CORPORATE FINANCE (LL)-W/ACCESS
11th Edition
ISBN: 9781259976360
Author: Ross
Publisher: MCG
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Chapter 14, Problem 26CQ
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Regarding Efficient Market Hypothesis (EMH), which of the following statements is TRUE?
Investors in the market are assumed to be rational and own private information.
If the semi-strong form of EMH is true, all information contained in the history of past prices has been reflected by the current price.
If the semi-strong form of EMH is true, you cannot beat the market by trading on private information.
Post-earnings announcement drift is consistent with the semi-strong form of EMH.
Question 1
If the stock market is strong form efficient, which of the below statements is true?
A) Technical analysis could be used to consistently beat the market
B) It would be possible to beat the market through insider trading
C It would be impossible to consistently beat the market
D) Stock prices reflect all historic and publicly, but not all privately, available information
A company announces a major expansion which causes the price of its stock to increase and also causes an increase in the standard deviation (or volatility) of stock returns. How will these two market reactions affect the value of put options on the firm’s stock?
A) Both reactions decrease the value of the put options.
B) Both reactions increase the value of the put options.
C) The change in volatility will not affect put option values while the increased stock price will decrease the put option values.
D) The reactions will have offsetting effects on put option values.
Chapter 14 Solutions
CORPORATE FINANCE (LL)-W/ACCESS
Ch. 14 - Prob. 1CQCh. 14 - Prob. 2CQCh. 14 - Efficient Market Hypothesis Which of the following...Ch. 14 - Market Efficiency Implications Explain why a...Ch. 14 - Efficient Market Hypothesis A stock market analyst...Ch. 14 - Semistrong Efficiency If a market is semistrong...Ch. 14 - Efficient Market Hypothesis What are the...Ch. 14 - Prob. 8CQCh. 14 - Prob. 9CQCh. 14 - Efficient Market Hypothesis For each of the...
Ch. 14 - Technical Analysis What would a technical analyst...Ch. 14 - Prob. 12CQCh. 14 - Prob. 13CQCh. 14 - Efficient Markets A hundred years ago or so,...Ch. 14 - Efficient Market Hypothesis Aerotech, an aerospace...Ch. 14 - Prob. 16CQCh. 14 - Prob. 17CQCh. 14 - Efficient Market Hypothesis Newtech Corp. is going...Ch. 14 - Prob. 19CQCh. 14 - Efficient Market Hypothesis The Durkin Investing...Ch. 14 - Efficient Market Hypothesis Your broker commented...Ch. 14 - Efficient Market Hypothesis A famous economist...Ch. 14 - Efficient Market Hypothesis Suppose the market is...Ch. 14 - Prob. 24CQCh. 14 - Prob. 25CQCh. 14 - Efficient Market Hypothesis Assume that markets...Ch. 14 - Prob. 27CQCh. 14 - Evidence on Market Efficiency Some people argue...Ch. 14 - Prob. 1QPCh. 14 - Cumulative Abnormal Returns The following diagram...Ch. 14 - Cumulative Abnormal Returns The following figures...Ch. 14 - Prob. 4QPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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- You would like to invest in ABC Corporation stocks. According to the stock broker, now is the best time to purchase it. Based on your own intrinsic valuation estimation, the stock is undervalued. A month later, the pandemic broke out and all stocks experienced significant decreases in their value. What should you do?a. File a case against the stock broker for misleading you to purchase the stocks.b. Switch from intrinsic valuation to relative valuation.c. Assume that the market is efficient and simply invest when there is excess cash and sell the investments which there will be large expenses.d. Acknowledge macroeconomic uncertainty and keep a cool but conscious mind about current and future investment plans.arrow_forwardYou 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_forwardThe 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…arrow_forward
- Telstra announces a major expansion into Internet services. This announcement causes the price of Telstra stock to increase, but also causes an increase in the volatility of the stock price. Which of the following correctly identifies the impact of these changes on the price of Telstra call options? A. The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease. B. Both changes cause the price of the call option to decrease. C. Both changes cause the price of the call option to increase. D.The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase.arrow_forwardWhich of the following is inconsistent or unrelated with the efficient market hypothesis? a. Changes in stock prices are impossible to predict from public information. b. Asset prices reflect all publicly available information about the value of the assets. c. Stock prices follow a random walk, so stock price movements should be impossible to predict. d. The stock market moves based on the changing animal spirits of investors. e. The stock market is informationally efficient. f. It is impossible to systematically beat the marketarrow_forwardStrong form efficient market hypothesis states that stock prices reflects all the information in a market. The information may be public or private (i.e., insider information about the market) and such information will not benefit an investor in the form of higher returns.arrow_forward
- The weak form of the efficient market hypothesis states: All information is known by all market participants. All financial markets clear. Only the corporate bond market clears. All public information is known by all market participants. Current stock prices are the best guess for future stock prices.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_forwardWhich of the following is a reason why an investor would place a stop buy order on a stock? To ensure a short position is closed out for profit To ensure that the broker executes immediately at the current market price To ensure the stock is sold before its price falls to a specified level To ensure the stock is purchased when its price is risingarrow_forward
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Efficient Market Hypothesis - EMH Explained Simply; Author: Learn to Invest - Investors Grow;https://www.youtube.com/watch?v=UTHvfI9awBk;License: Standard Youtube License