Concept explainers
A
To determine: It is to be determined that the given hypothesis is consistent or the violation of the
Introduction: The efficient market hypothesis can be defined as the concept in which all the trading opportunities are fairly priced.
B
To determine: It is to be determined that the given hypothesis is consistent or the violation of the efficient market hypothesis.
Introduction: The efficient market hypothesis can be defined as the concept in which all the trading opportunities are fairly priced.
C
To determine: It is to be determined that the given hypothesis is consistent or the violation of the efficient market hypothesis.
Introduction: The efficient market hypothesis can be defined as the concept in which all the trading opportunities are fairly priced.
D
To determine: It is to be determined that the given hypothesis is consistent or the violation of the efficient market hypothesis.
Introduction: The efficient market hypothesis can be defined as the concept in which all the trading opportunities are fairly priced.
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- The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 1% over the coming month. Beta R-square Standard Deviationof Residuals 0.75 0.65 0.05 (i.e., 5% monthly) Required: a-1. If he holds a $12.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. a-2. Should he buy or sell contracts?multiple choice Sell Correct Buy b. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is 0.8% per month. (Do not round intermediate calculations. Round your percentage answer to 2…arrow_forwardSuppose that Morningstar reports that a mutual fund has earned an alpha of 2.0% per year on average over the last five years. Is this a violation of market efficiency?arrow_forward(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently 4 percent, and the expected return for the market portfolio is 10 percent. What should be the expected rates of return for each investment? Security Beta A 1.67 B 0.58 C 1.14 D 0.78 (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. The expected rate of return for security A, which has a beta of 1.67, is enter your response here%. (Round to two decimal places.) Part 2 b. The expected…arrow_forward
- A local mutual fund says it has expertise in identifying stocks that are undervalued because they are under researched or unpopular. To prove its point, the fund produces evidence that it returns over the past four years was 3% above the return on the market index. a) What does efficient market hypothesis (EMH) say about undervalued stock? b) Does the fund’s evidence contradict the EMH?arrow_forwardThe attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.arrow_forwardFinancial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.06 in recession, and 0.10 in an economic boom. For the market the state dependent returns are -0.08 in recession,and 0.18 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50. Compute the standard deviation of the market._____________ * State your answer in decimal form, working your analysis using at least four decimal places of accuracy.arrow_forward
- Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.04 in recession, and 0.10 in an economic boom. For the market the state dependent returns are -0.12 in recession,and 0.14 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50.Compute the standard deviation of the market.arrow_forwardWhich 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_forward“The strong form of the efficient-market hypothesis is nonsense. Look at the T. RowePrice Global Technology Fund, which is the best performing mutual fund of the past decade,returning 20.5% annually over the past 10 years, according to Morningstar.”arrow_forward
- You are given the following information concerning several mutual funds: Fund Return in Excess of the Treasury Bill Rate Beta A 12.4% 1.14 B 13.2% 1.22 C 11.4% 0.90 D 9.8% 0.76 E 12.6% 0.95 During the time period, the Standard & Poor's stock index exceeded the Treasury bill rate by 10.5 percent (i.e., r(m) - r(f) = 10.5%) a. Rank the performance of each fund without adjusting for risk and adjusting for risk using the Treynor index. Which, if any, outperformed the market? (Remember, the beta of the market is 1.0.) b. The analysis in part (a) assumes each fund is sufficiently diversified so that the appropriate measure of risk is the beta coefficient. Suppose,…arrow_forwardLaPorta, Lakonishok, Shleifer, and Vishny (\Good News for Value Stocks," Journal of Finance, (June 1997) study the returns on stocks on the few days surrounding their quarterly earnings announcements (relative to various expected return benchmarks). They found that on average, high-B/M stocks earn 0.9% around an earnings announcement. In contrast, low-B/M stocks earn an average of -0.1% around an earnings announcement. The dierence is statistically significant. (i) High returns around earnings announcements are more likely to occur if the earnings surprise is . (Fill in the blank with \positive" or \negative".) (ii) Discuss whether the return pattern found by LaPorta et al. (1997) around earnings announcements is more consistent with the irrational expectations (behavioral) view, or the risk factor (ecient markets) view of the book-to-market effect, and explain your logic.arrow_forwardIn historical data, we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last? a. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds. b. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. c. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks. d. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. e. Small-company stocks, long-term corporate bonds,…arrow_forward
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