INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 11, Problem 13PS
A.
Summary Introduction
To determine: Provide proper explanation to the given statement.
Introduction: Stock Markets are highly volatile, and only those investors who are ready to take risk, are eligible for trading in the stock markets.
B.
Summary Introduction
To determine: Provide proper explanation to the given statement.
Introduction: Stock Markets are highly volatile, and only those investors who are ready to take risk, are eligible for trading in the stock markets.
C.
Summary Introduction
To determine: Provide proper explanation to the given statement.
Introduction: Stock Markets are highly volatile, and only those investors who are ready to take risk, are eligible for trading in the stock markets.
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Respond to each of the following comments.a. If stock prices follow a random walk, then capital markets are little different from a casino.b. A good part of a company’s future prospects are predictable. Given this fact, stock prices can’t possibly follow a random walk.c. If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in The Wall Street Journal.
Q1: Respond to each of the following comments:
If stock prices follow a random walk, then capital markets are little different from a casino.
A good part of a company’s future prospects is predictable. Given the ace, stock prices cannot possibly follow a random walk.
If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in the The Wall Street Journal.
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?
Chapter 11 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 11 - Prob. 1PSCh. 11 - Prob. 2PSCh. 11 - Prob. 3PSCh. 11 - Prob. 4PSCh. 11 - Prob. 5PSCh. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Prob. 9PSCh. 11 - Prob. 10PS
Ch. 11 - Prob. 11PSCh. 11 - Prob. 12PSCh. 11 - Prob. 13PSCh. 11 - Prob. 14PSCh. 11 - Prob. 15PSCh. 11 - Prob. 16PSCh. 11 - Prob. 17PSCh. 11 - Prob. 18PSCh. 11 - Prob. 19PSCh. 11 - Prob. 20PSCh. 11 - Prob. 21PSCh. 11 - Prob. 22PSCh. 11 - Prob. 23PSCh. 11 - Prob. 24PSCh. 11 - Prob. 25PSCh. 11 - Prob. 26PSCh. 11 - Prob. 27PSCh. 11 - Prob. 28PSCh. 11 - Prob. 29PSCh. 11 - Prob. 1CPCh. 11 - Prob. 2CPCh. 11 - Prob. 3CPCh. 11 - Prob. 4CPCh. 11 - Prob. 5CPCh. 11 - Prob. 6CPCh. 11 - Prob. 7CPCh. 11 - Prob. 8CPCh. 11 - Prob. 9CPCh. 11 - Prob. 10CP
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- You buy a stock from the capital market. If the capital market is semi-strong efficient, which of the following statements is NOT correct? a. You cannot earn any abnormal returns above the required return by trading on public information. b. Past stock prices can be used to predict future stock prices. c. The technical analysis of publicly available information will not lead to any abnormal returns. d. The stock is fairly priced. e. Stock prices reflect all publicly available information.arrow_forwardAnswer the following questions: A. Explain why the price of many individual stocks still goes down, even when the overall stock market goes up. b. How can you avoid the value of your stock from going down?arrow_forwardWhich 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…arrow_forward
- If the stock market is at least semistrong efficient then, O A. trading on information that you read in The Wall Street Journal or on the internet is unlikely to allow you to purchase stocks that are significantly underpriced. O B. you are likely to find underpriced and overpriced securities by conducting a thorough analysis of a firm's financial statements. O C. you should be able to determine when to buy or to sell a stock by studying the pattern of its historical prices. O D. you cannot expect to find underpriced or overpriced stocks even if you have inside information.arrow_forwardDay traders try to take advantage of the normal ebbs and flows of the market, seeking to buy stocks that are undervalued and sell them when they become overvalued. How does this compare to Warren Buffet’s investing strategy?arrow_forwardA good part of a company's future prospects are predictable. Given this fact, stock prices can't possibly follow a random walk.arrow_forward
- Assume that markets are efficient. Explain why you cannot retire all portfolio managers / financial analysts and simply rely on a random choice via computer to select securities for your portfolio. Give at least two reasons.arrow_forwardSome speculators think you should buy stock which are heavily shorted. Their reasoning is: a. The more a stock is shorted, the more that needs to be bought to close the short positions. b. The more a stock is shorted, the more speculators will have to sell in the future. c. the crowd is always right.arrow_forwardWhich of the following statements concerning the Efficient Market Hypothesis is correct? Select one: a. Stock market prices are based on speculation not on underlying information b. New information that confirms investor expectations should change stock prices c. Stock prices should slowly respond when unexpected information becomes available d. Careful research can help investors earn abnormal profits e. Your return on investment should reflect the riskiness of your portfolioarrow_forward
- Choose only one answer and explain the rationale in one or two sentences. 1. Which of the following contradicts the proposition that the stock market is weakly efficient? a. An analyst is able to identify mispriced stocks by looking at stock charts. b. Mutual funds do not outperform the market on average. c. Some investors can earn abnormal profits. d. The autocorrelations of stock returns are not significantly different from zero. 2. Which of the following would provide the strongest evidence against the semi-strong form of the efficient market theory? a. Fundamental analysis does not help generate abnormal returns. b. Technical analysis is worthless in identifying mispriced stocks. c. Stock prices response to firms’ earnings announcements gradually. d. Mutual fund managers do not beat the market on average. 3. Which of the following statements is true about the efficient market hypothesis? a. It implies a rational market. b. It implies that everyone makes zero profit from…arrow_forwardWhich of the following does NOT correctly complete this sentence: In general, the link between an information announcement and the stock price is that Select one: O a. the stock price will not change if the announcement provided only anticipated information. O b. if markets are efficient in the semi-strong form, then the market will react rapidly to the new information. O c. the expected stock return will change if the announcement contains a surprise component. O d. in order for the price of the stock to change, the announcement must be relevant to that particular stock and must be unanticipated. O e. only announcements that have already been discounted will affect the stock price.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
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