Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 10, Problem 9CTCR
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About market efficiency, which of the following statements is right:a. In a highly efficient stock market, it is almost impossible for an investor to make profit from the stock market.b. In a highly efficient stock market, some smart investors can definitely beat the market even without the inside information. c. An investor can make profit by buying the stock of free Inc. since it just reported that the half-year profit doubled with respect to that during the same period in the last year. d. The stock prices of big companies are closer to their intrinsic values than those of small companies since more people follow those big companies, whereas few people follow those small companies.
History suggests that all stock market bubbles will eventually pop and cause severe financial loss for many of those who purchased stock. Given this history, do you think that stock market bubbles will continue to occur? Why or why not?
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…
Chapter 10 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10.1 - Prob. 10.1ACQCh. 10.1 - Why are unrealized capital gains or losses...Ch. 10.1 - What is the difference between a dollar return and...Ch. 10.2 - Prob. 10.2ACQCh. 10.2 - Prob. 10.2BCQCh. 10.2 - Prob. 10.2CCQCh. 10.2 - Prob. 10.2DCQCh. 10.2 - Prob. 10.2ECQCh. 10.2 - Prob. 10.2FCQCh. 10.3 - What do we mean by excess return and risk premium?
Ch. 10.3 - Prob. 10.3BCQCh. 10.3 - Prob. 10.3CCQCh. 10.3 - What is the first lesson from capital market...Ch. 10.4 - In words, how do we calculate a variance? A...Ch. 10.4 - Prob. 10.4BCQCh. 10.4 - Prob. 10.4CCQCh. 10.4 - What is the second lesson from capital market...Ch. 10.5 - Prob. 10.5ACQCh. 10.5 - Prob. 10.5BCQCh. 10.6 - What is an efficient market?Ch. 10.6 - Prob. 10.6BCQCh. 10 - Section 10.1Say you buy a share of stock for 50....Ch. 10 - Prob. 10.3CCh. 10 - Prob. 10.4CCh. 10 - Prob. 10.5CCh. 10 - Prob. 10.6CCh. 10 - Prob. 1CTCRCh. 10 - Prob. 2CTCRCh. 10 - Risk and Return. We have seen that over long...Ch. 10 - Market Efficiency Implications. Explain why a...Ch. 10 - Prob. 5CTCRCh. 10 - Prob. 6CTCRCh. 10 - Prob. 7CTCRCh. 10 - Prob. 8CTCRCh. 10 - Efficient Markets Hypothesis. There are several...Ch. 10 - Prob. 10CTCRCh. 10 - Prob. 1QPCh. 10 - Prob. 2QPCh. 10 - Prob. 3QPCh. 10 - Prob. 4QPCh. 10 - Nominal versus Real Returns. What was the...Ch. 10 - Bond Returns. What is the historical real return...Ch. 10 - Prob. 7QPCh. 10 - Prob. 8QPCh. 10 - Prob. 9QPCh. 10 - Calculating Real Returns and Risk Premiums. For...Ch. 10 - Prob. 11QPCh. 10 - Prob. 12QPCh. 10 - Calculating Returns. You purchased a zero-coupon...Ch. 10 - Prob. 14QPCh. 10 - Prob. 15QPCh. 10 - Calculating Real Returns. Refer to Table 10.1....Ch. 10 - Return Distributions. Refer back to Figure 10.10....Ch. 10 - Prob. 18QPCh. 10 - Prob. 19QPCh. 10 - Arithmetic and Geometric Returns. A stock has had...Ch. 10 - Prob. 21QPCh. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Prob. 24QPCh. 10 - Prob. 25QPCh. 10 - Prob. 26QPCh. 10 - Prob. 27QPCh. 10 - Prob. 28QPCh. 10 - Prob. 1CCCh. 10 - Prob. 2CCCh. 10 - Prob. 3CCCh. 10 - Prob. 4CCCh. 10 - Prob. 5CC
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- Investment Performance. It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient?arrow_forwardWhich of the following is TRUE? a. A bull market is where stocks, on average, are expected to go up in the near future. b. A bull market is the primary market where IPO's are introduced. c. A bull market is a situation where the price of stock in that market has been rising over a fairly long period of time d. A bull market is a market where there are more buyers than sellers, there have been more purchases of stock than sales of stock and a lot of stock is traded every day.arrow_forward. It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient? (arrow_forward
