Provide an analysis of how the following investment patterns can be explained using theories of behavioral finance. Once a firm's current earnings become known, the information content should be quickly digested by investors and incorporated into the efficient market price. However, if the security’s price is close to its 52-week high, investors are reluctant to bid prices up even if the company has an extremely positive earnings surprise.
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Provide an analysis of how the following investment patterns can be explained using theories of behavioral finance.
Once a firm's current earnings become known, the information content should be quickly digested
by investors and incorporated into the
to its 52-week high, investors are reluctant to bid prices up even if the company has an extremely
positive earnings surprise.
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Solved in 2 steps
- Jolie Corp.is looking into the following transcations to change its risk profile. Which of the following transcations will for sure increase the risk-estimate of the company (and increase the borrowing interest rate) from the z-score perspective. Mark all that apply; more than one answer could be correct. Sold held-to maturity investments for a profit Write-off some obsolete inventory Collect cash from accounts receivable Buy long-term investments withcashAssess the following statements: I. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. II. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. III. Based on the expectations theoly of the term structure of interest rates, a flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future. IV. The forward rate is commonly used to represent the market's forecast of the future interest rate. All statements are correct. Only one statement is correct. Two statements are correct. OOnly one statement is incorrect.Suppose the market is strong from efficient. Can you expect to earn excess returns if you make trades based on: a. An analyst’s forecasts about future company earnings? b. Rumours about the takeover of a firm? c. A company’s announcement of a successful prototype launch?
- Investors invest in a firm because they are motivated by the potential return on their investment. In evaluating a firm's potential for delivering that rate of return, what do they most look for in a firm's projections? The firm's ability to pay dividends The firm's plans to stock up on inventory in order to never run out of stock The firm's plans to extend credit terms to customers in order to gain more sales The firm's ability to generate cash by liquidating its marketable securities portfolioAnalysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good. If a firm takes steps that increase its expected future ROE, its stock price will increase. Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has: High ROE and high risk High ROE and low riskAnswer quickly After making an investment, an investor learns that Intel stock is now undervalued. This is an illustration of a. Market Interruption b. Portfolio Management c. Security Analysis d. Asset Allocation
- Which of the following is FALSE regarding advantages and disadvantages of the SML or CAPM? ) The model does NOT consider systematic risk. ) The model relies on the past to predict the future, which is not always reliable. The model is applicable to all companies, as long as beta is available. () The user must estimate the expected market risk premium, which varies over time. A company's beta can vary over time. Next Page Page 30 of 30 Previous Page Submit Quiz O of 30 questions savedAnalysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company's ROE numbers look good. If a firm takes steps that increase its expected future ROE, its stock price will Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has: O High ROE and high risk O High ROE and low risk increase. Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a comparative analysis for the current year, you would: O Compare the firm's financial ratios with other firms in the industry for the current year Compare the firm's financial ratios for the current year with its ratios in previous years You decide also to conduct a qualitative analysis…Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above-average returns without assuming higher risk.The semistrong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information’s full effects.a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above.c. Discuss reasons why an investor might choose not to index even if the markets were, in fact,…
- Give your thoughts on the prompts below Firms use market capitalization when considering the market value added. We have seen that a number of things can affect capitalization values, so is this really the best method to use? A well known company recently had a 20-1 stock split that drew a lot of attention...how does this affect their market value added? Administrative errors can have a big impact in receivables turnover and payment delay ratios, so companies should include administrative and other indirect costs in the calculations of those ratios. Agree or Disagree and defend your answer.a) What is the similarity between the internal rate of return of a project and the yield-to-maturity of a bond? b) "If a stock had high returns so far, it will have low returns in the future". Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there. c) A salt sprinkler manufacturer considers making an investment in a ball-point pen factory. Explain how you would evaluate this investment project and discuss the appropriate discount rate to use. d) Explain how you could earn a positive return by following a momentum strategy.Suppose that you're an investment banker pitching a valuation to a potential acquirer. The acquirer's CFO asks how your valuation would be affected by significantly higher than expected inflation. You explain that the target firm's: -Pricing power over customers enables it to raise nominal prices by the same proportion as nominal costs would increase; and that -Required nominal returns and terminal growth rates would rise by roughly equal amounts. In aggregate this is likely to result in an equity valuation that's: Select one: a. Significantly higher. b. Largely unchanged. c. Significantly lower. d. Not enough information. (Please all options information and correct answer)
