random walk.
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A good part of a company's future prospects are predictable. Given this fact, stock prices can't possibly follow a random walk.
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- Which of the following are consistent with the efficient market hypothesis? Check all that apply. Changes in stock prices can be accurately predicted by investors. At the market price, the number of people who believe the stock is overvalued exactly equals the number of people who think the stock is undervalued. A positive news release about a company will increase the value and stock price for that firm. Some investors cite the existence of anomalies—observations that do not fit the model—as evidence that stock markets are not efficient. Which of the following are such anomalies? Check all that apply. The best time to sell a stock is late on Wednesday or Friday, whereas the best time to buy a stock is late on Tuesday or Thursday. The movement of stock prices of companies over time is the same as the changes in their earnings. High returns to a stock in one period are associated with even higher returns in a later period. There is a…The small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.Suppose that as the economy moves through a business cycle, risk premiums also change. For example, in a recession, when people are concerned about their jobs, risk tolerance might be lower and risk premiums might be higher. In a booming economy, tolerance for risk might be higher and premiums lower.a. Would a predictably shifting risk premium such as described here be a violation of the efficient market hypothesis?b. How might a cycle of increasing and decreasing risk premiums create an appearance that stock prices “overreact,” first falling excessively and then seeming to recover?
- Many financial economists believe that the random walk model is a gooddescription of the logarithm of stock prices. It implies that the percentagechanges in stock prices are unforecastable. A financial analyst claims to havea new model that makes better predictions than the random walk model.Explain how you would examine the analyst’s claim that his model is superior?What are efficient markets? Imagine if the price of a stock is going up and financial markets are efficient what can you tell us about the nature of the stock? What if the markets are inefficient then how would you react to increasing prices for a particular stock?No matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?
- Hello! How will you know if you think a certain stock will be more or less volatile in terms of price movements?If the expected rate of return on a stock is less than the required rate of return, The stock is experiencing supernormal growth. The stock should not be bought. The company is probably not trying to maximize its stock price. The stock is a good buy. Dividends are not being declared.Which of the following sources of market inefficiency would be most easily exploited?a. A stock price drops suddenly due to a large sale by an institution.b. A stock is overpriced because traders are restricted from short sales.c. Stocks are overvalued because investors are exuberant over increased productivity in the economy.
- Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. b. The beta of an "average stock," or "the market," can change over time, sometimes drastically. c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. d. All of the statements above are true. e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.“When the stock market declines the net worth of companies decreases, causing the problem of asymmetric information to decrease as well.” Is this statement true, false, or uncertain? Explain your answer.5. If stock prices follow a random walk, their prices bear no relation to the company's real activities. True/False?
