PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 13, Problem 10PS
Market efficiency How would you respond to the following comments?
- a. “
Efficient market , my eye! I know lots of investors who do crazy things.” - b. “Efficient market? Balderdash! I know at least a dozen people who have made a bundle in the stock market.”
- c. “The trouble with the efficient-market theory is that it ignores investors’ psychology.”
- d. “Despite all the limitations, the best guide to a company’s value is its written-down book value. It is much more stable than market value, which depends on temporary fashions.”
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The efficient markets hypothesis
True or False: The efficient markets hypothesis holds only if all investors are rational.
False
True
Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to “beat” the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices.
Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement:
Current market prices reflect all information contained in past price movements.
This statement is consistent with:
Strong form efficiency
Semistrong form efficiency
Weak form efficiency…
The 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?
Which of the following statements is incorrect?
Select one:
A. It is possible for markets to be efficient with respect to some information and inefficient with respect to other information
B. It is possible for some markets to be more efficient than others
C. The market is likely to be more efficient with respect to companies where there is greater analyst following
D. The market is totally efficient with respect to companies providing regular dividends to investors
Chapter 13 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 13 - Prob. 1PSCh. 13 - Prob. 2PSCh. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 4PSCh. 13 - Prob. 5PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Prob. 9PSCh. 13 - Market efficiency How would you respond to the...
Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 13PSCh. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 17PSCh. 13 - Prob. 18PSCh. 13 - Prob. 19PSCh. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PSCh. 13 - Prob. 23PS
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