- Peter Lynch is one of the most successful active investor who has generated an average return of more than 25% per year over a period of one and a half decades, which has outperformed the stock market of 12% many times over.(a) Judge the relevance of the efficient market hypothesis in Peter Lynch’s case. Your answer should not exceed 200 words.(b) Discuss your investment strategy assuming the efficient market hypothesis holds true. Your answer should not exceed 200 words.arrow_forwardYou have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What are two potential tests that can be conducted to verify the CAPM? What are the results of such tests? What is Roll’s critique of CAPM tests?arrow_forwardMy class is called Quantitative analysis, so I believe it falls under Statistics. My question is: As a financial advisor, you are assigned a new client who is considering investing in one of two stocks, A or B. The table below shows information about the performance of stocks A and B last year. Return Standard Deviation Stock A 15 % 8.3% Stock B 14% 2.1% As a financial advisor, are there factors other than return and risk that should be considered in making this decision? Based on these factors, what stock would you recommend to the client? What reasons will you convey to your client to justify your decision in recommending this stock? How will this recommendation impact the client? I just need help with part 4arrow_forward
- Which one of the following would provide evidence against the semistrong form of the efficient market theory?a. About 50% of pension funds outperform the market in any year.b. All investors have learned to exploit management signals about the future performance of the firm.c. Trend analysis is worthless in determining stock prices.d. Low P/E stocks tend to have positive abnormal returns over the long run.arrow_forwardThe efficient markets hypothesis identifies three forms of market efficiency. (a) You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency? (b) If the weak form of the efficient market hypothesis is valid, must the strong form also hold? Conversely, does strong form efficiency imply weak form efficiency? (c) Stock XYZ, which traded for several months at a price of K72, and then declines to K65. if the stock eventually begins to increase in price, K72 is considered a resistance level because investors who bought originally at K72 will be eager to sell their shares as soon as they can break even on their investment. If everyone in the market believes in resistance levels, why do these beliefs not become self-fulfilling prophecies?arrow_forwardAs the economy goes through highs and lows, investors with stock in various companies can face significant risk, and significant benefits. How do you see the stock market affecting your own investing plans in the future? What types of risks do investors take? Do you have any companies you follow thru their stock prices?arrow_forward
- Which of the following hypothetical phenomena would be either consistent with or a violation of the efficient market hypothesis? Explain briefly.a. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year.b. Money managers who outperform the market (on a risk-adjusted basis) in one year are likely to outperform the market in the following year.c. Stock prices tend to be predictably more volatile in January than in other months.d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February.arrow_forwardIn a few sentences, answer the following question as completely as you can. Imagine you are the treasurer of a small manufacturing firm. Your firm is planning to go public (i.e., sell stock to investors for the first time). One unresolved question concerns the market’s required return on the stock. Given what you have learned, how do you think the required return will affect the market value of your firm’s stock? How would you go about estimating this rate?arrow_forwardIn relation to the efficient markets hypothesis, consider the following observations: Mutual fund managers do not on average make superior returns. In any year approximately 50 percent of all pension funds outperform the market. It is possible to make superior returns by buying or selling stocks after the announcement of an abnormal rise in earnings. Managers who trade in their own stocks make superior returns. Which of the following statements is true? I does not provide evidence against semi-strongform efficiency, but II does provide evidence against semi-strong form efficiency. II does not provide evidence against semi-strongform efficiency, but I does provide evidence against semi-strong form efficiency. Both I and II provide evidence against the semi-strongform of market efficiency III provides evidence against semi-strong form efficiency and IV provides evidence against strongform efficiency. III and IV provide evidence against semi-strong form efficiency.arrow_forward
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