Suppose we observe from market data that, for a given non-dividend paying stock, F, ±Soer. What might explain the inequality in this relationship (i.e. why don't we observeFo = Soe"T) if markets are efficient? Hint: try to identify real-world market frictions thatmight cause cases where Fo + Soe™" does not result in arbitrage opportunities

Futures: It represents the contract where the buyer agrees to buy the asset or the seller agrees to…

Suppose we observe from market data that, for a given non-dividend paying stock, Fo # SoerT. What might explain the inequality in this relationship (i.e. why don't we observe F₁ = Soe¹¹) if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where Fo # Soer does not result in arbitrage opportunities

Suppose we observe from market data that, for a given non-dividend paying stock, Fo # SoerT. What might explain the inequality in this relationship (i.e. why don't we observe F₁ = Soe¹¹) if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where Fo # Soer does not result in arbitrage opportunities

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 11MC

See similar textbooks

Similar questions

Suppose we observe from market data that, for a given non-dividend paying stock, See ImageWhat might explain the inequality in this relationship, is markets are efficient or does result in arbitrage opportunities?
Regarding Efficient Market Hypothesis (EMH), which of the following statements is TRUE? Investors in the market are assumed to be rational and own private information. If the semi-strong form of EMH is true, all information contained in the history of past prices has been reflected by the current price. If the semi-strong form of EMH is true, you cannot beat the market by trading on private information. Post-earnings announcement drift is consistent with the semi-strong form of EMH.
Strong form efficient market hypothesis states that stock prices reflects all the information in a market. The information may be public or private (i.e., insider information about the market) and such information will not benefit an investor in the form of higher returns.
Which is true in relation to stock market efficiency? A.Market Price and Intrinsic value are inputs in determining whether a share is overvalued or undervalued B. If markets are truly efficient, each share prices should have a high deviation from its intrinsic value C. Intrinsic Value is readily observed from the stock market daily reports D. Large companies which is followed by many analyst are generally considered as highly inefficient
Which of the following statements is most correct? Semi-strong form market efficiency implies that all private and public information is rapidly incorporated into stock prices Market efficiency implies that all stocks should have the same expected return Weak form market efficiency implies that recent trends in stock prices would be of no use in selecting stocks (i.e. technical analysis is a waste of time)
Which of the following statements is most correct? Why?* a. If a market is weak-form efficient, this means that prices rapidly reflect all available public information. b. If a market is weak-form efficient, this means that you can expect to beat the market by using technical analysis that relies on the charting of past prices. c. If a market is strong-form efficient, this means that all stocks should have the same expected return. d. All of the statements above are correct. c. None of the statements above is correct.
Based on the results from Fama and French, does it matter for the Efficient Markets Hypothesis if value stocks are riskier than growth stocks, or if growth stocks are riskier than value stocks? Why or why not?
When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs. a. true b. false
Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?
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?
Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock? a) Because the earning multiples are easily found in online financial databases. b) Earnings per share is a known amount that is related to the payment of future dividends. c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute. d) The price-earnings method has been shown to provide the most accurate price estimate.
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?