FUND. OF CORPORATE FIN. 18MNTH ACCESS
15th Edition
ISBN: 9781259811913
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12, Problem 5CRCT
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2D5) Financial theory states that: studying historical stock price movements to identify mispriced stocks:A. is effective as long as the market is only semi-strong form efficient.B. is effective provided the market is only weak-form efficient.C. is ineffective even when the market is only weak-form efficient.D. becomes ineffective as soon as the market gains semi-strong form efficiency.
10-10
The absence of price movements in a world in which investors are bombarded with information every day would suggest
Select one:
a. market stability.
b. market instability.
c. market efficiency.
d. market inefficiency.
e. market inflation.
20. When we are studying the stock price reactions to earnings announcement, why do we need to know analysts’ earnings forecast consensus?
Chapter 12 Solutions
FUND. OF CORPORATE FIN. 18MNTH ACCESS
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- A4 6 a Suppose we observe two stocks with the following characteristics: Stock Expected return Beta K 20% 1.6 L 12% 0.9 a. An asset is said to be overvalued if its price is too high given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks overvalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not overvalued).arrow_forwardStock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent with a 25 percent probability of a recession. What is the covariance of these two securities? A) .007006 B) .005180 C) .006274 D) .003938 (Don't Hand writing in solution) .arrow_forward12.2 Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: Factor Beta Expected Value Actual Value GDP .0000734 $19,571 $19,843 Inflation -.90 2.6% 2.7% Interest Rates -.32 3.4% 3.2% What is the systematic risk of the stock return? Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on…arrow_forward
- please quickly 11 In an efficient market: A.Prices are constant over the short-term. B.The risk premium on all securities will diminish to zero. C.All investors are guaranteed a positive return. D.Prices react quickly and correctly to new information. E.Risks for investment are low.arrow_forward8.4 Assume that the risk-free rate is 3% and the market risk premium is 4%. What is the required return for the overall stock market? Round your answer to two decimal places. % What is the required rate of return on a stock with a beta of 1.7? Round your answer to two decimal places. %arrow_forwardH5. Dan has heard that his required investing knowledge is redced due to the efficient market hypothesis. which of the following is not an implication he can rely on? a) stocks are fairly valued overtime b) technical analysis will not help him choose better c) his best strategy is to buy and hold d) the odd hot tip can help him beat the market from time to timearrow_forward
- A4 6 b b. Suppose we observe two stocks with the following characteristics: Stock Expected return Beta M 20% 1.6 N 12% 0.9 An asset is said to be undervalued if its price is too low given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks undervalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not undervalued).arrow_forward1) Consider the following expectations for the market and two stocks in two possible equally likely states: State Market return Stock A Stock B Boom 25% 38% 12% Recession 5% -2% 6% a. What is the expected return on each stock? b. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a β of 2 and Stock B has a β of 0.3. c. Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?arrow_forwardMf2. 1. Consider the data in the following table for a hypothetical two-stock version of the Dow Jones Industrial Average. a) Calculate the percentage change in the index value. b) Suppose firm XYZ from part (a) were to split two for one during the period (price drops to $35 immediately after the split and the new final price is $30). Calculate the percentage change in the index value. c) If this was for S&P500-type index, what is the percentage change in the index value? Is it affected by the stock split of firm XYZ?arrow_forward
- SECURITIES BETA EXPECTED RETURN GOOGLE 1.25 19% APPLE 0.75 15% if the risk free rate is 6% and are the securites are correctly priced according to CAPM? WHAT WOULD BE THE RISK FREE RATE IF THERE ARE CORRECTLY PRICEDarrow_forwardState of the Economy Recession Average Boom Probability of Occurrence O 0.26 0.51 -0.26 0.96 35% 45% 20% What is the correlation between stocks X and Z? Stock X Expected Return 25% 14% 4% Stock Y Expected Return -10% 8% 14% Stock Z Expected Return 15% 25% -10%arrow_forwardQuestion 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number) *Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.arrow_forward
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